ATO releases draft guidance on new transfer pricing laws

New transfer pricing laws

Transfer pricing laws affect transactions between related parties in different tax jurisdictions.

The Australian Taxation Office has released the following guidance on how it proposes to administer Australia’s new transfer pricing laws which commenced on 1 July 2013:

  • Draft Taxation Ruling TR 2014/D3 about the ATO’s power to reconstruct international transactions between related parties to achieve an appropriate arm’s length outcome

  • TR 2014/D4 about the transfer pricing documentation an entity operating in Australia should prepare and keep to minimise penalties in the event of a transfer pricing audit. Draft practice statement PS LA 3673 contains further guidance

  • PS LA 3672 about the penalties applicable to transfer pricing adjustments and transfer pricing documentation requirements

The new transfer pricing laws give the Tax Office the power to reconstruct international transactions to ensure that Australian taxes to be paid from cross border transactions, including withholding taxes, are consistent with the expected outcomes under the arm’s length principle for dealings between independent enterprises. Particular difficulties arise where unrelated parties would not have typically entered into similar transactions.

The documentation requirements and potential penalties are considerably more onerous than those that existed previously. Taxpayers that do not have supporting documentation in place before they lodge their income tax returns are automatically subject to a minimum penalty level of 25% of any transfer pricing tax shortfall.

The ATO outlines the following five step approach to documentation:

  1. Identify the actual conditions in connection with the commercial or financial relations.
  2. Select the most appropriate and reliable method to be used to identify the arm's length conditions.
  3. Identify the comparable circumstances relevant to identifying the arm's length conditions.
  4. Application of the transfer pricing rules so as best to achieve consistency with the relevant guidance material.
  5. Monitor, review and update transfer prices, as necessary.

This imposes a considerably higher compliance burden on taxpayers than existed previously.

Please contact us for any assistance on transfer pricing matters.