Conduct of review

1.1 This is the Inspector-General of Taxation's (IGT) report of his review into the Australian Taxation Office's (ATO) management of transfer pricing matters. It is produced pursuant to section 10 of the Inspector-General of Taxation Act 2003 (IGT Act 2003).

1.2 The review arose from concerns raised by taxpayers, tax professionals and their representative bodies in relation to the long timeframes and excessive costs of dealing with the ATO on transfer pricing matters. The IGT started this review, pursuant to subsection 8(1) of the IGT Act 2003, by announcing the terms of reference on 25 October 2012 (a copy is reproduced in Appendix 1).

1.3 The IGT received a significant number of written submissions in response to the terms of reference and also met with a range of stakeholders, including academics, current and former ATO officers as well as taxpayers, tax advisers and their representative bodies, to better understand the issues covered by this review. Broadly, the issues raised related to the ATO's overarching strategy and recent organisational changes, protracted timeframes to complete compliance activities, lack of ATO communication during compliance activities, inadequate public advice and guidance and ineffective use of consultative forums. The key underlying theme seemed to be insufficient staff capability in dealing with transfer pricing matters.

1.4 Most submissions impressed on the IGT that the above issues have been exacerbated by major changes in the global business environment over the past two decades such as:

  • ongoing evolution of globalisation leading to the decline of trade barriers and increasing the privatisation of business activity, which is said to have facilitated the expansion of many businesses globally and increased the importance of transfer pricing policies;
  • ongoing (re)location of the production of final products and components to various jurisdictions to improve business efficiency with decisions based on production costs, infrastructure, tax incentives and skilled labour force;
  • the concentration of service functions and assets, such as research and development, internal finance, production and intangible assets within different business units of a Multi-National Enterprise (MNE) which may be located in different jurisdictions; and
  • advances in telecommunications that has allowed, amongst other things, the advent of electronic commerce and '24/7' trading.1

1.5 To assist with the IGT's consideration of issues, the IGT established a working group comprising key tax practitioners and representatives: Richard Atkinson (Rio Tinto); Chris Bowman (BTTP Consulting); Stuart Coggin (GlaxoSmithKline); Michael Fenner (Chevron); Geoffrey Gill (Deloitte); Denise Honey (Pitcher Partners); Nick Houseman (PricewaterhouseCoopers); Jason Levine (GM Holden); Steve O'Connor (Lloyds International); Jesper Solgaard (Ernst & Young); Richard Vann (University of Sydney); and senior ATO officials.

1.6 We greatly appreciate the generosity of the members of this working group in freely giving their time and expertise. Their involvement has greatly enhanced the outcomes of this review.

1.7 The working group considered stakeholders' concerns and canvassed potential solutions to the systemic issues in a frank and confidential manner. It should be noted, however, that the views and recommendations expressed in this report are not necessarily those of individual members of the working group. The views and recommendations were finalised by the IGT after much deliberation, and based on input received and discussions with the ATO and a range of external stakeholders.

1.8 The IGT also worked progressively with ATO senior management to distil the scope for improvement and to agree on specific actions. Furthermore, the Commissioner of Taxation (Commissioner) was provided with an opportunity to make submissions on any implied or actual criticisms contained in this report.

1.9 The following material in this chapter sets out the background information needed to understand the nature of transfer pricing in the context of intra-group trade, its relationship to the tax rules, the international approaches to these rules and the Australian transfer pricing regime.

What is transfer pricing?

1.10 'Transfer pricing' is a management accounting and economic concept. It is defined as the amount that is charged by a part of an organisation to another part of the same organisation for assets or services.2 Transfers may include tangibles or intangibles, including raw materials, semi-finished goods, finished goods, royalties, loans and various services.3

1.11 Accordingly, transfer pricing policies are common for organisations that have multiple business units operating in either the domestic or global market place. It is the process that establishes an exchange price for the assets or services being exchanged between these different business units in the course of intra-group trade.4 The figure below provides such an example for an MNE with two business units, or divisions.

Figure 1: Intra-group trade

Diagram setting out intra-group trade between division 1 and 2.

Source: IGT.

Significance of intra-group trade

1.12 The significance of intra-group trade has increased along with the emergence of global value chains and the expansion of activities of MNEs, particularly in Asia and other developing countries.5 The term MNE is no longer limited to very large organisations, but also includes smaller organisations with one or more subsidiaries or permanent establishments in countries other than where the parent is located.6

1.13 This expansion has significantly increased the amount of international transfers of assets and services.7 Whilst there is little direct data on international related party transactions, there is indirect evidence that suggests intra-group trade represents a substantial share of world trade. It has been estimated that between 40 to 60 per cent8 of total international trade is carried out within MNEs. However, this percentage differs widely across countries and industries.9 For Australia, the ATO estimates that international related party transactions amount to approximately $270 billion annually.10

1.14 Broad patterns of intra-group trade are said to arise in trade statistics and organisational-level data. These patterns suggest that 'intra-group trade and vertical integration occur predominantly among Organisation for Economic Co-operation and Development (OECD) countries and that organisational behaviour and relationships between buyers and suppliers explain the patterns of intra-group trade'.11 These patterns are:

  • First, a large share of world trade is between related parties, that is organisations that are linked through ownership. It is difficult to provide an average share for world trade, as data are available for very few countries. But for nine OECD countries, intragroup exports of foreign affiliates already represent 16% of total exports. Adding the exports of parent entities to their associates abroad, one could come close to the figure of one-third (as measured in U.S. trade statistics).
  • However, this average masks wide differences; for example, the share of intragroup exports in total manufacturing exports is 51% in Sweden and 10% in Japan. Canada, Poland and Sweden are the countries where the share of intragroup trade is the highest. There are also wide differences across sectors. The share of intragroup trade is especially high in the automobile, pharmaceuticals and transport equipment industries.
  • Data on intragroup trade in services is even rarer. According to U.S. balance of payments data, in 2008, the share of intragroup trade in total U.S. private services trade was 22% for imports and 26% for exports.
  • In the case of the U.S. economy, the share of intragroup trade in total trade has remained more or less unchanged over the past 10 years, while the share of intragroup trade in services has increased. For other countries, there is evidence of an increase in intragroup trade in both goods and services industries.
  • Intragroup transactions are more common among OECD countries than among emerging economies. In 2009, 58% of U.S. goods imports from OECD countries were intragroup, while only 29% of U.S. goods imports from Brazil, the Russian Federation, India, Indonesia, China and South Africa (BRIICS economies) occurred between related parties. This is consistent with the fact that the bulk of foreign direct investment (FDI) is among OECD countries; and
  • While intragroup trade is mainly in intermediate goods, connecting the different stages of global value chains, there are also significant intragroup trade flows for final goods. This is explained by the importance of distribution networks in international production chains.12

Why do organisations price intra-group trade?

1.15 There are a number of reasons why notional or actual transfer prices are charged for intra-group trade. 'From an operational point of view, a properly designed transfer pricing strategy will provide the framework for management to make decisions congruent with the [organisation's] goals and a basis for rewarding the managers for their performance. More importantly, from a strategic perspective, transfer pricing can play an important role in the achievement of [organisation-wide] goals'.13

1.16 A well-developed transfer pricing policy has become increasingly important to organisations with highly decentralised decision-making structures with profit responsibility allocated to individual business units.14

1.17 Decentralised decision-making structures are a response to the need to become more competitive and increase market share in today's global marketplace. To cope with the rapidly changing marketplace, organisations have divided themselves into strategic business units by, for example, products, services, function or location, each with its own revenues, expenditures and capital asset purchase programmes. Therefore, each unit has its own profit and loss responsibility which enables it to keep the day-to-day decision making at a lower organisational level where quality and speed of the decisions can be enhanced and some or all of the separate business units may be effectively, autonomous 'profit centres'.15

1.18 To further improve profitability and efficiency, business units may be located in different jurisdictions where, for example, particular skilled labour forces exist or where labour costs are particularly low. Frequently, this is how MNEs have come into existence in recent times.

1.19 Management accounting and economic literature commonly acknowledge the use of transfer pricing of assets and services between business units as providing incentives for unit managers to achieve the optimal level of output that will maximise the organisation's profit as a whole. This is because prices which are set on internal transfers affect the level of activity within the units.16

1.20 Charging transfer prices for intra-group transactions allows an organisation to also evaluate the performance of the business units. The individual units within an organisation may be separate profit centres and transfer prices are required to determine the profitability of the units. Therefore, by charging prices for goods and services transferred within an organisation, managers of business units are able to make the best possible decision as to whether to buy or sell goods and services inside or outside the organisation.17

1.21 The organisation's transfer pricing policy will define its rules for calculating transfer prices, amongst other things, including whether internal purchasing is mandatory or if business units have discretion to source purchases.18

Management accounting transfer pricing methods

1.22 There are a range of methods and variations that are used in management accounting systems to calculate transfer prices. The typical transfer pricing methods are:

  • dictated transfer prices which are determined by senior management and used where sufficient information is available concerning costs and demand characteristics that would optimise the profits for the overall organisation;19
  • market-based transfer prices which may be used where there is a well-established, competitive and stable external market for the asset or service. This method is only useful where such a market exists and there is no economic distress or no particular pricing strategies, such as price discrimination;20
  • negotiated transfer prices which involves managers of business units negotiating a mutually agreed transfer price. This method may be used when managers have their own profit responsibility and may have the ability to source assets or services from external suppliers;21 and
  • cost-based transfer prices which are based on the production costs of the supplying business unit and may be used where there is no established market for the asset or service. There are a number of variations of this method that seek to, for example, better align managers' incentives.22

Transfer pricing and taxation

1.23 As outlined above, transfer pricing is used by managers for a number of genuine management accounting and economic reasons, such as group profit maximisation and performance measurement. The controversy with transfer pricing however, stems from the jurisdictional nature of MNEs and the overarching relationship between related business units, as opposed to unrelated organisations. Due to different rates of income taxation globally, it is possible for MNEs to use the relationship between their business units to set transfer prices that may reduce the MNE's worldwide tax bill.23

1.24 Corporations law requires directors to focus on the overall profitability of the corporation. This is due to the agency relationship between directors and shareholders, which obliges management to optimise the returns on investment for their principals—the shareholders.24 In discharging their obligations, managers take into account the corporate tax burden as it contributes to the overall profitability of the MNE.25

1.25 For example, in the diagram below, if the 'tax rate B' is greater than the 'tax rate A' then the MNE may have an incentive to shift profits to the Division 1, located in the country with 'tax rate A' by paying a higher than arm's length transfer price.

Figure 2: Cross-border intra-group trade

Diagram setting out cross-bordner intra-group trade.

Source: IGT.

1.26 The definition of cross-border transfer pricing for tax purposes is similar to the management accounting and economic concept. For example, the Bills Digest to Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 defines cross-border transfer pricing as, 'the prices charged when one entity of a multinational group buys or sells products or services from another entity of the same group in a different country'.26

1.27 The evolution of the global business environment and intra-group trade over the past two decades has had significant implications for the issue of cross-border transfer pricing. This is due to the impact of transfer pricing on the income generated on cross-border transactions and profits of business units which also impacts the tax paid in each jurisdiction.27 Accordingly, transfer pricing is of interest to governments because it directly affects their corporate tax base.

