TAX NEWS - FEBRuary 2010
Australia launches strategic compliance initiative for transfer pricing
As part of its strategic compliance initiative, the Australian Taxation Office (ATO) has begun issuing information requests to companies assessed as having significant international related-party dealings, with questions focusing on business restructuring, intragroup financing (including guarantees) and profitability. Mining service information requests are expected to follow across the broader resources sector shortly.
While the "profitability" letter focuses on exploring the effect of the global recession on taxpayers' economic performance, it also includes a short series of questions about relevant financing and business restructuring issues, similar to the questions raised in the tailored questionnaires on these topics.
The Australian Taxation Office's focus for its compliance and risk assessment project is not surprising, giving the level of transfer pricing debate on intragroup financing and business restructuring over the last few years.
What is not clear, however, is how risk will be assessed in these areas when there is still uncertainty in the ATO's position, no final or practical guidance for taxpayers, and significantly, no clear guidance for ATO officers who will be responsible for evaluating risk. The ATO issued a draft discussion paper on business restructuring in May 2007 and a further revised draft paper in October 2007. In July 2008, an extract from a third paper on the topic was released to National Tax Liaison Group members. There have been preliminary views shared by the ATO on financing in TD/2007/D20, and more recently in TR2009/D6 and PS LA 3187 (draft).
The following examples of questions from the ATO's information requests seem straightforward on the surface, but years of debate at both local and international forums lurk behind these issues without resolution:
- In relation to your financing arrangement,
. What factors were considered in setting the interest rate and any of the associated charges?
. How have you satisfied yourself the interest rate and any associated charges are in accordance with the arm's length principle?
- In relation to business restructuring:
. Detail the commercial drivers and reasoning behind the business restructuring
. Detail any amounts payable and receivable in connection with the charge
. Detail how you believe the arm's length principle has been applied.
We recommend taxpayers consider their responses to these questions carefully, provide appropriate context for international related-party transactions described, and refer to all ATO guidance relied on, whether final or otherwise, as evidence they have made concerted efforts to comply with the arm's length principle despite the absence of clear guidance from the ATO.