Exploring the latest updates across the Australian transfer pricing landscape
Exploring the latest updates across the Australian transfer pricing landscape
Over the last few months, we have seen new developments continue to shape the Australian transfer pricing landscape, including ongoing developments in relation to intangibles, intra-group financing, transparency and reporting, exemptions, and in relation to base erosion and profit shifting (BEPS) Pillar 2.
This article brings together all the latest transfer pricing updates in one place, and outlines the key issues, considerations and takeaways for impacted taxpayers who are navigating this rapidly changing space.
BEPS Pillar 2
The Australian Pillar 2 Global and Domestic Minimum Tax (GDMT) laws have passed the final steps to become enacted law in Australia and are now enacted and effective for financial years commencing on or after 1 January 2024.
The introduction of BEPS Pillar 2 rules will impact multiple countries including Australia, see BDO - Status of Pillar 2 implementation around the world. The Australian measures apply to multi-national enterprises (MNEs) to the extent that they have a presence in Australia, with consolidated global revenues greater than or equal to €750 million, consistent with Organisation for Economic Cooperation and Development (OECD) guidelines.
In specific circumstances a ‘safe harbour’ may be available to allow eligible groups to avoid the Pillar 2 analysis, in part or in full. The purpose of the new taxes is to ensure that MNEs have an effective tax rate (ETR) of at least 15 per cent in all jurisdictions in which they operate.
The Australian legislation introduces the Global Anti-Base Erosion Rules (GloBE Rules) which includes the following:
- 15 per cent global minimum tax for MNEs via the:
- Income inclusion rule (IIR): applies to fiscal years starting on or after 1 January 2024
- Undertaxed profits rule (UTPR): applies to fiscal years starting from on or after 1 January 2025
- 15 per cent Domestic Minimum Tax (DMT): applies to fiscal years starting on or after 1 January 2024.
The first GDMT tax reporting obligations applicable to companies with fiscal years ending on 31 December 2024 will be due by 30 June 2026.
Read more about the legislation and the required next steps for taxpayers here, or find out more about the impact on financial statements here.
The ATO is currently in the process of developing systems to enable MNEs to lodge the GloBE Information Return and pay any arising top-up tax liabilities payable in Australia to the Australian Taxation Office (ATO).
It is important to note that impacted taxpayers with operations in Australia and/or other jurisdictions should consider their reporting obligations, noting that calculations and reporting are required regardless of whether any top-up tax is payable in Australia and/or other jurisdictions. Practically, this will require both large Australian outbounds and subsidiaries of large overseas multinationals to address the complex reporting requirements.
Intangibles
Arrangements involving intangibles continue to be a key focus area for the ATO and the Australian courts.
The two most recent developments include the finalisation of practical compliance guideline (PCG) 2024/1: Intangibles Migration Arrangements, and the potential implications of a successful ATO appeal in relation to the PepsiCo case (e.g., such as finalisation of Tax Ruling [TR] 2024/D1 regarding royalties on software and IP rights).
PCG 2024/1 - Intangibles migration arrangements
In early 2024, the ATO finalised PCG 2024/1, which provides taxpayers with a risk assessment framework to ascertain the likelihood of the ATO dedicating resources to reviewing their 'intangibles migration arrangements’.
Broadly, this means that taxpayers required to lodge a reportable tax position schedule (RTPS) (i.e., Australian taxpayers with revenues over AUD $250 million) must identify “intangibles migration arrangements” and disclose the risk rating for the three most material Intellectual Property (IP) Migrations arrangements, as well as any arrangements that score a higher risk rating. This means that taxpayers must review all arrangement involving intangibles, regardless of materiality.
The definition of an intangibles migration arrangement under the PCG is very broad and therefore taxpayers will need to do a significantly ‘deeper dive’ into which aspects of their business involve intangibles to be able to appropriately document their risk rating under the PCG.
Status of PepsiCo and TR 2024/D1 (character of payments in respect of software and intellectual property rights)
The ATO was granted special leave by the High Court of Australia to appeal the decision of the Full Federal Court (FFC) for the case of PepsiCo, Inc. v Commissioner of Taxation [2024] FCAFC 86 (PepsiCo case), in November 2024.
The ramifications of the case include the ATO deferring finalisation of Tax Ruling (TR) 2024/D1 until the High Court delivers its judgment, which is expected late in 2025. This draft TR pertains to a binding interpretation of law (on the ATO) relating to the characterisation of payments connected to software and intellectual property rights, and the associated liability to pay royalty withholding tax on these payments. In mid-2025, it is expected the ATO will share a draft PCG providing a draft risk assessment framework and the ATOs compliance expectations in relation to royalties and intellectual property rights. It is hoped the ATO will also issue an updated draft of the ruling after the High Court delivers its judgment, incorporating the precedent set by the High Court and allowing further comments to be submitted by the public before the ruling and PCG are finalised.
In the interim, the ATO has flagged that taxpayers should continue to consider its views in Taxpayer Alert TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets, which contains the ATO’s current views regarding mischaracterisation of payments connected with intangible assets.