1.28 Transfer pricing, in a base erosion and profit shifting (BEPS) context, is one of the most important global tax issues. This issue has received much attention in recent years at forums, including the OECD,28 the Group of Eight (G8)29 and the Group of Twenty Finance Ministers and Central Bank Governors (G20),30 as governments are becoming increasingly concerned with corporate tax base erosion31 — the colloquially named 'double Irish, Dutch sandwich' arrangement is a prime example. Concerns have also become increasingly political with major governments launching inquiries into activities of a number of large corporations.32

1.29 Although, the minimisation of tax liabilities may influence MNE transfer pricing policies and practices for cross-border intra-group transactions, it is not the only factor. As stated earlier, the need to set transfer prices is a normal aspect of how MNEs operate.

1.30 Indeed, the OECD states that the expression 'transfer pricing' is neutral, 'the consideration of transfer pricing problems should not be confused with the consideration of problems of tax fraud or tax avoidance, even though transfer pricing policies may be used for such purposes'.33

1.31 The United Nations (UN) similarly states that the 'term transfer pricing is, however, sometimes used, incorrectly, in a pejorative sense, to mean the shifting of taxable income from a [business unit], belonging to [an MNE], located in a high taxing jurisdiction to a [business unit] belonging to the same [MNE] in a low taxing jurisdiction through incorrect transfer prices in order to reduce the overall tax burden of the [MNE]'.34

1.32 The UN also notes that,

[m]any MNEs prefer to maintain a good relationship with the tax authorities of the countries where they are active. Certainty about the amount of tax to be paid is a top priority for large companies and they usually operate a well-documented, straightforward transfer pricing system, which is... in the first place, a requirement of sound business economics.35

1.33 It should also be noted that revenue authorities generally have opposing concerns compared to customs authorities.36 For example, with inbound transactions, revenue authorities will be concerned with potential overpricing of transactions whereas customs authorities will be concerned with under-pricing of transactions to avoid duty.

Arm's length principle

1.34 To avoid the erosion of the corporate tax base, each government has to scrutinise the transfer pricing policies of MNEs operating in its jurisdiction. OECD member countries use the arm's length principle in determining whether a cross border transfer price is appropriate. This principle is described in the following terms:

[where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.37

1.35 The arm's length principle is based on the economic rationale that a business unit having a view to its own interests would only acquire assets or services from another related unit if the purchase price was equal to, or cheaper than, prices being charged by unrelated suppliers. This principle also applies, conversely, in relation to a unit providing an asset or service, as it would rationally only sell assets or services to an associated unit if the sale price was equal to, or higher than, prices paid by unrelated purchasers. On this basis, prices should gravitate towards the transaction price to which two unrelated parties would agree.38

1.36 The development of an arm's length principle in taxation rules had simple origins. In the domestic legislation of several European countries such as Austria, Germany, Luxembourg, the Netherlands and Switzerland, the arm's length principle was the underlying basis for the adjustment of income of shareholders who had received extraordinary benefits from a company which had not officially been declared as dividends. The adjustment in such cases is made by deeming such benefits to be dividends.39

1.37 Accordingly, the arm's length principle featured in the treaties concluded by France, the United Kingdom (UK) and the United States (US) during the 1920s and 1930s.40

1.38 Today, if the pricing of related-party cross border transactions does not accord with an arm's length price, the revenue authorities of many countries, including OECD countries, may consider it to be tax avoidance or evasion under their respective legislation.41

History of international transfer pricing tax rules

1.39 The history of international transfer pricing tax rules to address profit shifting is one that continues to evolve.

1.40 One of the original international tax rules for transfer pricing was the predecessor of section 482 of the US Internal Revenue Code:

...Section 482 was enacted in 1928 as Sec. 45. Until 1986 it remained substantially unchanged. It gives authority to the Secretary of the Treasury — in the case of two or more organisations owned or controlled by the same interests — to distribute, apportion or allocate gross income, deductions, credit or allowances between or among these organisations if it is determined that such a distribution, apportionment or allocation, is necessary to prevent tax evasion or to clearly reflect the income of such organisations. This language is very broad and grants the Internal Revenue Service (IRS) extensive powers to make adjustments.42

1.41 However, it was acknowledged that difficulties would arise if each country involved in cross-border transactions were to unilaterally impose tax on income generated within their borders without regard to the taxations rights of the other countries and the potential for double taxation.43

1.42 Rules were needed to safeguard inter-jurisdictional equity between countries while at the same time not distorting the competitive environment within which both independent organisations and business units within MNEs operate.44 These rules are established through tax treaties which are more formally known as 'Conventions for the Avoidance of Double Taxation with Respect to Taxes on Income and the Prevention of Fiscal Evasion'.

1.43 The primary function of tax treaties is to control the way in which income is taxed by two countries to avoid or alleviate double taxation and reduce international tax avoidance bilaterally.45 It is worth noting that most tax treaties include provisions which establish the Mutual Agreement Procedure (MAP) for eliminating double taxation and resolving conflicts of interpretation of the convention.46

1.44 Since one of the two main goals of tax treaties is the avoidance of double taxation, the benefit of a standardised and uniform approach to clarify and confirm the economic situation of taxpayers who are engaged in activities in other countries, was first recognised in 1936 by the League of Nations in its Draft Convention on the Allocation of Profits and Property of International Enterprises.47

1.45 The OECD continued the work of the League of Nations and, in 1963, released its draft Model Tax Convention (MTC).48 The MTC and its commentary were clarified in 1977, with further revisions in 1992, 2008 and 2010.49

OECD administrative guidance

1.46 Due to the increase in the number of MNEs and related party transactions within MNEs since the 1960s, the OECD considered it necessary to produce administrative guidance for its members' revenue authorities. The development of these guidelines was significantly influenced by the US Treasury's regulations of 1968 on the transfer pricing of tangible property.50 In 1979, the OECD's Committee on Fiscal Affairs, Working Party Number 6 sub-group, produced the guidelines which were entitled 'Transfer Pricing and Multinational Enterprises' (OECD Guidelines).51

The [guidelines were] not intended to establish a detailed standard of transfer pricing, but rather to set out the problems and the considerations to be taken into account and to describe which methods and practices were acceptable from a tax point of view in determining transfer prices.52

OECD transfer pricing methods

1.47 For the purposes of taxation, the OECD and revenue authorities, such as the ATO, outline five generally acceptable pricing methods for the transfer of assets or services:

  • The comparable uncontrolled price method (CUP) compares the transfer price for transactions between business units within an MNE (controlled transaction) and that charged for comparable transfers between the MNE and unrelated organisations (uncontrolled transactions).
  • The resale price method uses the price at which assets or services that have been purchased from a related business unit are resold to an unrelated organisation (resale price). The resale price is then reduced by an appropriate 'resale price margin' which is determined by reference to the margins in comparable uncontrolled transactions.
  • The cost plus method uses the costs incurred by the supplying business unit in controlled transactions plus an appropriate mark-up. The mark-up is determined by reference to the mark-up earned by suppliers in comparable uncontrolled transactions.
  • The transactional net margin method (TNMM) uses a net profit indicator of comparable uncontrolled transactions. Net profit indicators include the ratio of net profit to costs, sales or assets.
  • The transactional profit split method splits an MNE's combined profits from controlled transactions on an 'economically valid' basis that approximates the division of profits that would have been anticipated between unrelated organisations.53

Difficulties in choosing transfer pricing methods

1.48 There are a range of factors that complicate management's choice of appropriate transfer pricing methods. These factors include:

  • organisational management concerns, such as corporate strategic goals, incongruity between differing managers' goals, organisational culture, and performance measurement;
  • organisational financial issues, such as management of cash flows, currency exchange rate fluctuations and valuation difficulties, including those with unique patents and other intangibles, highly specialised goods, particular forms of services and certain transactions that are rarely or never conducted between independent organisations;
  • economic and industry pressures, such as intensity of competition and economic conditions; and
  • regulatory issues, such as differing international taxation regulations, tariffs and custom duties, anti-dumping regulations, and restrictions on capital flows.54

1.49 More fundamentally, not all management accounting transfer pricing methods easily align with, or are acceptable for, the purposes of taxation unless they reflect arm's length prices. This is due to management and revenue authorities having different areas of focus.55 Management is focused on business optimisation and performance assessment whereas revenue authorities are concerned with the arm's length principle.56 For example, dictated transfer prices or group profit maximising prices may not align with arm's length prices.

1.50 There are other potential incongruences between management accounting methods and methods acceptable to revenue authorities. For example, management accounting transfer prices consider synergies between business units that contribute to the overall profit of an organisation. These related party synergies are inherently at odds with the arm's length principle used by revenue authorities.57

1.51 Another potential inconsistency between management accounting transfer pricing methods and methods acceptable to revenue authorities is that the former generally starts from marginal cost as a base for determining optimal transfer prices, whereas the latter starts from the market price as the best estimate for intra-group transfer pricing.58

1.52 Tax legislation of a country may also have an impact on commercial transfer pricing approaches. If the commercial system is in conflict with the relevant tax rules, companies may either adopt a revenue authority's accepted system or, if allowed, maintain two systems, one for commercial purposes, the other for tax purposes.59

1.53 Accordingly, from these conceptual differences, the efficient business transfer prices and those required under tax law may rarely coincide.60

1.54 Due to the difficulties in setting appropriate transfer pricing policies, many managers regard transfer pricing as an unsolved or unsolvable conundrum.61 Specifically, in relation to income tax, it has been said that:

[o]ne of the greatest challenges faced by multinationals in setting appropriate transfer pricing policies is the alignment of the applicable tax regulations and the corporation's business objectives.62

Challenges to the OECD's approach

1.55 Challenges to the OECD's approach to international transfer pricing is not new. For example, when the US tightened their domestic legislation in 1986, the changes induced both US and foreign groups to revise their transfer pricing methods that gave the US Treasury a greater proportion of tax revenue than, according to some commentators, was reasonable.63 However, countries with less sophisticated tax systems and administrations ran the risk of significant loss of their corporate tax base at the expense of the more comprehensive US rules. Indeed, the UN states,

[c]ountries with less sophisticated tax systems and administrations have run the risk of absorbing the effect of stronger enforcement of transfer pricing in developed countries and in effect paying at least some of the MNEs' tax costs in those countries. In order to avoid this, many countries have introduced new transfer pricing rules.64

1.56 The above tension led the OECD to revise its transfer pricing guidelines in 1995 in an attempt to bridge the differences.65

1.57 The governments of developing countries are also turning their attention to new domestic legislation, building and refining auditing practices and capability, and increasing enforcement resources.66

1.58 In the current global environment, the importance of countries such as Brazil, Russia, India, China and South Africa (BRICS Countries) has continued to grow. On some estimates, non-OECD countries will form the majority of global Gross Domestic Product (GDP) by 2030, as is set out in Figure 3 below.

Figure 3: OECD vs non-OECD participation in global GDP

Stacked column graph showing OECD vs non-OECD participation in global GDP. On some estimates, non-OECD countries will form the majority of global Gross Domestic Product (GDP) by 2030.

Source: OECD Development Centre, Perspectives on Global Development 2010: Shifting Wealth (June 2010).

