Internal derivatives of multinational banks | KPMG | AU

The highs and the lows of internal derivatives of multinational banks

Internal derivatives of multinational banks

Alia Lum examines the ATO's latest guidance on the use of internal derivatives by multinational banks, PCG 2017/8.

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The Australian Taxation Office (ATO) has released PCG 2017/8: Income Tax – the use of internal derivatives by multinational banks. The guideline outlines the circumstances in which internal derivatives, that represent arm’s length dealings, can be used as a proxy for attributing income, expenses or profit to a permanent establishment.

The PCG is largely similar to the 2014 guidelines issued to the domestic banks after a protracted consultation process, but has been modified to also apply to inbound banks that have elected out of Part IIIB of the Income Tax Assessment Act 1936.

The approach in the guideline is to apply a separate enterprise principle and Australia’s transfer pricing rules, having regard to all dealings within the bank and the outcomes of those dealings. It sets out the indicators of high, medium and low complexity transactions:

  • Highly structured transactions are considered out of scope.
  • Medium complexity transactions still require some linkage to third party transactions, albeit less direct. Other scenarios are considered high complexity scenarios and may require commercial justification and a higher level of analysis or review. For these transactions in particular, it will be important to have strong transfer pricing documentation to support positions taken.
  • Low complexity transactions require a direct or back to back relationship to an unrelated third party derivative transaction. There are likely to be many intra-branch transactions falling outside this category.


For domestic banks, this PCG replaces the 2014 guidelines. For foreign bank branches, the extension of the principles in the previous guidance to cover their intra-branch derivatives is welcome to ensure consistency in treatment between inbound and outbound banks, and to provide greater clarity for the increasing number of foreign bank branches who have opted out of Part IIIB.

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