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New transfer pricing rules broaden the ATO’S power

Transfer pricing rules address arrangements under which profits are shifted out of Australia. On 8 September 2012, the first tranche of the new transfer pricing rules received Royal Assent. The new transfer pricing rules (Division 815) replace the former transfer pricing rules found in Division 13 of the ITAA 36.

 

There was a lot of uncertainty surrounding the interpretation of the former transfer pricing rules. By enacting the amendments, the Australian government has agreed with the ATO’S interpretation of the operation of Australia's transfer pricing rules, rather than the interpretation of the Full Federal Court in Federal Commissioner of Taxation v SNF. In SNF, the Court held that the correct way under Division 13 to consider a transfer pricing adjustment on a transaction between two related entities was to examine the arm’s length price for the actual transaction based on the available evidence. The ATO disputed the availability of the comparable transaction method relied on by SNF. Instead the ATO priced the transaction by applying the transactional net margin method discussed in the OECD guidelines. The Court also held that the OECD guidelines could not be used as an aid in interpreting and applying Division 13.
 
The new transfer pricing rules applies to dealings which are subject to an Associated Enterprises or Business Profits Article of a relevant Double Tax Agreement. That is, the new transfer pricing rules only applies where there is a relevant tax treaty. The new transfer pricing rules allows the ATO to make a determination to increase the taxable income or reduce the capital losses of an Australian taxpayer or a non-resident with a permanent establishment in Australia where the taxpayer receives a transfer pricing benefit.  A “transfer pricing benefit” will arise where the taxpayer’s actual profits are less than that which would have been accrued if the parties had been dealing on an arm’s length basis. The new rules are required to be interpreted to best achieve consistency with the OECD guidelines.
 
There are many concerns surrounding the new transfer pricing rules. One of the biggest being that the new transfer pricing rules broadens the ATO’s power to make a transfer pricing adjustment and further creates a power for the ATO to choose alternative pricing mechanisms. This in turn creates uncertainty for the taxpayer. Another major concern is the retrospective application of the new transfer pricing rules as the rules are to be applied retrospectively from 1 July 2004.
 

Posted in: Tax & ATO News Australia at 10 December 12

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Author: David Hughes

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