1.59 The UN entered the transfer pricing arena in 200967 by releasing its first working draft chapters of its Practical Manual on Transfer Pricing for Developing Countries (UN Manual) in 2010. The first version of this manual was published 2012. The UN also published a Model Double Tax Convention between Developed and Developing Countries (UN MDTC) in 2011.68

1.60 Whilst the UN Manual and UN MDTC similarly adopt the arm's length principle,69 the UN Manual also aims to reflect the realities for developing countries at different stages of their development. The specific experiences of developing countries and the work done in other forums, such as the OECD and African Tax Administration Forum is also accommodated.70

1.61 A key difference between the OECD Guidelines and the UN Manual is the latter's emphasis on location savings and location-specific advantages. From a developing country perspective, the UN Manual emphasises that additional consideration should be given to the appeal that developing country markets offer companies doing business within their jurisdictions. Consideration is also given to the subsequent turnover generated from such activities, the availability of relatively low labour costs and skilled people to render services and the fact that there may be access to a large consumer force with spending power.71

1.62 Another significant difference to the OECD Guidelines is that the UN Manual includes a country-specific chapter on the BRICS Countries. In this chapter Brazil, China, India and South Africa list either the transfer pricing system in place in their country, such as Brazil's fixed margins system, or issues of particular concern for their respective jurisdiction, such as China's location-specific advantages, India's control over research and development activities and South Africa's challenges with comparability and the high cost of foreign management services.72

1.63 Accordingly, the main challenges for the OECD Guidelines stem from the divergence of views of some BRICS Countries on the arm's length principle itself or on theoretical aspects, such as location-specific advantages and marketing intangibles.

Current challenges for many countries

1.64 In the current economic environment, many countries are experiencing lower government revenues. This experience has prompted many to re-examine the nature of cross-border transactions, the applicable rules and whether the risk of erosion of the corporate tax base is sufficiently addressed. The OECD observes that this is heightened because international standards have not kept pace with changing business environments that facilitate profit shifting:

While there clearly is a tax compliance aspect, as shown by a number of high profile cases, there is a more fundamental policy issue: the international common principles drawn from national experiences to share tax jurisdiction may not have kept pace with the changing business environment. Domestic rules for international taxation and internationally agreed standards are still grounded in an economic environment characterised by a lower degree of economic integration across borders, rather than today's environment of global taxpayers, characterised by the increasing importance of intellectual property as a value-driver and by constant developments of information and communication technologies.73

1.65 Many countries now face the challenge to find the right balance between protecting their national tax base and avoiding double taxation that would hamper international trade.74 As a net capital importer, Australia also faces the challenge of encouraging foreign investment while ensuring that MNEs pay an appropriate level of tax.

1.66 These challenges have been discussed in a number of international forums including the OECD, G8 and G20 as the potential remedies require a degree of international cooperation to protect sovereign revenues whilst avoiding double taxation or double non-taxation. To help facilitate discussion on the issues, the OECD has released an 'action plan' for base erosion and profit shifting.75

1.67 As a result, these changes are contributing to uncertainty and complexity experienced by tax authorities and businesses alike.

Simplification measures

1.68 Transfer pricing requirements may create a substantial amount of uncertainty for taxpayers. For taxpayers with comparatively less resources, the compliance burden can be significantly disproportionate to the risk to revenue and have a regressive effect. In this respect, many countries have adopted transfer pricing 'simplification measures' to reduce the compliance costs for Small and Medium Enterprises (SMEs) and those with smaller international transactions.

1.69 Indeed, the OECD in June 2012 published a paper acknowledging that transfer pricing documentation requirements should be reasonable and should not impose costs and burdens which are disproportionate to the circumstances.76

1.70 The OECD paper outlines the transfer pricing 'simplification' measures of a range of OECD and observer countries. In summary, the paper generally found:

  • 80 per cent of respondent countries (41 in total) indicated that they have transfer pricing simplification measures and are generally viewed favourably by taxpayers in their respective countries;
  • almost 75 per cent of simplification measures benefit SMEs, small transactions and low value adding intra-group services (transactions deemed to carry limited risk); and
  • all safe harbours reported are optional which probably explains why no country reported double taxation cases that may have been caused by the application of their own or another country's simplification measure.

1.71 A further analysis of the types of simplification measures show:

  • 54% are exemptions from or simplified documentation or reporting;
  • 22% are simplified transfer pricing methods, safe harbour arm's length ranges and interest rates;
  • 11% are exemption from rules or adjustment;
  • 10% are simplified Advance Pricing Arrangement (APA) procedures; and
  • 3% are exemption or reduction from penalties.

1.72 As can be seen from the above break-down, the simplification measures mainly relate to documentation and transfer pricing methods.

Australian transfer pricing legislation

1.73 The Australian Parliament first enacted legislation to address the revenue concerns with transfer pricing under clause 28 of the Income Tax Assessment Act 1922.77 The intention of this provision was to address concerns with foreign companies not paying appropriate tax in Australia.78

1.74 Clause 28 was later revised as section 136 with the enactment of the Income Tax Assessment Act 1936 (ITAA 1936). The intention of section 136 of the ITAA 1936 was to allow the Commissioner to reconstruct the taxable income of a taxpayer in situations where the Commissioner determined that profits had been transferred out of Australia to reduce their Australian taxation liabilities.79

1.75 Over time, many issues were identified with the effectiveness of section 136 including:

  • The section can be read as applying only in a direct parent-subsidiary situation... the provision can be avoided simply by adding one more company to the structure.
  • The section is generally capable of application only to foreigners and does not set out to deal with tax avoidance through international transactions by Australians.
  • The "control" test precludes application of the section when independent parties act in collusion to shift profits for mutually shared tax advantages.
  • The limitation to business profits may preclude application to arrangements involving rents or other income not clearly business proceeds.
  • The section may not be appropriate to allow only one element of business arrangements, e.g., payment of inflated royalties, to be examined in isolation.
  • It is arguable that the section is applicable only to companies whereas the arrangements can be made also by individuals, trusts and other entities.
  • The section's link with total receipts is arguably unduly restrictive; it could mean that, even where total receipts have been reduced by a tax avoidance ploy, the Commissioner cannot look beyond the reduced amount in determining taxable income.
  • The section is inadequate to impute derivation of income in a transaction which, if between independent parties, would produce it. (A common arrangement is the granting of interest-free loans to off-shore associates located in tax haven countries).80

1.76 Some of the issues above became apparent in Federal Commissioner of Taxation v Commonwealth Aluminium Corporation Ltd,81 where the High Court of Australia (High Court) held that the test requiring a company to be controlled by non-residents before section 136 of the ITAA 1936 could be invoked, was not satisfied. The High Court found that although the Australian resident company was 90 per cent owned by two non-resident companies, the business was 'controlled' by its Australian resident directors. This case also found that the share ownership tests in section 136 were limited in their application.82

1.77 Following the development of uniform and standardised international tax rules for transfer pricing during the 1960s and 1970s, and as a result of Commonwealth Aluminium Corporation,83 the Australian Parliament in 1981 responded to domestic concerns by enacting Division 13 of the ITAA 1936.84

1.78 Division 13 was designed to give the Commissioner broad powers to reset the prices for certain transfer pricing transactions and overcome the technical or potential deficiencies of the former section 136 of the ITAA 1936. With Division 13, the Commissioner gained the power to deem an arm's length amount for both income and expenses.85 As such, the Commissioner was authorised to apply the substantive provisions of Division 13 to adjust income or deductions in situations where property, including services, was acquired or supplied under an 'international agreement'.86

1.79 The substantive operation of Division 13 of the ITAA 1936 has been tested relatively recently, in two cases. These cases were Roche Products Pty Ltd v Commissioner of Taxation87 and Commissioner of Taxation v SNF Australia Pty Ltd (SNF Case).88 The Full Federal Court's decision on appeal in the latter case raised a number of issues with the scope and operation of Division 13. The decision did not remove the doubt on the ATO's authority to rely on tax treaties as a basis for assessment. Also, the decision did not allow the ATO to rely on the OECD Guidelines in interpreting Division 13. Importantly, it also rejected the ATO's profit-based approach in requiring arm's length consideration to be determined on all of the circumstances of the taxpayer, rather than a transaction based appraisal involving a comparison of purchases by independent parties with the same characteristics and circumstances of the taxpayer.89

1.80 Following this decision, the Government announced its intention to replace Division 13 of the ITAA 1936 with modernised transfer pricing rules.90

1.81 Essentially, the Government sought to ensure that Australia's modernised domestic transfer pricing rules were consistent with OECD principles and clarified that the treaty articles provided a separate power to make transfer pricing adjustments.91

1.82 The first tranche of transfer pricing reforms92 became law on 8 September 2012, which inserted Subdivision 815-A into the Income Tax Assessment Act 1997 (ITAA 1997).93 It applies retrospectively from 1 July 2004 and to cases involving jurisdictions with which Australia has a relevant tax treaty. The requirement for the Commissioner to determine the transfer pricing adjustment has been removed and the law has become self-executing which is more aligned with the self-assessment system.

1.83 Specifically, Subdivision 815-A of the ITAA 1997 is intended to confirm the broader profit-based approach through applying to a 'transfer pricing benefit'. Amongst other things, this subdivision incorporates the OECD Guidelines as extrinsic materials for the interpretation of the law.

1.84 The second tranche of transfer pricing reforms,94 became law on 29 June 2013, repealing Division 13 of the ITAA 1936 and enacting Subdivisions 815-B to 815-E of the ITAA 1997. It operates prospectively and applies to cross-border dealings involving jurisdictions with which Australia does not have a tax treaty.

1.85 In addition to confirming the broader profit-based approach and the use of the OECD Guidelines as extrinsic materials, this tranche also sets out 'arm's length conditions' which effectively elevates into law the ATO's compliance approach in the SNF Case.

1.86 Importantly, penalties for no reasonably arguable position will be imposed on those taxpayers that do not maintain transfer pricing documentation that meets the requirements of Subdivision 284-E of the Taxation Administration Act 1953. This will enhance the need for taxpayers to maintain comprehensive and contemporaneous transfer pricing documentation. The new legislation also implements a seven-year time limit for transfer pricing adjustments. Previously the Commissioner had an unlimited period in which to make amendments in transfer pricing matters.

Transfer pricing in the ATO

1.87 The following section will outline both the history of transfer pricing in the ATO and aspects of the ATO's current approach to transfer pricing.

History of the ATO's transfer pricing approach

1.88 The ATO's approach to transfer pricing has evolved over time from its increasing emergence as a taxation risk in the 1960s. From this time, the ATO performed a role in engendering a more focused coordination of international efforts to address profit shifting as a risk to sovereign revenue though its involvement in the OECD.95

1.89 At that time, the ATO's internal organisational arrangements were geographically based on functional activities, such as audit and review. The ATO had no national compliance programs focused on assessing potential transfer pricing risks. However, during a pilot initiated in 1988 that focused compliance activities on large business, generally known as the Large Case Program, the ATO became aware that international tax was emerging as an important revenue risk in a very complex area at the larger end of the market.96

1.90 During the 1980s, the ATO worked with the United States Internal Revenue Service (IRS) to develop a binding ruling approach to transfer pricing issues. This work was in response to US taxpayers and their representatives' requests for an alternative form of transfer pricing compliance. They sought a form that was less adversarial and more productive by agreeing on a pricing methodology that reflected profits. In 1990, the IRS released its Revenue Procedure for Advance Determination Rulings and shortly afterwards the world's first bilateral APA was concluded in 1991 between the ATO, IRS and an MNE.97

1.91 In 1994, the ATO established the International Tax Division (ITD) as a specialist group to develop strong organisational capability to deal with international tax risks and to support the audit function.98 Over time, the ITD was renamed the International Strategy and Operations (ISO) unit and was located in the Large Business and International (LB&I) business line.

