Article:

TP Minds Australia 2022: Conference Highlights

03 August 2022

Zara Ritchie, National Leader, Transfer Pricing Services |

As lead sponsor of this year’s TP Minds Australia 2022 conference, our BDO team were delighted to be together once again and connect with the industry face-to-face after the COVID-19 disruptions of the previous two years.

The conference covered a wide range of topics, from the latest Organisation for Economic Cooperation and Development (OECD) developments, including the impending implementation of Base Erosion and Profit Shifting (BEPS) 2.0, to insights from the latest Transfer Pricing (TP) disputes in Australia. The sessions were led by a number of impressive industry panellists and keynote speakers, including:

We share our conference highlights from TP Minds Australia 2022 below.

OECD Developments – BEPS 2.0

The OECD’s Melinda Brown provided an update in relation to BEPS 2.0, including Pillar 1 and 2, and noted the following:

  • Global Minimum Tax (GMT) - There has been significant development regarding GMT at a global level. An agreement has been reached across 141 countries for a GMT of 15%, which is intended to take effect from 2023. This timeline is ambitious and will require coordination across member countries to re-write and amend local legislation, in order for the changes to be implemented and enacted next year.
  • Global formulary approach - There was some conjecture as to whether a global formulary approach may replace the arm’s length principle. While BEPS 2.0 will incorporate a type of formulary apportionment in its application, this aspect is not comprehensive. Therefore, traditional TP concepts and practice will continue to play an integral role in the post-BEPS 2.0 world.
  • Industry compliance - It was clear that industry participants impacted by BEPS 2.0 were working diligently to understand the necessary steps to prepare for compliance. These steps include the relevant investments to ensure availability of data, as well as how the new regime will interact with other forms of taxes. The consensus from those impacted was that there would be an increase in administrative burden and a sense of whether it would be worth it. Will this ultimately lead to additional tax collections? However, it was accepted that it would not always be the case and that entities would need to act early to understand the impact of the measures on the OECD’s global effective tax rate.
  • Additional OECD initiatives included an inclusive framework on carbon pricing, as well as ongoing reviews of previously published BEPS-related guidance materials.

Transfer Pricing During COVID-19

Many of the sessions reflected on the impact of COVID-19 on commercial operations and existing TP arrangements. These reflections reinforced the following: 

  • ‘Arm’s length’ during unprecedented times – The pandemic hit some industries harder than others, impacting supply chains and TP policies that were implemented both pre- and post-pandemic. This has placed into question what an ‘arm’s length’ outcome is, as well as to what extent the impacts of the pandemic are influencing the characterisation of the entity and the comparable companies identified.
  • Revenue Authorities (RAs) and review activity – RAs are likely to be under pressure to raise revenues in order to fund the measures undertaken during the pandemic. Therefore, there is an expectation of increased reviews and audit activity in the future with respect to the pandemic period.
  • Contemporaneous evidence – RAs will expect any amendments to be accompanied by contemporaneous evidence, which explain both the commercial rationale and why they are considered ‘arm’s length.’ The industry experts recommend robust analysis, along with compiling documentation early and updating contemporaneously, particularly given the lingering impact of the pandemic.

Operational Transfer Pricing Automation and Implementation (TPAI)

Experienced in-house tax professionals shared their views on what is considered ‘best practice’ for Multinational Enterprises (MNEs) in managing compliance obligations and risks. They noted the ever-increasing complexities arising from the following global and local developments:

  • Communication – For the successful delivery of an in-house TP framework, it is imperative to have a deep understanding of the business and supply chain structure. This requires proactive collaboration with various departments and key stakeholders to obtain optimal outcomes.
  • Defence – With an increased level of TP scrutiny from RAs around the world - along with a focus on tax governance as part of the justified trust program in Australia - it is evident that operational TPAI and the broader tax governance of MNEs has become a priority matter for corporate boards and leadership teams.
  • Technology – A technology-driven approach to TP planning and compliance models is now seen as ‘best practice’ in the industry. An investment automating manual TP processes has been seen to significantly reduce resourcing needs, as well as improve data and reporting quality over the medium- to long-term.
  • RAs – The RAs are also increasing their use of digital tools, which means that MNEs will need to keep-up with the advancing technology and sophistication of digital tools. This includes examples such as blockchain technology, which while currently limited in its application, is expected to have increasing relevance to operational TPAI as the technology evolves.

