TAX NEWS - 2010

Australia issues draft ruling on business restructurings

The Australian Tax Office on 2 June issued a draft ruling on business restructurings by multinational enterprises. The draft (TR 2010/D2) which in substance follows the OECD's Discussion Draft on Transfer Pricing Aspects of Business Restructurings of 9 September 2008, is among the first country-specific guidance on business restructurings released.

The draft ruling, which is structured in the context of TR 98/11, addresses substantive issues related to business restructurings and provides a framework for documenting these for transfer pricing purposes.


Key features

The draft ruling recognizes that comparability (and lack thereof) is a recurring issue when dealing with business restructuring. A number of pricing arrangements typically in place between related parties do not occur between unrelated parties; and restructurings within an MNC often have different characteristics from those between independent companies. Consequently, it will often be difficult to find comparable data from unrelated parties, to evaluate the arm's length nature of a related-party restructure. Therefore, the draft emphasizes the types of comparability measures, which may be relevant in establishing how third parties would have behaved under comparable circumstances.

The focus on the options realistically available to taxpayers is not surprising, as it represents: i) a key feature of comparability, and ii) a basic yardstick for determining the commercial rationale behind the restructuring. The guidance on the practical application of the concept includes valuable language about the types of questions taxpayers should ask and the particular issues to document for transfer pricing purposes.

The draft ruling focuses on relative bargaining positions as a key concept in connection with establishing how independent parties would interact under similar circumstances. The discussion regarding bargaining positions and game theory are generally in line with the ones expressed in the OECD Draft.

The draft ruling includes a general acceptance of the taxpayer's right to enter into business restructurings, without the business purpose being subject to separate review by the ATO under the arm's length principle. However, the draft ruling points to Division 13 and Article 9 of the OECD Model treaty, as relevant regulations that must also be satisfied when determining the business purpose of a restructuring.

The draft ruling specifies that it does not address the application of Australia's general anti-avoidance provisions (Part IVA of the Income Tax Assessment Act 1936). Broadly, Part IVA gives the Commissioner of Taxation the power to cancel a tax benefit (for instance, a reduction in Australian assessable income) when the sole or dominant purpose of the relevant scheme is to obtain a tax benefit. The ATO has been active in this area recently and has sought to apply Part IVA to the interposition of a foreign holding company (in the context of a private equity transaction). Thus, it is important that business restructures have a business purpose.


Conclusion

The draft ruling is very specific in its guidance on transfer pricing documentation for Australian purposes. This guidance has a significant emphasis on business purpose and the requirement to prepare detailed and fact-specific analyses to document the options realistically available and relative bargaining positions.

The draft ruling applies to all open years, and accepts that even if no contemporaneous documentation has been prepared, it should be prepared after the fact.

With the draft ruling, the ATO has formalized its views on documentation approaches, thereby significantly extending the tools available at audit. In particular for multinationals preparing global or regional documentation masterfiles, the concept of business restructurings may not always be fully integrated in the documentation process. Accordingly, taxpayers should consider preparing Australian-specific transfer pricing documentation for restructures, in line with TR 2010/D2.