1.92 The ISO's immediate focus was to develop public guidance. In the late 1990s, the ATO provided advice on links between the concepts of 'arm's length' and 'comparability' with the methods that can be used to establish the arm's length outcome in certain circumstances in Taxation Ruling TR 97/20 and the documentation taxpayers should have in place to support their transfer prices in Taxation Ruling TR 98/11.99

1.93 Soon after publishing Taxation Ruling TR 98/11, the ATO embarked on a 'transfer pricing record review and improvement project'. This project selected 190 companies from the large market to assess these companies' transfer pricing processes and documentation against that set out in Taxation Ruling TR 98/11. Companies that were assessed as a comparatively medium risk were either asked to explain how the transfer pricing practices and documentation complied with the arm's length principle or to lodge a schedule of information, Schedule 25A, with their next tax return. The project also sought to review taxpayers' use of the Schedule 25A and the accuracy of taxpayers' responses. Those with a comparatively higher risk were either subjected to a transfer pricing record review on their next tax return or a full audit.

1.94 Companies, notified by the ATO that they would be audited, were given the option of negotiating an APA allowing them to negotiate an agreement on the transfer pricing methodologies used. As a result of this project, the amount of tax paid by these companies increased by 32 per cent in the following year, even though the income for these companies fell by 5 per cent. The results were calculated by adding the net tax paid from all companies in the project beginning with the year preceding the project through to three years after the project was completed.100

1.95 As ISO officers gathered more experience, the ISO area developed to fill capability gaps in the audit function by establishing a Transfer Pricing Practice (TPP) and International Audit Review Committees (later renamed the Transfer Pricing Review Panel (TPRP)) with these experienced officers. These ISO officers became directly involved in conducting reviews and audits involving transfer pricing issues (transfer pricing case work) although Operational case teams were still expected to remain involved in transfer pricing case work.101 This approach is referred to as the 'centralised' approach.

1.96 The ATO also identified that many medium sized enterprises were also involved in international related party dealings. This had been facilitated by developments in technology and the movement towards a more integrated global economy which provided greater mobility of labour, capital and value chains.

1.97 As a result, the ATO established two case teams in the SME business line in 2003-2004 to exclusively conduct transfer pricing case work. Although a large majority of these cases are said to involve less complex technical issues as larger business cases, SME cases could involve greater complexities as there is comparatively less publicly available information on non-publicly listed companies and high wealth individuals. Therefore, the ATO's concerns in this market segment were more focused on understanding the reasons for taxpayers' economic performance.

1.98 During the period 2004 to 2009 the ATO identified transfer pricing as a major focus area with emerging risks including:

  • business restructures;
  • guarantee fees;
  • intra-group loans;
  • transfer of intangible property;
  • foreign banks (profit allocations); and
  • transfer of losses between jurisdictions.102

1.99 The ATO undertook a number of specific projects during this period to address these risks, such as the intangibles project. To assist with Australia's economic recovery following the Global Financial Crisis (GFC), the Government also provided specific funding to the ATO for a 'Strategic Compliance Initiative' (SCI) in 2009. Of this funding, $50.7 million over four years was allocated by the ATO to focus on the above emerging transfer pricing risks under the Transfer Pricing SCI (TPSCI) project. Under this project, 100 ATO officers were to conduct a number of transfer pricing matters.103 As there were not enough transfer pricing specialists within the ATO at the time, the ATO recruited staff with varying capability. Conscious of taxpayers' compliance costs, the ATO took a differentiated approach to compliance activities.104

1.100 Although the ATO received increased funding to address transfer pricing matters, the ISO area faced its own challenges. The ISO unit, and the TPP, had lost a number of key experienced and technically equipped officers to other areas of the ATO or the private sector or through retirement. The ATO was aware that the capability of the departing key ATO officers would take a number of years to develop and replace.105

1.101 Tensions between the ISO unit and business lines also began to arise as the operational case teams in the business lines considered that they lacked opportunities to develop their capability by being excluded from more challenging transfer pricing case work. A view emerged in the business lines that there was no need for a specialist unit to do transfer pricing work as the key competencies required were centred on business knowledge and complex accounting skills rather than tax law. This may have led to the decline in overall ISO staff morale.106

1.102 In 2007, the ATO was aware that the rate of APA applications had slowed, which may have been due, in part, to increasing criticisms by taxpayers.107 In mid-2007, the ATO responded to a number of issues regarding large and complex APAs by implementing the Transfer Pricing Management System (TPMS) (reproduced in Appendix 2). Through this system the ATO sought to establish 'a uniform approach to the management of transfer pricing throughout the [ATO], including processes to ensure the quality and consistency of transfer pricing work and develop capability in transfer pricing via a technical network'.108 The TPMS implemented cross-line specialist support for operational matters through a Transfer Pricing Network (TPN), a new emphasis on intelligence and data flows as well as cross-line representation on forums and committees to strengthen intelligence and coordination.109

1.103 Following the implementation of the TPMS, the ATO engaged PricewaterhouseCoopers (PWC) Legal to undertake a review of its APA program in 2008 (2008 APA Review). At the time of the 2008 APA Review, PWC Legal noted that the TPMS had 'yet to have the intended traction', with the majority of feedback and experiences with the TPMS not being considered as part of their review. PWC Legal was of the opinion that full implementation of the TPMS may address a number of the issues raised in their review.110

1.104 The review made recommendations directed at a number of aspects of the APA program, including:

  • improving the consistency and certainty in the application of the ATO's APA processes;
  • improving the ATO's communications on the reasons for information requests and their focus;
  • providing oversight of the APA program by a 'dedicated team' which would allocate cases to appropriately capable APA teams;
  • requiring detailed project plans to be agreed upfront and adhered to;
  • reviewing work completed to resolve issues at each stage and not re-raising those issues unless previously agreed to between the parties — a 'stage and gate' approach;
  • increasing investment in and the structure of ATO officer training and development;
  • publishing safe harbours and benchmarks; and
  • improving the performance measures for the APA program.

1.105 The complete list of recommendations can be found in Appendix 3.

1.106 In 2009, the ATO released its draft response to the 2008 APA Review where it stated that it 'agrees with the broad thrust of the recommendations but does not necessarily agree with each of the specific sub recommendations'.111 However, the ATO did identify the priorities for implementing the recommendations and additional measures by consulting with two of its key forums, the Large Business Advisory Group (LBAG) and the (former) National Tax Liaison Group (NTLG) Transfer Pricing Sub-group.112

1.107 As a result, the ATO established an APA Co-design Committee in January 2009 as a subcommittee of the former NTLG Transfer Pricing Sub-group, comprising tax practitioners, their representatives and ATO officers. This committee was responsible for co-designing aspects of the ATO's APA program in line with the 2008 APA Review, including a process for negotiating complex APAs.113 Key aspects of this work included:

  • identifying the issues to be agreed in advance between the ATO and the taxpayer on the scope of an APA during the pre-lodgment phase;
  • developing guidelines for a differentiated APA Program;
  • developing a project management framework for all APAs; and
  • establishing a review mechanism which provides taxpayers with a right of review for ATO decisions regarding the APA process.114

1.108 The culmination of this co-design work was ultimately documented in Practice Statement PSLA 2011/1.

1.109 Importantly, around 2008, ATO senior management became aware that in some case work, which focused on narrow aspects of transfer pricing, a number of key non-international tax risks, such as capital gains, may not have been considered.115

1.110 At this time, the ATO also commissioned two internal reviews of the function and operations of the ISO unit, one in 2008 and one in 2009.116

1.111 The latter internal review, the International Review Project into 'Achieving Best Practice for Managing International Work across the ATO' (International Review),117 was conducted by a senior officer who had worked in the ISO unit.118 The findings of the review were discussed in a number of internal ATO forums and, although the ATO has been unable to locate this report for the IGT,119 senior ATO officers advise that the key findings of that review included the following:

  • Although it was a good idea in 1990 to establish a specialist group to develop the capability to deal with transfer pricing matters, the organisational arrangements made it difficult to disseminate that capability more broadly within the ATO. In particular, the ISO unit and TPP had become too involved in conducting casework at the expense of developing the capability of others in the business lines to deal with international tax risks.120 When a number of key influential and experienced transfer pricing officers left the ATO, succession planning had failed to address the resulting capability gap.121
  • The ATO's strategy and risk management of transfer pricing involved unclear and complicated interactions between different areas of the ATO (see Appendix 2 which sets out the TPMS as at 2007) and effective treatment of international tax risks needed strengthened leadership and clearer accountabilities.122
  • There was inadequate interaction and integration between the TPP and other units in the ATO.123 In particular, some international tax risks may have been missed because of 'siloing' of tax law specialisations in the international area.124

1.112 The issues were presented to the ATO's Executive and the following four recommendations were endorsed:

  1. International work needs to be appropriately handled in a diversified way across the ATO and managed largely as 'business as usual'. (Recognising diversification)
  2. The International Steering Committee (ISC), which is represented by compliance, law and operations, should help to steer and co-ordinate international work across the ATO. (Better steering and co-ordination)
  3. Clearer ownership of, and accountabilities for, international risks. (Clearer ownership and accountabilities)
  4. Need for a more strategic approach in our relationships with Treasury, Government etc and in international relations. (More strategic approach to relationships).125

1.113 Further ATO work was undertaken to identify what action should be taken to implement these recommendations.

International review — changes to the ATO's approach in 2010

1.114 A proposal, 'International Review — Proposed Changes to, and Options for, Organisational Structure and Staffing' (International Review Proposal), was presented to, and endorsed by, the ATO Executive on 12-13 October 2010. The following is a summary of actions that the ATO carried out:

  • Restructure the ISO function by:
    • replacing the ISO area with an Internationals unit comprising:
      1. an International Strategy & Risk Unit with a 3-5 year strategic plan to design risk mitigation strategies, assist the ATO to develop a comprehensive approach to the management of international strategy and risk, work closely with and support the ISC and provide assurance to the ATO Executive;
      2. a Jurisdictional Income Practice (later renamed the Profit Shifting Practice (PSP)) that would be removed from case work and provide a specialist advisory role to the business lines on an expanded scope of technical issues involved in 'profit shifting', including transfer pricing, thin capitalisation, offshore banking units, cross-border arbitrage, treaties and withholding taxes;
      3. an Offshore Non-Disclosure & International Relations Practice (later renamed the International Engagement and Transparency Practice) that would work towards increasing international cooperation on international tax risk issues in accordance with a 3 year strategic plan;
    • Moving 120 Full Time Equivalent (FTE) staff in the Offshore Compliance Program to the Micro Enterprises and Individuals (MEI) business line so as to, amongst other objectives, help the Internationals unit focus on higher level strategy and risk tasks while helping to develop capability in the business lines;
    • Moving the Internationals New Measures function to the LB&I New Measures area;
    • Moving the Joint International Tax Shelter Information Centre (JITSIC) function from the ATO's Aggressive Tax Planning business line to the Internationals unit to, among other objectives, provide the JITSIC with more support from the Internationals unit;
    • Incorporating the Economist Practice into the Internationals unit temporarily to, among other objectives, provide a stronger link between the tax law and economic aspects of transfer pricing;
  • Rationalise the ATO's internal and external committees responsible for international tax risks and restructuring their reporting by:
    • establishing a new International Steering Committee (ISC)126 that would report directly to the ATO Executive rather than the Income Tax Steering Committee (ITSC) which reported indirectly to the ATO Executive through the Compliance Executive;
    • moving the reporting of various international committees to the newly formed ISC, rather than reporting to the ITSC and LB&I business line Executive;
    • absorbing the Treaties Steering Committee, Non-Resident Withholding Tax Steering Committee and Transfer Pricing Steering Committee into a newly formed Jurisdictional Income Working Group (now called the Profit Shifting Working Group); and
    • absorbing a number of NTLG sub-groups into one Internationals NTLG Sub-group.127

1.115 At this time, the ATO also identified the need for an improved international data set to assess risk and to facilitate the strategic management of international compliance risks. The ATO considered that although Schedule 25A obtained information relating to international related party transactions, it did not capture enough information on emerging international arrangements. These arrangements include those, such as involving trade in international financial markets/products, intangibles and services.

