The Australian Taxation Office (ATO) released a “practical compliance guideline” on its approach to tax issues associated with cross-border related-party financing arrangements and related transactions.
The Practical Compliance Guideline (PCG) 2017/4 : ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions follows on from a draft that the ATO issued for consultation in May 2017, and the effective date is 1 July 2017, and it applies to existing and newly created financing arrangements.
The ATO has modified its colour-coded tax risk spectrum (White, Green, Blue, Yellow, Amber & Red-zone) following the consultation on the draft. The relevant factors that the ATO will rely on to score taxpayers—such as the spread relative to third-party debt or global cost of funds (“external debt funding costs”), interest-cover ratios, security, subordination, and the existence ‘high risk’ factors including the use of use of hybrids—remain unchanged.
The risk rating is now derived from the intersection of the taxpayer’s scores on two axes of a matrix, being “Pricing” and “Motivational”—rather than from a one-dimensional aggregate points score.
The ATO provided some concessions relative to the draft guideline; for example, there are now more accommodating interest coverage ratio metrics, and taxpayers will not be penalised for the tax jurisdiction of the lender provided it is the location of the head office or treasury department. However, compared to the draft guidelines, the final version generally places taxpayers in higher risk categories when the pricing of their debt differs from external debt funding costs. For example, an intra-group debt which was subordinated, priced between 51-100bps above external debt funding costs, and received no other points from relevant factors, would be scored as Green (low risk) under the draft guideline. This intra-group debt cannot receive a rating better than Yellow (moderate risk) under the final guideline.
When there are cross-border intra-group loans, taxpayers need to consider reviewing the final guideline to understand how the ATO will view the loan arrangements from a risk-evaluation perspective. Taxpayers need to determine that the interest rates applied to their intra-group debt, and the guideline colour category determined for their intra-group debt are supported by appropriate evidence—such as transfer pricing documentation, intercompany legal agreements and policy documents. The guideline is not tailored to account for different facts and circumstances of taxpayers (such as materiality and industry) and as such, there will be instances when arm’s length debt arrangements could be placed in higher risk categories. In these circumstances in particular, care needs to be used in analysing and benchmarking such cross-border loan positions.
Further ATO transfer pricing publications with respect to financing arrangements can be expected relating to the interaction of transfer pricing with debt/equity, guarantees, interest-free loans, and derivatives in the first quarter of 2018.
Read a January 2018 report prepared by the KPMG member firm in Australia
© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.