Australia tax: New accounting standard requires certainty on transfer pricing

A new Australian tax effect accounting standard, expected to apply from reporting periods commencing during 2011, introduces a requirement for entities to account for "uncertain tax positions" that are still open to Australian Taxation Office (ATO) (or other taxing authority) review at the implementation date. The new standard was released as an Exposure Draft (ED2009/2) on 31 March 2009.

The standard has significant ramifications for multinational companies with international related party dealings, as it is often impossible to reach a conclusion about whether a transfer pricing position is "uncertain" without carrying out a detailed functional and economic analysis, and applying one of the generally accepted transfer pricing methods. Since there is no time limit on transfer pricing adjustments, all past international related party arrangements also will need to be reviewed and accounted for under the new standard.

Reporting entities should start preparing now for implementation, as the required accounting methodology is onerous. In particular, companies should start planning mitigation strategies, including preparation of transfer pricing documentation, the use of private binding rulings or the negotiation of advance pricing arrangements (APA) with the relevant revenue authorities.

With the imminent application of this standard and the ATO's current work to make the APA process more relevant to taxpayers, APAs are likely to become an increasingly common strategy for dealing with material transfer pricing issues in Australia.