1.116 Accordingly, the ATO considered that numerous international risks could not be adequately mitigated without obtaining better data. It also considered that the ATO's strategic management of international compliance risks would become increasingly vulnerable without better data to monitor market and industry wide patterns and trends.128

1.117 As a result, the ATO sought to replace the Schedule 25A and the Thin Capitalisation Schedule to the income tax return, with a new schedule. The proposed schedule comprised 40 questions, 30 of which were replicated from the former schedules. The ten new questions were the subject of public consultation. The resulting single schedule is now known as the International Dealings Schedule (IDS). The ATO's consultation process for the IDS is summarised as:

In 2011, the ATO wrote to 32 taxpayer and industry forums, groups and associations seeking written feedback on the IDS and requested the professional associations which are members of the International subcommittee of the National Tax Liaison Group (I-NTLG) to provide representatives to participate in the consultation on the IDS 2012.

Membership of the consultation group was sought from these associations to enable feedback to be obtained from their membership base, which constitutes a range of taxpayers or taxpayers' representatives across all markets. A volunteer(s) was also sought from the Corporate Taxpayers Association as a taxpayer representative. The final external consultation group consisted of members from CPA, Law Council, Institute of Chartered Accountants and Taxation Institute. A representative from the Corporate Taxpayers Association joined the consultation group halfway through the process.

Due to the sudden illness of a key ATO officer who had been developing the IDS and the consultation process and also due to the Tax Time 2012 systems requirements, a four week period of scheduled telephone consultation on the IDS was conducted during October and November 2012. Consultation on the supporting instructions was extended until the first week in December 2012.129

1.118 In November 2011, the ATO acknowledged that some questions required data not previously captured by taxpayers' reporting processes. It also recognised that the IDS requires some data already requested in other tax return schedules. However, it would not make further changes to the IDS as formal consultation on the IDS had closed.130

1.119 The IDS was introduced from 2012 as a schedule to the income tax return. Taxpayers with international related party dealings of more than $2 million, or other types of international activities, are required to complete the IDS. Approximately 11,000 taxpayers are expected to complete the IDS in 2012, with the majority comprising taxpayers from the SME market segment.131

Governance and management of transfer pricing issues

1.120 The key to understanding the ATO's governance and management of transfer pricing issues is to first consider how the ATO has organised itself to deal with the risks raised by transfer pricing.

1.121 As the ATO does not have the resources to verify compliance for all taxpayers on all issues for every reporting period, the ATO takes a risk-based approach to identify potential risks of non-compliance from available data. For example, profit shifting risks are identified from sources of data including the IDS. These potential risks form the basis of risk hypotheses.132 The ATO then develops appropriate 'treatment strategies' such as the compliance activities the ATO may undertake to test the hypotheses and address the risks. Other treatment strategies may include providing advice and guidance, initiating legislative change and increasing international cooperation.

1.122 The ATO generally separates responsibility between the risk function and the compliance, or operational function:

  • the risk function considers risks of non-compliance with the tax laws and how the ATO can best address or 'treat' those risks?
  • the operational function explores whether the risk is evidenced in a particular taxpayer's affairs and, if so, and in 'treating' that risk, what should the outcome be for that particular taxpayer?

1.123 These two functions have their own specialist officers, forums, internal reporting and governance requirements, which may overlap in some circumstances.

1.124 The operational function for 'treating' transfer pricing risks by conducting compliance activities, or case work, are carried out by two different business lines within the ATO:

  • the LB&I business line, that focuses on those corporate taxpayers with annual turnovers of $250 million and above;
  • the SME business line, that focuses on taxpayers with turnovers between $2 million and $250 million and individuals with net wealth of more than $5 million.133

1.125 These two business lines have their own staff, forums, reporting lines and governance.

1.126 It should be noted, however, that towards the finalisation of this IGT review, the ATO changed its focus of these two business lines. The LB&I business line now focuses on listed and unlisted public companies and is now called the Public Groups and International (PG&I) business line. The SME business line now focuses on private businesses and is now called the Private Groups and High Wealth Individuals (PG&H) business line. As no details on the impact of these changes were available at the time of drafting, it is unknown how the ATO's arrangements to manage transfer pricing issues will be affected.

Risk function — corporate governance and management of transfer pricing risks

1.127 The ATO governs and manages all its risks through its enterprise risk management framework.134 All of the risks covered by this framework include tax risks such as risks that taxpayers are not complying with particular aspects of the tax law as well as corporate risks such as risks that the ATO itself is not complying with certain legislative obligations.

1.128 Particular risks governed by this framework may be specific to a certain aspect of the ATO's operations and therefore managed by that particular area. Other risks may span a number of different areas in the ATO, enterprise level risks, which are managed on a whole-of-ATO basis, regardless of the ATO's internal divisions of allocated responsibilities and work.

1.129 The ATO treats the transfer pricing tax risk as an operational level risk under its enterprise risk management framework. Each business line's approach to managing transfer pricing risk will be outlined in the section below.

1.130 International tax risks are governed by the ISC, which is to provide:

  • assurance directly to the ATO Executive that international tax work across the ATO is being effectively managed; and
  • high level strategic direction on international tax work is consistent with ATO objectives.

1.131 Membership of the ISC includes ATO National Program Managers (generally Deputy Commissioners) and senior ATO officers from the Law and Practice, SME, LB&I, MEI, Indirect tax — GST, Serious Non-Compliance, Debt Collection, Superannuation and Tax Practitioner and Lodgment business lines.

1.132 The above membership is similar to the ITSC, which previously had responsibility for international tax risks. However, the formation of the ISC is intended to strengthen the ATO's focus on strategically managing the risks as the forum is focussed solely on international tax work, which includes:

...all work, in the broadest sense, on international tax measures and issues (wherever the work is performed in the ATO and whatever the head of revenue). In particular, it includes work on those tax measures affecting Australian residents in relation to offshore activity and non-residents in relation to Australian-connected activity.135

1.133 The Profit Shifting Working Group (PSWG) reports to the ISC on transfer pricing risks. The three main roles of the PSWG are:

  1. managing and evaluating ATO work on jurisdictional income risk for the International Steering Committee (ISC) and other corporate forums as required. Specific tasks will include:
    • evaluating the assessment of jurisdictional income risks from across Internationals and the ATO;
    • contributing to the development of mitigation strategies;
    • recommending mitigation strategies;
    • escalating identified gaps in mitigation strategies to the ISC; and
    • engaging with relevant committees including the [LB&I Risk and Intelligence Committee].
  2. evaluating the effectiveness of mitigation strategies against agreed indicators i.e. effectiveness measures.
  3. provide an assurance to the ISC that international jurisdictional income tax risks are being effectively managed.136

1.134 It can be inferred from the ISC Charter that the PSWG would receive information about international tax matters from business lines and the Internationals unit. The PSWG's members include senior ATO officers from the PSP, International Centre of Expertise, and operational compliance areas of the LB&I, SME and ME&I business lines.

1.135 It should be noted that the ATO has advised the IGT towards the end of the review that the ISC is currently reviewing the PSWG in line with the ATO's broader corporate review of its committee structures and, accordingly, the PSWG is currently suspended.137

1.136 In addition to the committees that govern the management of operational level risks, particular responsibilities are placed on 'operational risk owners' and 'risk managers'. Their roles and responsibilities are described below:

Operational risk owners have accountability and responsibility for managing a discrete risk population or group (risk pool) within an enterprise risk category. Operational risk owners are responsible for:

  • working with Enterprise risk owners to create a whole-of-enterprise view of related risks and controls
  • monitoring changes in the risk environment
  • assessing and evaluating risks
  • designing treatment, including design of risk controls
  • resourcing identification and negotiation for controls management
  • defining and monitoring measures of effectiveness.

Risk managers have responsibility for managing risk controls, treatment or mitigation, and aspects of risk assessment and identification as directed by an enterprise risk owner. Risk managers do not have overall responsibility for the management of risks at the enterprise or operational level.138

1.137 The ATO has also advised that risk managers are expected to work with the business risk and operational areas.

Risk function — business line governance and management of transfer pricing risks

1.138 In addition to the governance arrangements outlined above, each ATO business line has its own risk committee with the role of reviewing and assessing risk 'treatment plans' to test the risk hypotheses, consistent with the broader ATO approach, but also within the scope of the business line's work. These treatment plans are expected to be endorsed by the relevant business line executive and reviewed annually.

1.139 During this review, the LB&I business line subsumed the management of transfer pricing risk into a broader scope of risk, the profit shifting risk, which also includes other 'manifestations' of profit shifting, such as thin capitalisation and attribution. Non profit shifting international tax risks, such as non-resident withholding tax is managed as a separate operational risk.139 The LB&I Internationals unit is responsible for providing strategic guidance and assisting the business lines understand, prioritise and mitigate all international risks.140

1.140 The SME business line similarly has subsumed the management of transfer pricing risk but into a single international tax risk manager whose responsibilities include both profit shifting and non-profit shifting international tax risks. Previously, the SME International Strategic Unit (ISU) was responsible for developing and implementing appropriate strategies and working with other units, such as the LB&I Internationals unit and supporting the SME International Risk Manager among other things. However, during the review, with the broader restructure of the ATO's business lines mentioned earlier, the ISU has been disbanded.141

1.141 The ATO's operational risk owners and risk managers are expected to develop the 'treatment plans' and liaise closely with the business line risk committees so that the business lines' risk assessments are coordinated.142 Implicit in developing a treatment plan is the design of a compliance strategy that is achievable with the available operational resources.

1.142 In the LB&I business line, as a result of concerns identified by risk managers, the latter in conjunction with the LB&I Risk, Intelligence and Systems Support (RISS) unit, are to develop a prioritised list of 'lower consequence' large business taxpayers that should be subjected to a risk review. The prioritised list would then be referred to the LB&I Case Selection Sub-Committee (CSSC) of the Risk and Intelligence Committee (RIC) for review and confirmation. The LB&I Executive, LB&I Operations Senior Executive Service (SES) Group and LB&I RIC would then provide final endorsement of the 'lower consequence' case pool.143 During this review, the ATO modified its risk assessment and case selection process for lower consequence taxpayers which will be further explored later in this chapter.