Dispute Resolution

ATO Insights

The Australian Taxation Office (ATO) provided an insight into their activities regarding TP disputes and review programs, with an acknowledgement that most taxpayers reviewed (> 90%) were found to be compliant. However, the ATO’s view remains that profit shifting is a key driver of the tax gap and that this gap would increase if engagement with the industry were to decline. Therefore, the likelihood of ATO engagement continues to be a question of ‘when’ rather than ‘if’.

RTP Schedule

The Reportable Tax Position (RTP) schedule has played a significant role in providing information on the level of risk in the market. The two focus areas of the RTP schedule are Intercompany Financing Transactions and the Diverted Profits Tax.

  • Intercompany Financing Transactions (IFT) - IFTs continue to be a key risk area for RAs around the region, particularly in a post-pandemic world. This is the case for businesses that are highly leveraged, or have entered into arrangements that may not be supported by the current economic environment. A panel discussion explored the factors to be considered as part of any financing analysis or policy-setting process, including:
    • Increasing global consistency – There appears to be increasing alignment between the approaches taken locally, by the ATO and other RAs, in relation to the treatment of IFTs.
    • Analysis for IFTs – The basis for determining an ‘arm’s length’ interest rate has shifted from using credit ratings and benchmarking, to identifying potential third-party arrangements (i.e. comparable uncontrolled prices).
    • Commerciality - RAs are likely to begin with ‘whether the arrangement makes commercial sense’, including whether the arrangement is in the form of a loan, or could be seen as equity. The terms of the loan, and therefore the intercompany agreement, is increasingly important and will be critically assessed in any TP dispute with RAs.
  • Diverted Profits Tax (DPT) - There has been a significant increase in the number of ATO cases considering DPT since it was introduced in 2017, with at least one case that will be decided in the courts.

APA Program

The relevance and certainty gained through the Advance Pricing Arrangement (APA) program was discussed in the context of increasing TP disputes and review programs, both in Australia and across the world. The ATO noted that the APA is a long-established program and that it is committed to efficient resolution.

The consensus was that an APA undertaken on the basis of trust and transparency will result in a better outcome, than a potential future dispute with a RA. Many MNEs continue to believe that the APA program remains an important and viable risk-mitigation tool, which emphasises the importance of contemporaneous evidence and documentation as readily available support.

Insights from Keynote Speaker: John de Wijn AM, QC

In the keynote address from John de Wijn AM, QC, he shared his insights and experience in dealing with TP disputes in Australia. These insights included the following:  

  • As TP disputes are heavily driven by commercial and industry factors, rather than interpretation on a point of law, it will often be difficult for the courts to resolve. As a result, MNEs should not underestimate the importance of industry experts as part of the process to hypothesise the ‘arm’s length’ position.
  • The ‘arm’s length’ principle requires depersonalisation between the taxpayer and the transaction. This process differs for decisions that involve financial transactions, where the characteristics of both the transaction and taxpayer are critical to the outcome.
  • A hypothetical transaction that includes a guarantee fee to override a high interest rate may be appropriate in some circumstances, but not all. There may be circumstances and commercial reasons why the parent may not guarantee a transaction.

It will be intriguing to observe future decisions based on the updated TP rules, while seeking to undertake the same objective – such as hypothesising an ‘arm’s length’ outcome for transactions that may not necessarily exist in the real world.

BDO Comments

The first key takeaway from TP Minds Australia 2022 was the impending arrival of the BEPS 2.0 initiatives. While these initiatives will only initially impact significant global entities, we anticipate the amount of work required to achieve compliance will be onerous.

The second key takeaway was the ongoing need to do ‘more with less’. The COVID-19 pandemic created a unique set of circumstances requiring additional consideration, often with little or no increase in resources. This required TP professionals across the industry to rely on technology, or focus on key risks, in an effort to work smarter rather than harder.

We look forward to seeing you at TP Minds Australia 2023, which we anticipate will be held in the first half of the year.

If you have any questions about the topics raised above, or would like more information on Transfer Pricing related issues, please contact your local BDO adviser.