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ATO Releases Draft Practical Compliance Guideline for Transfer Pricing

Zara Ritchie , Global Lead, Transfer Pricing |

16 May 2017

The ATO has today issued a Draft Practical Compliance Guideline that deals with taxation issues associated with cross-border related party financing arrangements -effective from 1 July 2017.

Zara Ritchie, Leader of BDO’s Global Transfer Pricing Practice commented:

“The guideline has been anticipated for some time and now it’s here it can be considered controversial.  In an attempt to produce a simple guidance the ATO overlooks the complexity and multitude of possible arrangements when dealing with the related party debt which could result in puzzling outcomes on application,” Ms Ritchie said.

“It’s clear that the ATO is feeling confident following the Chevron Corporation loss of appeal in the Australian Full Federal Court and the Guideline reflects this.

“However, this is posssibly premature as Chevron Corporation is still considering a possible appeal in the High Court. It also clear that the ATO is taking a one sided approach to risk assessing the related party financing arrangements and only time will tell whether other tax authorities and OECD are likely to hold similar views to the ATO, thus increasing the risk of double taxation for multinationals.

“The Guideline provides limited guidance on how taxpayers can self-assess how they accord with the arm’s length principle, which underpins the transfer pricing legislation.  However, it is more of a tax officer’s tool as it uses a very prescribed checklist approach that will provide taxpayers with insight as to their risk of being challenged by the ATO.

“Based on the answers to the checklist within the draft Guideline, the taxpayer will derive a risk rating, ranging from ‘Green zone’ (i.e. safe apart from the exceptional circumstances) to ‘Red zone (i.e. immediate ATO review or even audit is likely).

“There are numerous taxpayers with loans from the third party financiers that are unlikely to fall into the ‘Green zone’ for commercial reasons alone, highlighting the lack of commercial focus of the draft Guideline. As such, its impact will be far reaching - affecting all types of taxpayers and industries.

“Any business notified by the ATO to complete the Reportable Tax Position Schedule will have to self-assess the risk rating of the related party financing arrangement. The ATO will allow the taxpayers 18 months grandfathering period in which to self-assess and amend the related party debt (both existing and newly created) to fall into the ‘Green zone’, with zero penalties.

“One would expect taxpayers to review their arrangements with the Guideline in mind but to act in a way that makes commercial sense for the Australian taxpayer and the group as a whole, taking the possibility of the ATO review into account.  The Commissioner accepts that he cannot make an assessment based on the Guideline alone.  The Guideline is only a risk assessment tool and does not surpass the application of the current transfer pricing legislation.

 “The court’s view in Chevron Corporation case was that taxpayers need to strive to ensure the related party arrangements are commercial, in the context of market practices and group’s internal policies. The draft Guideline however is trying to deal with that notion in a way that is uniform and therefore too simplistic, failing to take account of multitude of possible commercial facts that may exist in the real world. 

“It would be unreasonable to expect all taxpayers to structure their arrangements to fall within the ‘Green zone’ as that maybe uncommercial not only in the context of the affairs of the Australian taxpayers but also in the context of the whole multinational group. However, it is clear that the combination of the Full Federal Court decision on Chevron and the ATO Guidelines mean Australian taxpayers must review their current financing arrangements and ensure they have sufficient analysis and evidence to support their positions, differentiating the emerging views and have a risk mitigation plan as the likelihood of financing arrangements being reviewed by the ATO is now high.”

The comments are due by 30 June 2017 and the ATO can expect a flurry of submissions from advisors and taxpayers alike.