1.143 The 'higher consequence' taxpayers are subject to continuous monitoring with approval for review required by the responsible senior executive officer. Risk managers or the LB&I RISS unit may identify risks for the LB&I Operations case teams to consider and determine the scope of the review144 (this will be further explained in Chapter 3). Therefore, while the 'strategic risk' is managed in various committees which will be described later below, the risk of particular taxpayers is managed by risk managers and LB&I Operations case teams.

1.144 In relation to the LB&I business line, there is a committee called the Profit Shifting Governance Group (PSGG). Some ATO documents indicate that the PSGG has also a role to play in case selection and allocation with respect to profit shifting risks.145 However, the ATO has advised during the finalisation of this review that it intends to establish an International Structuring and Profit Shifting (ISPS) unit which would fulfil this function, which will be further described at the end of this chapter.146

1.145 The LB&I Operations SES Group is responsible for the allocation of LB&I Operations resources to cases. Whilst the risk managers, RISS and CSSC decide on the population that ought to be reviewed, the LB&I Operations SES Group ultimately decides on how many cases will be conducted.

1.146 There is an expectation that the CSSC will consult with the LB&I Operations SES Group to ensure that resources are available to conduct the proposed compliance activities. The ISC Charter also expects the PSWG to 'work actively with the LB&I CSSC and LB&I RIC to ensure risks are properly managed and resourced within the Enterprise Risk Management Framework.'147

1.147 Similar arrangements for case selection are in place in the SME business line, whereby a committee performs the 'case selection' function, to ensure the business line's resources are directed to the areas and taxpayers of greatest perceived risk.

1.148 Once the risk population has been decided, the risk reviews are conducted by ATO officers in operational areas. In the LB&I business line, this area is called LB&I Operations. In the SME business line, this area is called SME General Compliance.

1.149 The following diagram visually sets out the relevant bodies that have a role in governing the management of transfer pricing risks. As the ATO's internal arrangements are in a state of flux, the following diagram has been compiled from a number of different ATO documents and discussions with different ATO officers.

Figure 4: ATO governance of the transfer pricing risk

Chart showing ATO governance of the transfer pricing risk.

Source: IGT.

View image enlarged

Case work — governance and management of transfer pricing case work

1.150 The ATO business line executives have responsibility for planning, resourcing and executing compliance activities, amongst other activities, that contribute to the ATO's broader compliance program. In this respect, the business line executives themselves are responsible to the Compliance Executive for the conduct of case work, who in turn is responsible to the ATO Executive.

1.151 The business lines are responsible for selecting the cases that operational case teams will review in their work program. Once a case is selected, these operational teams are responsible for the conduct and management of compliance activities, such as Transfer Pricing Record Reviews (TPR Reviews), audits, APAs, Annual Compliance Reports and, in the future, MAPs. The operational case teams conducting transfer pricing case work are ultimately accountable to their respective business line executive for the conduct of compliance activities.

1.152 One important implication of the 2010 changes was that all international case work, including transfer pricing case work, would now be carried out by generalist operational case teams in the LB&I and SME business lines. These generalist operational case teams would be responsible for the management of all casework involving international tax issues as well as domestic tax issues, including: fact finding, evidence gathering148 and the application of the ATO's views on all international tax issues including transfer pricing matters.149

1.153 The exceptions to this approach, until recently, were the use of dedicated transfer pricing case teams in:

  • LB&I operations that worked on the TPSCI, until the teams were disbanded on 30 June 2013; and
  • SME General Compliance which continued to complete transfer pricing case work until those teams were disbanded in September 2013.
Site Governance in the LB&I business line

1.154 In addition to the ATO governance arrangements above, the LB&I business line has recently implemented an ATO location-based governance process called Site Governance. The governance sessions are 'envisaged' to consider all facets of business within each site and may include:

  • international strategies and risks;
  • risk strategy;
  • active compliance and compliance assurance (projections and effectiveness);
  • case leadership and callover;
  • interpretative advice and disputes;
  • New Measures and Government Relations; and
  • financial and workforce reporting.150

1.155 In relation to 'callovers' of compliance case work:

Aspects of the AC Case Callover Program will be incorporated as part of the focus of the Governance session. The overarching analysis of the AC case program (previously prepared prior to case selection for callovers) will be provided to the sites and the Governance panel. The panel will discuss the AC case program at a strategic level and may recommend specific cases for workshopping by case leaders and subject matter experts. This gives Site SES the opportunity to have case leaders and subject matter experts work with them to follow up on the outcomes of the Governance sessions. However, case callover processes will not be the primary focus of the governance sessions.151

1.156 The ATO has advised that Site Governance callovers focus on different aspects and types of cases, such as 'aged cases', and there are different criteria for triggering the callover of any particular case depending on the 'quantum of risk' as determined by the operational case team. If follow-up is needed, there may be case workshops involving site leaders or the LB&I Technical Leadership Group (TLG).152

1.157 It is unclear how the SME business line manages its governance or callovers of transfer pricing case work after March 2013.

Case work — LB&I business line operational case teams and specialist units

1.158 Operational case teams are expected to have a wide ranging knowledge both in terms of international and domestic tax law and commercial awareness. The ATO has advised that the case team members are not able to maintain specialist knowledge in all areas. Therefore, case teams are expected to draw on the assistance of specialist units within the ATO, including the Internationals unit, when needed. This approach assumes that the operational case teams:

  • are aware of the different assistance available to them and when such assistance should be sought; and
  • have the capability to manage the different units involved.

1.159 The figure below seeks to depict the operational case teams and the specialist units for international tax matters. Each unit identified below is discussed separately in more detail in the sections that follow.

Figure 5: LB&I operations case teams and specialist areas on international tax

Graphic depicting the LB&I operational case teams and the specialist units for international tax matters.

Source: IGT.

LB&I Operations

1.160 The LB&I Operations unit has two different types of case teams that deal with transfer pricing: 'business as usual' (BAU) and 'dedicated international' case teams.153

Business as Usual case teams

1.161 The higher consequence BAU case teams are responsible for reviewing and auditing approximately 100 taxpayers with the highest turnover, or 'higher consequence' taxpayers. These teams specialise in dealing with their allocated taxpayer. However, they are 'generalist' teams in the sense that they conduct compliance activities in respect of all tax risks identified for that taxpayer, including transfer pricing.

1.162 The BAU operations generally comprise:

  • Senior Compliance Audit Directors, which are:

accountable to plan, organise and direct the work of other managers including other EL2s. They are the principal specialist and will provide leadership and direction in the development and implementation of compliance strategies and the resolution of complex, significant, precedential and priority technical issues, through collaborative processes with various internal and external stakeholders. They will lead and manage a very large and complex set of resources, with a whole of business area focus;154

  • Compliance Audit Directors, which are:

accountable to perform [a]... leadership role and are expected to lead and manage change and take an active role in the implementation of the ATO strategic direction. They will provide leadership and direction in the development and implementation of compliance strategies and the resolution of complex, significant, precedential and priority technical issues through collaborative processes with various internal and external stakeholders;155

  • Senior Auditors, which are:

accountable for coordinating] and undertak[ing] detailed, complex, technical or sensitive projects that impact on strategic, political or operational outcomes for the ATO. [They] will be part of a team undertaking case work of a highly complex nature relating to any market segment or revenue products. They are accountable for the management of cases within acceptable timeframes and the appropriate management of operational risks to ensure the work program is achieved;156

  • Auditors, which are:

accountable for delivering results in accordance with the requirements of their work area and team plans. They will undertake or lead case work that will generally be of a complex nature, in relation to any market segment or revenue products. They [are] required to conduct risk assessments, audits (including field, telephone and desk audit), settlement negotiations and dispute resolution... [and] manage relationships with [taxpayers]... and make decisions exercising sound judgment;157 [and]

  • less experienced officers, are generally accountable to undertake a range of procedural, operational and administrative activities.158

1.163 Accordingly, Senior Auditors and Auditors in BAU case teams are accountable for making decisions with direction provided by more senior team members. These officers may also draw on a range of support outside their team to assist in the conduct of their work as demonstrated in the diagram above.159

1.164 Lower consequence taxpayers are also reviewed by LB&I Operations case teams. These teams, however, are not dedicated to particular taxpayers. Lower consequence taxpayers are not necessarily the subject of year-to-year engagement or review (unlike higher consequence taxpayers). Furthermore, should they be reviewed again in the future, they will not necessarily be reviewed by the same team that reviewed them previously.

Dedicated international case teams

1.165 During the review the ATO advised the IGT that as part of ongoing internal restructurings, it plans to implement dedicated international cases teams to focus on conducting case work on business restructuring issues. At the time of writing, the ATO was unable to provide further details.160

Internationals unit

1.166 Although the Internationals unit is located within the LB&I business line, it is a 'gateway' for all internationals related tax risks in the ATO and is expected to interact with other business lines and units that may encounter and deal with international tax risks.

1.167 The Internationals unit comprises six units, PSP, Economist Practice, International Engagement and Transparency Practice, International Risk Strategy and Intelligence Unit, JITSIC and the Program Management Office, which have different roles. The units that assist officers with transfer pricing case work are the PSP and the Economist Practice.

1.168 The JITSIC unit provides assistance in relation to joint audits with other tax authorities. The other units within the Internationals unit do not have a role in assisting in the conduct of transfer pricing case work.

Profit Shifting Practice

1.169 The PSP is responsible for building organisational capability to deal with international tax issues across the ATO such as, providing 'technical advice and assistance where capacity exists.'161 The operational case teams may draw on the PSP to:

  • become involved in case teams' workshops on international tax issues;162
  • provide additional assistance in TPR Reviews where 'the nature of the transfer pricing risk requires' such assistance;163 and
  • provide additional support where necessary in audits.164

1.170 The PSP unit maintains its own referral form which asks case officers to provide comprehensive details of cases such as:

  • the identified issue;
  • relevant facts, law, ATO view or other guidelines;
  • the referring officer's preliminary view;
  • whether there are any additional comments or documents that would assist in understanding the referring case officer's view; and
  • any other matters that would assist the International unit in providing a comprehensive response.165

1.171 The PSP also houses the ATO's three officers who are Competent Authority Representatives (CARs). These officers are designated officials who may approve the terms of the agreement of bilateral and multilateral APAs and MAPs. The CARs become involved to ensure key steps of the process are followed, including information gathering review and interpretation guidance. The CARs are expected to act independently from auditors and in professional good faith with the overseas counterparts.166 CARs are discussed in more detail in Chapter 4.

