Australia: Related-party financing arrangements | KPMG | GLOBAL

Australia: ATO draft guidance on related-party financing arrangements

Australia: Related-party financing arrangements

The Australian Taxation Office (ATO) today released draft guidance concerning related-party financing arrangements.

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The draft guidance—Practical Compliance Guideline PCG 2017/D4: ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and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.

Tax risk, ATO assessments

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.).

KPMG observation

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.

Benchmarking

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

Reinterpreting the arm’s length principle

The Full Federal Court issued a decision for the government in Chevron Australia Holdings Pty Ltd (CAHPL) v Commissioner of Taxation [2017] 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 | angelawood@kpmg.com.au

Frank Putrino | +61 3 9838 4269 | fputrino@kpmg.com.au

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