The outcomes of this case will be relevant to any multinational that makes payments for goods or services that arguably include some element of intellectual property that may be subject to copyright, including brands, technology, formulations or a wide range of other intangibles.
If the ATO is successful on appeal, we anticipate that multinationals will be required to evaluate their payment flows with related parties offshore to determine whether any of their related party dealings include elements of intellectual property in relation to which a royalty should be paid and tax withheld on the payment in Australia.
Thin capitalisation changes
On 8 April 2024, the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share — Integrity and Transparency) Bill 2023 (the Bill) to amend the thin capitalisation rules and introduce the debt deduction creation rules in Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) was given Royal Assent and therefore enacted into law. Both rules operate to limit the amount of income tax deductions for interest and other ‘debt deductions’.
The new thin capitalisation rules apply to income years beginning on or after 1 July 2023, and the debt deduction creation rules apply for income years commencing on or after 1 July 2024.
The key transfer pricing implication of these changes is that an intra-group financing arrangement needs to be assessed from an Australian transfer pricing perspective to determine not only an arm’s length interest rate but also an arm’s length amount of debt. Further, the transfer pricing analysis is required to determine the arm’s length amount of debt prior to the thin capitalisation analysis.
The requirement to complete a transfer pricing analysis will now apply to entities that were previously not concerned with considering the arm’s length nature of their debt amount as the amount of interest expense deductions that they were taking fell below the thin capitalisation de minimis threshold.
Short Form Local File
The ATO has implemented changes to the Short Form Local File (SFLF) for statements lodged from 1 January 2025 relating to reporting periods beginning on or after 1 January 2024.
The ATO has standardised the SFLF format, using a similar format to the Australian Local File - Part A and B. The new schema, v4.0, will incorporate the short form section into the ‘Message Structure Table’, moving away from the current free text format (i.e. historically the format of the SFLF has been either as a word document or Microsoft PowerPoint format).
The new SFLF reporting requirements include the following key changes:
- Main business lines: Key business lines need to be identified, and the following must be disclosed for each: description of the business line, strategies implemented for each line, the extent of overlap with other main business lines / functions, and key competitors of each business line. We note that supporting functions (e.g. IT, HR, Finance, etc.) do not need to be disclosed to the extent that they do not generate revenue or are not linked in any way to business intangibles
- Restructures: For business restructures or new arrangements involving intangibles, entities must describe the nature of the intangibles, their capital value, anticipated tax impacts, and provide a copy of any step plan with dates and details of the parties involved. Notably, business restructures also include ‘significant changes to related party financing’. Further guidance on what constitutes a ‘significant restructure’ is provided by the ATO on their website.
It will be important to begin discussions proactively with key management personnel locally and overseas, as the level of information now required by the SFLF has potentially significantly increased. We anticipate that a higher and more robust level of information gathering will be required, particularly in the first year of the updated schema, as taxpayers grow accustomed to the new requirements.
Public country-by-country reporting
To meet the Australian Government’s commitment to greater transparency and open scrutiny, on 29 November 2024, the Australian Parliament passed new laws introducing public country-by-country (CbC) reporting. This new legislation will run in parallel with the existing CbC reporting obligations and applies to tax years commencing on or after 1 July 2024, and companies will have 12 months post-year-end to submit the information required to the ATO. The rules apply to CbC reporting parent entities with an Australian presence, with AUD $10 million or more of Australia-source aggregated turnover in the current year.
These laws mandate that large multinational groups submit data on their global financial and tax footprint to the ATO, which will be made publicly available (the first disclosures will be published online in late 2026).
As part of the requirements, a list of 'specified' countries for which information is required to be reported separately on a CbC basis (i.e. not aggregated) has now been made available.
It will be useful to evaluate this list and proactively identify which entities will require separate CbC reporting to potentially start ‘dry runs’ of the additional reporting obligation, as well as begin communicating with management in these countries.
The ATO is expected to issue guidance on the implementation of these new requirements in early to mid-2025, which are likely to relate to lodgement mechanics, any exemptions, definitions and interpretations.
Changes to CbC reporting exemption requests (from 1 January 2025)
The ATO has released updated guidance for CbC reporting obligations applicable to all exemption requests lodged from 1 January 2025. This new guidance replaces the previous 'fast-track' exemption guidance, reducing the scenarios from seven to three specific cases where an exemption from CbC reporting statements may be granted.
The Commissioner may grant an exemption if the taxpayer's conditions are considered exceptional and supported by the OECD Base Erosion and Profit Shifting (BEPS) Action 13 report. The new guidance will not impact any exemption requests lodged before 1 January 2025.
Conclusion
The transfer pricing landscape continues to change and adapt rapidly. While this article outlines the latest updates in Australia, the situation will continue to evolve and it’s crucial for impacted taxpayers to stay at the forefront of development to ensure compliance.
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How BDO can help
Our team of experts provide services to multinational clients of all sizes on a local, regional or global basis. We provide a range of transfer pricing services, including compliance, audit defence, planning, controversy/dispute resolution and benchmarking.
If you have any questions about any of the topics discussed in this article, or would like further information, contact your local transfer pricing advisers.