Australia: Renewed focus on arm’s length behaviours

Australia: Renewed focus on arm’s length behaviours

Officials of the Australian Taxation Office (ATO) appeared before a Senate inquiry panel in July 2015, and while the focus of that appearance was on pharmaceutical companies, some comments emerged that are applicable to all Australian taxpayers with cross-border arrangements.

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In short, the ATO officials expressed concern in respect of Australian members of multinational groups as follows:

  • Are taxpayers truly acting as low risk entities or as something more? The ATO officials expressed concern that not enough focus is applied to economic and comparability analysis and suggested that by applying a global lens to the supply chain, Australian taxpayers might be contributing value that is not being appropriately rewarded.
  • Have Australian taxpayers truly acted in their own best interests or in the interests of the multinational groups? The ATO officials indicated that they would seek evidence of independent negotiations and arm’s length behaviours around pricing and margins by Australian taxpayers seeking to maximise their returns, as might expected at arm’s length.
  • Would cross border arrangements be structured the same if agreed at arm’s length? The ATO indicated that it was limited under the old transfer pricing law to challenge the basis of multinational arrangements as structured. Under the new law, the ATO would seek to understand whether arrangements would have been structured in the same way at arm’s length or in other more profitable ways.

The ATO has indicated that it will apply this lens to Australian taxpayers, a task made easier with the country-by-country reporting measures proposed to take effect in Australia beginning 1 January 2016.

KPMG observation

Given this evolving focus, taxpayers may want to consider the robustness of their existing transfer pricing policies and documentation. Taxpayers might also consider active engagement with the ATO and whether an advance pricing agreement (APA) provides an appropriate strategy to engage. 

Read an August 2015 report prepared by the KPMG member firm in Australia: Transfer pricing - a renewed focus on arm's length behaviours?

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