The Australian Taxation Office (ATO) today released draft guidance concerning related-party financing arrangements.
The draft guidance—Practical Compliance Guideline PCG 2017/D4: ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions—is scheduled to be effective from 1 July 2017 and to apply to existing and newly created financing arrangements.
Comments on the draft PCG are due by 30 June 2017.
Like the guidance in respect of “Marketing Hubs,” the ATO is continuing its “colour spectrum approach” (e.g., white, green, blue, yellow, amber and red-zone) to assessing tax risk in relation to funding arrangements. This approach allocates scores to various attributes of the funding arrangements based on spreads, leverage, interest cover ratios, security, subordination, tax attributes of the lender entity jurisdiction, currency of the loan versus operational functional currency of the borrower, hybrid mismatching and other “exotic” features (payment-in-kind or interest deferral, early break fees, conversion to equity, etc.).
Tax professionals have observe that the scores allocated to the “green” or low-risk rating are largely features only ascribed to AAA-rated loans as opposed to similar ratios for investment grade funding.
In preparing PCG 2017/D4, it is understood that the ATO conducted benchmarking based on its portfolio of Australian taxpayers in order to arrive at the indicative draft scores ascribed in the draft PCG—a process that included discussions with a former member of a “Big 4 bank” lending committee, a Treasurer of an ASX listed company and a “boutique” capital markets debt advisory firm.
Read a May 2017 report prepared by the KPMG member firm in Australia
The Full Federal Court issued a decision for the government in Chevron Australia Holdings Pty Ltd (CAHPL) v Commissioner of Taxation  FCAFC 62 (21 April 2017), in a case relating to the transfer prices applied to certain cross-border related-party loans. The case concerns the transfer pricing implications of an intercompany loan agreement between the Australian entity and its U.S. subsidiary (CFC) and whether the interest paid to the CFC exceeded an arm’s length price for the borrowing.
The decision has implications not only for taxpayers with cross-border related-party financial dealings, but also taxpayers with any other cross-border related-party dealings. The decision offers insights into the approach that both courts and the Commissioner are likely to take when examining transfer pricing issues going forward—specifically in relation to the construction and application of the words “might reasonably be expected” in Division 13 of Part III ITAA 1936.
Read a May 2017 report [PDF 432 KB] providing an analysis of the decision, as prepared by the KPMG member firm in Australia
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services group in Australia:
Angela Wood | +61 3 9288 6408 | firstname.lastname@example.org
Frank Putrino | +61 3 9838 4269 | email@example.com
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.