1.172 The PSP also 'sponsors' the TPN and provides officers to staff the TPRP.167

Transfer Pricing Network

1.173 The TPN is a cross business line forum, the operation of which is ensured by the TPN Leader who is currently a transfer pricing 'specialist' from the PSP.168 The TPN is coordinated by the PSGG. It is an 'open forum for all officers with an interest in [transfer pricing] and international issues who are prepared to commit to the program of formal and informal training and [transfer pricing] casework'.169 Standing members of the TPN include ATO case officers with transfer pricing experience and the ATO's transfer pricing 'specialists' from a range of units within the ATO, such as the PSP, the Internationals unit, LB&I TLG, Economist Practice, LB&I Operations, SME and the Tax Counsel Network.170

1.174 The TPN was established by the ATO as a means of providing technical support to ATO case officers with transfer pricing case work and build capability through a range of activities such as: phone meetings, delivery of technical bulletins and identifying intelligence, capability and training opportunities.171 The ATO views its technical networks, such as the TPN, as a platform to achieve appropriate knowledge management and capability building through their activities.172

1.175 The ATO has advised that case officers unfamiliar with transfer pricing that have been allocated transfer pricing case work, are identified by PSGG site representatives who then nominate those officers to the TPN Leader for inclusion into the TPN. The PSGG site representatives are senior officers in the site and are aware of all cases where transfer pricing is an issue for their site.173

1.176 Case 'ownership' remains with the operational case teams, including the responsibility for finalising case work.174

1.177 In relation to TPR Reviews, operational case teams with transfer pricing case work may request the involvement of a TPN member. According to the ATO's procedures, such requests are made via the PSGG site representative.175 The ATO advises that the TPN member allocated to TPR Reviews will normally be more experienced in transfer pricing matters176 and will 'supervise' the case work.177

1.178 The TPN also has a role in identifying, monitoring and reporting on emerging transfer pricing risks from case work across the ATO and escalating issues to the PSGG.178

Transfer Pricing Review Panel

1.179 The membership of a given TPRP is determined by the Chairperson,179 who 'should' have regard to 'the nature, complexity and priority of the issue(s) and any particular expertise needed to effectively and efficiently hear the case'.180 Unless the case is an audit, the Chairperson need not be a member of the PSP.181 On occasions the TPRP will consist of only the Chairperson. However, there is an expectation that for all but the least complex cases, the TPRP would have at least three members from each of the Internationals unit, Economist Practice and an 'industry specialist' from the relevant business line (LB&I or SME).182

1.180 The TPRP is the central forum to ensure consistency and technical accuracy of all transfer pricing compliance case work, other than MAPs and objections. It is managed by the PSP183 and replaces the previous International Audit Review Committee.

1.181 The role of the TPRP is to:

  • oversee the Tax Office's transfer pricing (TP) compliance program with a view to maintaining a high standard of technical and case management decision making to ensure that a sound and consistent approach is taken with TP casework; and
  • ensure that the principles and practices in Tax Office TP Rulings and other guidance are reflected in TP casework.

... [and] includes:

  • providing an independent quality review of TP cases to ensure that the approach taken and technical decisions made are consistent, sound and appropriately reflect the Tax Office view;
  • providing advice to facilitate the making of Division 13 determinations and applications of the corresponding Treaty Articles on a sound basis by the most appropriate officer; and
  • ensuring that a 'whole of ATO' approach is adopted in dealing with TP issues.184

1.182 The ATO notes that there is a need for a degree of flexibility in the referral processes to the TPRP so as not to impede the effective and efficient performance of case work. However, there is an expectation that the requirements outlined in Practice Statement PSLA 2004/13 must ordinarily be met. Practice Statement PSLA 2004/13 states that ATO compliance case teams 'must' refer transfer pricing issues to the TPRP for its 'advice and guidance'.

…This includes the following:

  • the determination of a risk rating for a TP record review or other type of TP review that requires such a rating, subject to paragraphs 11 and 12;
  • the approach to be taken in the auditing of a TP issue, including significant case management decisions related to the planning and conduct of the audit;
  • a Position Paper, Discussion Paper or similar type of document that is to issue to the taxpayer in an audit or APA case;
  • the decision to make a Division 13 determination or apply a corresponding Treaty Article;
  • the decision to take no further action in respect of an audit of a TP issue;
  • the decision to accept an APA application, if there is doubt;
  • the approach to be taken in considering an APA application or pre-lodgement proposal, including significant case management decisions related to the planning and conduct of the work; or
  • the determining of a Tax Office position on the terms and conditions of an APA (but not including decisions made during MAP, as per paragraph 6).

11. Regarding the first dot point in the previous paragraph, in accordance with Taxation Ruling TR 98/11 a TP review (eg. a TP record review) involving an assessment of documentation quality and commercial realism of outcomes is required before proceeding to audit. The risk rating resulting from such a review requires TPRP involvement. This is the case whether the TP review is performed as part of a client risk review (CRR) or independently of a CRR. It is also the case if the TP review is performed in streamlined form.

12. However, not all TP risk assessments involve such a TP review and risk rating and therefore need be referred to the TPRP. For instance, a TP issue may be risk assessed in performing a CRR without the need for TPRP involvement.185

1.183 The ATO advises that the TPRP may also be involved in information requests in complex cases.186

1.184 Practice Statement PSLA 2004/13 outlines that the advice of the TPRP 'should' be followed by case teams subject to any relevant escalation processes. Where this advice is not followed, the TPRP should be advised of the reasons for this to ensure that these reasons are taken into account in giving future TPRP advice. The advice of the TPRP does not displace officers' responsibility for the proper exercise of their authority to make transfer pricing decisions.187

Economist Practice

1.185 The Economist Practice is a unit of approximately 60 economists within the Internationals unit in the LB&I business line and is led by an SES officer.188 During the conduct of this review, the Economist Practice issued Practice Statement PSLA 2013/2 which outlines its role and function which,

...supports international and non-international work across the ATO with a focus on three broad areas:

  • building economist skill sets, including through the Economist Network
  • operational advice on cases including active compliance, advisings and litigation, particularly in relation to multinational taxpayers
  • strategic research on economic issues which includes support for law reform and effectiveness evaluation.189

1.186 The advice of the Economist Practice to the case teams includes analysis of:

  • price, profit and other outcomes arising from commercial, business and tax contexts;
  • taxpayer decision making, which may include examining internal and external factors such as preferences, available options, market context, regulatory framework and the tax environment; and
  • patterns and trends in taxpayer and industry performance in the context of wider market and economic cycles.190

1.187 Specifically, in relation to TPR Reviews, the Economic Practice also assists case teams in completing the commercial realism report and key ratios, summary of key findings as well as the risk assessments and risk ratings.191

1.188 In audits involving transfer pricing issues, the ATO outlines in its Streamlined Audit Manual for Transfer Pricing that the Economist Practice:

  • 'should' be consulted by operational case teams in the development of case plans;
  • 'will' assist operational case teams with information gathering;
  • 'to' research comparables relied on by taxpayers;
  • 'to' replicate the taxpayer's comparability search, their accept and reject criteria and the integrity of the process;
  • 'improve' on the taxpayer's search criteria and determination of comparables where possible;
  • 'benchmark' the comparables by using appropriate profit level indicators;
  • 'work with' the case teams to complete the functional and comparability analyses; and
  • 'input' to the Position Paper.192

1.189 Practice Statement PSLA 2013/2 also describes the role of the Economist Practice as including:

  1. the economist will determine the economic issues to be examined with the referring area, and will outline the approach to analysing and resolving the economic issues. In a case advice setting, this may include determining:
    1. the information required
    2. characterisation of issues including functional analysis
    3. analytical approach
    4. choice of method, and
    5. benchmarking and arm's length range (where applicable).193

1.190 The advice provided by Economist Practice is prioritised according to the:

  1. availability of economists
  2. materiality and revenue impact
  3. risk to the ATO reputation and the integrity of the system
  4. technical complexity and precedential value
  5. Compliance Program and ATO objectives.194

1.191 The Economist Practice has for a number of years maintained an engagement or referral form which requests details of:

  • the economic issues that require assistance; and
  • any risk profiling work, tax returns and schedule analysis and any relevant documentation already completed or on hand.

1.192 The ATO has also advised that Economist Practice requires access to all information held by case officers.195

Economist Network

1.193 The Economist Network is a technical network that seeks to build economic capability in the ATO and provides support to ATO strategy and operations. Membership of the network provides another way to access economic analytical skills, including assurance of work completed outside of the Economist Practice.196 The Economist Practice manages the Economist Network.

Case and Topic Leaders unit

1.194 The Case and Topic Leaders (CTL) unit membership is drawn from both the LB&I business line's Case Leaders and the TLG.197

Case Leaders

1.195 Case Leaders may be engaged by LB&I operational case teams to provide oversight and strategic direction of key compliance cases. They may also provide technical leadership on cases involving more complex issues, such as transfer pricing, and aged cases. Case Leaders may also participate in site governance case callovers. For example, Case Leaders provide guidance, counsel and leadership in managing technical issues and the case itself to ensure the case is progressing appropriately. The nature and extent of Case Leaders' engagement varies from one case to another. However, Case Leaders do not manage any cases. The operational case teams remain responsible for planning and active case management.198

Technical Leadership Group

1.196 The TLG focuses primarily on the resolution of technical issues and comprises technical leaders and advisers. LB&I operational case teams may engage the TLG to provide advice, guidance and support on low and medium risk precedential or technical issues of law, covering consolidations, capital gains tax, insurance, finance and investment, international tax and areas of administrative law. The TLG may attend taxpayer meetings, participate in risk workshops, and participate in the site governance case callovers and monthly review processes. The TLG may also review and provide input into audit position papers, private rulings and objections.199 The role of TLG does not include case management or establishing facts such as assisting case officers with conducting functional analyses in transfer pricing compliance activities.200

Office of the Chief Tax Counsel

1.197 The Office of the Chief Tax Counsel (OCTC) is responsible for formulating the ATO's precedential view on various technical issues amongst other things. It comprises the ATO's most senior technical officers and is part of the ATO's Law Group. The OCTC may provide technical expertise and leadership on the highest risk technical issues.201

1.198 Operational case teams may engage, either formally or informally, the OCTC in accordance with Practice Statement PSLA 2012/1. There is a joint commitment by all business lines and tax technical officers involved to ensure commitments under the Taxpayers' Charter and relevant ATO service standards are met.202

Case work — SME business line operational case teams and their access to specialist units

1.199 Prior to September 2013, transfer pricing case work in the SME business line was largely undertaken by two dedicated teams203 with transfer pricing specialist support. Following a recent restructure of the SME business line, transfer pricing risks and issues are now addressed by all General Compliance teams. Officers from the former dedicated teams have either been integrated with other General Compliance teams or SME Technical Leadership 204

1.200 There are a range of units that SME General Compliance case teams may access for assistance in relation to transfer pricing. These are represented visually in Figure 6 below. The International units including the TPRP and OCTC provide the same type of support to the SME General Compliance case teams as they do to the LB&I Operations case teams. As a result, a description of their roles and responsibilities is not duplicated below.

Figure 6: SME case teams on transfer pricing case work

Graphic showing the range of units that SME General Compliance case teams may access for assistance in relation to transfer pricing.

Source: IGT.

SME General Compliance case teams

1.201 The SME General Compliance case teams conduct compliance activities on taxpayers with turnovers from $2 million to $250 million and high wealth individuals. The types of taxpayers a case team may examine will vary from sole traders, partnerships, closely held private groups, not-for-profit organisations, and Australian entities of foreign MNEs. From September 2013, any SME General Compliance case team can conduct transfer pricing case work, following a similar approach to that of the LB&I operations teams in Figure 5.

Technical and Case Leadership

1.202 The Technical and Case Leadership (TCL) unit includes both the Technical Leadership unit and the Case Leadership unit.

Technical Leadership

1.203 The Technical Leadership unit provides technical guidance for complex case work which may include cases involving transfer pricing issues.

