Starbucks, Google, Apple - these are just some of the huge international names that have come under the spotlight for their perceived underpayment of tax in recent years. Transfer pricing is the principle means by which multinational groups allocate profits and losses between companies operating in different countries around the globe. With government budgets under pressure, tax authorities globally are fighting for their share of tax on the profits of global enterprises. In 2012, the OECD introduced its Base Erosion and Profit Shifting (BEPS) initiative to stem the perceived transfer pricing avoidance by large groups. However, with governments all over the world taking tougher stances on tax avoidance, individual countries have also introduced their own legislation, some of which take a much more aggressive stance than the OECD.
Behavioural transfer pricing in Australia
Australia, in particular has been singled out for taking BEPS one step further with what has become known as ‘behavioural transfer pricing’. Essentially, the Australian Government has started looking at good and bad behaviours to try and influence how taxpayers act.
The Australian Taxation Office (ATO) has introduced practical compliance guidelines that allow taxpayers to self-assess the risk profile of their structures. This correlates to a traffic light scheme whereby those groups in the green zone are treated as low risk and require little transfer pricing documentation. Those in the red zone, however, have a high likelihood of a transfer pricing audit and potential litigation, and so conversely, will need to prepare a comprehensive analysis to support their position.
The Australian Government is then offering those entities that have adopted more aggressive transfer pricing structures the option to engage with the ATO and agree a settlement for the past without penalties. This compromise will usually involve unwinding their current aggressive structures eventually moving into the green zone.
This carrot and stick approach will see taxpayers encouraged to adopt a more conservative position, with the stick being that the ATO will then more stringently audit multinationals they see as taking a more aggressive transfer pricing position.
However, the stick approach is driven by the ATO’s views on Australian transfer pricing and multinationals could be exposed to double tax if their counterpart’s international tax authority disagrees with the ATO's position.
Why is the ATO taking a more aggressive transfer pricing stance?
Australia’s economy sees a high volume of international investment, and the ATO views its stance on transfer pricing as setting an important precedent for a large number of foreign subsidiaries operating in Australia to protect tax revenue.
High profile transfer pricing cases such as Chevron have also been a useful precedent for the ATO to successfully target other taxpayers with financing arrangements into Australia.
Diverted profits tax
Australia has also followed the UK's example and introduced a diverted profits tax. When a group has global turnover in excess of AUD $1 billion and Australian turnover exceeding $25 million, where certain criteria are met, the local entity may be subject to a penalty tax rate of 40%. Furthermore, a ‘pay now, argue later’ approach has been adopted. A high level of evidence and analysis will be required to demonstrate the required substance exists within the supply chain overseas.
Next steps for business
Some of the ATO’s new tool kit of measures are still in their infancy, but it may mean that many businesses need to review their operating structures and invest more time and resources to manage transfer pricing compliance.
Ultimately, companies will need to decide whether they modify their structures to soften their transfer pricing stance. If they opt to stay on course, they must be fully prepared for the high level of ATO scrutiny they will attract. In these cases, it will be more ‘when’ the ATO come to visit rather than ‘if’.
For more information on how BDO can assist with your company’s transfer pricing obligations, contact the team today.