Australian Transfer Pricing Alert - OECD Action Plans
07 October 2015
ON 5 OCTOBER, THE OECD ISSUED THE FINALISED 15 ACTION PLANS THAT ARE EXPECTED TO FUNDAMENTALLY CHANGE THE COURSE OF INTERNATIONAL TAXATION AND TRANSFER PRICING FOR ALL MULTINATIONAL BUSINESSES.
Whilst the OECD should be commended for the progress made over the past two years in addressing perceived base erosion and profit shifting risks, the reality is the global tax world has just become more complicated. The OECD has recommended a number of actions be implemented, however, other than a limited number of areas identified as ‘minimum standards’, most are at the option of each country to adopt and implement within their own domestic laws. This means many countries will ‘wait and see’ what others do and some may go beyond the intent of the changes for their own self interest. Australia has already indicated it supports many of the recommendations and has been actively engaged during the process.
The main areas of change for Australian multinationals are likely to include:
- Hybrid arrangements will no longer be effective with interest deductions denied where income is not taxed elsewhere.
- Tax structures to minimise withholding taxes could be subject to treaty shopping rules that limit the benefits where the purpose of an intermediate entity is mainly to obtain a tax benefit.
- Smaller and medium sized online groups are likely to be impacted by changes to the digital economy. If you have a presence in Australia such as a large warehouse or business development team, this can now create a permanent establishment (PE) of an offshore e-retailing business.
- Commissionaire arrangements where an agent receives a small commission for sales that are concluded offshore will now create a PE where the agent regularly is generating leads for the offshore parent.
- The thin cap rules could be tightened up to an income based ratio of net interest to EBITDA and potentially further limited to the ratio of net interest expense to EBITDA of the group as a whole. This could be substantially less generous than Australia’s current thin cap rules if implemented.
- Transfer pricing rules align profits with value creation. Risks and intangibles will follow the parties making the critical decisions. Fly-in fly-out arrangements will not be effective or companies with little or no substance.
- The OECD is introducing the Master file/country file concept and Country by Country Reporting for larger groups. This has already been endorsed by Australia.
We recommend that you discuss how these changes may affect your business and encourage you to speak with your local BDO contact. Download to find out more detail about how these changes may impact Australian multinationals (if enacted in our domestic law).