1.204 This unit offers advice, support and feedback by reviewing documents, including those prepared by the SME General Compliance case teams. Depending on the issues, the extent of this unit's involvement could range from full involvement in the case work to only undertaking a monitoring role. In consultation with the SME General Compliance case team, the Technical Leadership unit will also provide assistance in respect of case management in appropriate circumstances.205 However, this unit is not responsible for the management of cases or preparing documentation associated with the case. This remains the primary responsibility of the case team.

1.205 The ATO's internal referral guidelines for the Technical Leadership unit states that the unit must be involved in certain matters including where:

  • fraud or evasion is in contemplation;
  • a penalty of 50% or more (including uplifting penalties) is in contemplation...;
  • audit cases that are identified as having a possible dispute (that is, an objection is likely to be lodged) and officers are unable to resolve the issues that have potential for dispute. ;
  • a precedential technical issue which requires resolution, including the creation of an ATO View; and
  • a high risk technical issue is identified which may require engagement with Law & Practice. The risk associated with failing to address the issue must be assessed as outlined in PS LA 2012/1 and the Guide to managing high risk technical issues.206

1.206 The Technical Leadership unit may also be involved on other issues, including:

  • international issues including, transfer pricing and where use of section 264A is in contemplation/considered necessary;
  • taxpayers with foreign trusts, companies, and/or superannuation funds in the structure (controlled foreign company — CFC, foreign investment fund — FIF and Division 6 ITAA 1936);
  • taxpayers treating certain dividends as [non] assessable non-exempt income under section 23AJ ITAA 1936. Significant Australian Transaction Reports and Analysis Centre (AUSTRAC) activity — particularly with tax havens;
  • disposals of intellectual property (including goodwill) and royalty payments offshore; and
  • issues which are not high risk as outlined in PS LA 2012/1 but referral to Law and Practice is in contemplation.207

1.207 The two ATO officers that led the two dedicated case teams before September 2013 were moved to the Technical Leadership unit.

Case Leadership

1.208 Case Leadership in the SME business line aims to build collective capability within case teams whilst not diminishing the individual leadership or decision-making responsibilities of those who have carriage of a case. Case Leadership involvement is directed towards more complex casework or cases which deal with significant systemic or reputational risks. The extent to which Case Leadership becomes involved in a particular case will vary and will depend on the complexity of the case, the level of risk involved, and the capability of the officers involved.

1.209 The ATO guidelines state that cases should be referred to Case Leadership if any of the following indicators are present:

  • significant revenue impact — where potential increase in tax payable is greater than $15m for all years under review/audit;
  • major reputational risk issues including, issues with the potential to attract media attention or to adversely impact on community confidence in the tax and superannuation system;
  • systemic issues;
  • significant or unresolved blockers which are delaying case progress or completion (whether or not the case is already an aged case). For example, blockers which will cause compliance cases to exceed cycle time or fail Taxpayers' Charter requirements; or
  • cases which are moving towards settlement, dispute resolution or litigation.208

1.210 Case Leadership input may also be identified through their participation in case workshops, callovers and other sources of information in addition to referral from case teams.209

1.211 In the SME business line, the Risk Management Committee conducts callovers to review ratings and ensuring compliance activities are balanced and prioritised accordingly.210

The ATO's approach to transfer pricing compliance activities

1.212 As mentioned earlier, compliance activities are one of the main means through which the ATO identifies and addresses tax risks. A description of the ATO's various compliance products is provided in Appendix 4.

1.213 Generally, the ATO seeks to target its compliance approach to the identified risk. The information that the ATO requires to identify risk can result in significant administrative and taxpayer compliance costs. Therefore, the intensity of the information gathering exercises, such as annual lodgment, risk reviews and audit, are generally aimed to be proportionate to the perceived risks involved.211

1.214 The ATO is concerned that the characteristics of international tax risks may be difficult to identify from lodgment data alone without undertaking more involved compliance activities. Furthermore, the ATO does not limit the scope of compliance activities to only international tax risks gleaned from the information provided in income tax returns as otherwise the operational case teams may not fully consider other tax risks.212

1.215 The more involved compliance approach may provide increased assurance that identifiable risks have been addressed. However, it may also increase the overall compliance burden for taxpayers.

1.216 Where a transfer pricing risk is identified for review, it may be initially examined through ATO risk review 'products', such as TPR Reviews, Client Risk Reviews213 (CRR) or specific issue TPR Reviews. During the finalisation of this IGT review, the ATO has advised the IGT that it intends to discontinue use of the TPR Review product. This will be further explained later in this chapter. Nevertheless, these reviews are conducted by operational case teams in the LB&I and SME business lines.

1.217 Once a transfer pricing risk is identified, a TPR Review must be conducted.214 The TPR Review process is outlined in greater detail in the next section. Broadly, the TPR Review involves an evaluation of the quality of taxpayers' documentation used in support of their pricing methodologies and the evaluation of the taxpayer's financial performance over four years to determine the commercial realism of prices set by reference to high level benchmarks using Australian Bureau of Statistics (ABS) data and the LB&I business line's industry knowledge.215 The TPR Review does not attempt to specifically identify the area of transfer pricing or establish whether circumstances justify the taxpayer's position.216

1.218 It should be noted that there are also specific issue TPR Reviews which focus on a particular transfer pricing risk or risks and are project based in design.217 The CRR, on the other hand, may examine a number of different tax risks which may include transfer pricing risks. However, it is unclear whether a separate process or 'product' is commenced or whether case teams conduct the CRR in the same manner as a TPR Review.218

1.219 At the conclusion of a TPR Review the ATO will decide on any follow-up action, such as commencing a transfer pricing audit.

1.220 Broadly, when conducting a transfer pricing audit, ATO operational case teams are directed to recreate a taxpayer's transfer prices by following the four steps outlined in Taxation Ruling TR 98/11. The audit process is described in greater detail in the next section.

1.221 Where the ATO's adjustments of transfer pricing arrangements occur as a result of audits, the taxpayer may initiate a MAP to minimise any double taxation imposed by any other tax jurisdictions that are a signatory to a tax treaty with Australia.

1.222 The ATO's MAP process is outlined in Taxation Ruling TR 2000/16. In the conduct of MAPs, ATO officers are directed to follow the OECD's Manual on Effective Mutual Agreement Procedures.219 The MAP process generally has two stages:

  • stage one begins with the presentation of the case by the taxpayer to the CAR of the taxpayer's country of residence. The CAR considers whether the request can be accepted; and
  • stage two concerns the dealings between the two countries, with the country of the original request acting as a 'defender' of the claim.220

1.223 It should be noted that the MAP articles in most Australian tax treaties do not compel the treaty signatory's representative, or CAR, to reach an agreement and resolve tax disputes.221

1.224 Particular to transfer pricing issues, taxpayers may also enter into an APA to reach agreement with the ATO on the method and application of the arm's length principle to their international related party dealings on a prospective basis, thereby resolving any tax uncertainty relating to those dealings. These APAs may either be unilateral, bilateral or multilateral. Bilateral and multilateral APAs are concluded under the MAP article of the relevant tax treaty or treaties. The ATO also has simplified APAs for taxpayers with low value or low risk international related party dealings. The APA process is outlined in Practice Statement PSLA 2011/1 and has five steps:

  • the pre-lodgment step identifies the scope of the APA including, the likely type of APA product and any collateral issues;
  • the lodgment step requires taxpayers to lodge their formal APA application and supporting documentation;
  • the analysis and evaluation step involves the APA teams evaluating the taxpayer's information, requesting further information and undertaking fieldwork;
  • the negotiation and agreement step involves reaching an agreement with the taxpayer or tax treaty partner on the terms of the APA and preparing a draft APA; and
  • the concluding step requires finalising the APA terms amongst all the parties.

Specialist unit support during transfer pricing matters

1.225 The following sections describe the role of the special units during various compliance activities.

TPR Reviews

1.226 The Transfer Pricing Risk Assessment Guide and the TPR Review Procedural Manual outline the role of some of the 'specialist' units that may be involved in TPR Reviews.

1.227 Once the TPR Review is allocated, the operational case team is to notify the International Gatekeeper via email that the TPR Review is about to commence.222 It should be noted that there is inconsistency between the two key documents on this step (see below for details).223

1.228 The operational case team then sets up the case in the ATO's case management system (Siebel).224

1.229 In the conduct of the substantive TPR Review, operational case teams are directed to email:

  • their site PSGG representative to request a TPN member be attached to the case;225
  • a referral form to the Economist Practice to request economic assistance and have an economist attached to the case;226 and
  • a referral form to the PSP where the 'nature' of the transfer pricing risk 'requires assistance'.227

1.230 It should be noted that the engagement of the Economist Practice and PSP is subject to availability of resources.228

1.231 The operational case team will be 'supervised' by the TPN member who will provide 'technical support' to the teams dealing with transfer pricing issues. 'Ownership' of the TPR Review remains with the operational case team.229 No further explanation of the role of the TPN member is provided.

1.232 The role of the PSP is to 'provide technical advice and assistance... including in technical reviews through the Transfer Pricing Review Panels'.230 No further explanation is provided.

1.233 The previous step, the referral to the PSP, is contradicted by the Transfer Pricing Risk Assessment Guide which states that it is to occur after the next step being operational case teams determining whether there is any transfer pricing risk by seeking answers to what is known as transfer pricing filter questions.231

1.234 Once a TPN member, an economist and a PSP representative (if requested) have been allocated, the operational case team is to discuss with them the timeframe for the TPR Review and then complete the TPR Review plan.232 Specific responsibilities of each unit are not further explained.

1.235 The next step in TPR Reviews is to:

  • evaluate the quality of a taxpayer's transfer pricing documents in line with paragraph 4.26 of Taxation Ruling TR 98/11 by using the TPR Review 'checklist'; and
  • determine the profitability level of the taxpayer as either being commercially realistic, less than commercially realistic, or consistently returns losses.

1.236 To ensure proper evaluation of documentation quality and level of profitability, operational case teams 'should work with' and 'seek advice' from the Economist Practice to 'ensure' that the following analyses are completed:

  • summary of findings from the review of documentation (the Transfer Pricing Risk Assessment Guide contradicts this by stating this is to occur after a TPRP is organised);
  • calculation of key ratios which are determined in consultation with the Economist Practice, and evaluation against industry standards to assess whether the taxpayer has achieved a commercially realistic outcome; and
  • risk assessment based on quality of processes and documentation and profitability level as per the chart at paragraph 4.27 of Taxation Ruling TR 98/11.233

1.237 Operational case teams are then to conduct a workshop and in certain circumstances, which are further described in Chapter 3, must include 'ATO technical leaders and relevant experts'. These 'experts' may include industry, tax technical, accounting, law, economic, broker, analytical, access, valuation and audit experts and may either be internal or external consultants. The operational case teams should utilise 'expert' lists where available.234 No further guidance is provided to operational case teams on the specialist units that are available to provide advice, guidance or support. However, other units, such as the LB&I TLG may provide advice on the interpretation of the legislation and participate in risk workshops and risk reviews.235 Identifying and engaging specialist units is further discussed in Chapter 2.

1.238 The operational case team, in 'conjunction' with the Economist Practice, should come to an agreed position on the risk rating assigned to a taxpayer and the recommended follow-up strategy.236

1.239 The Transfer Pricing Risk Assessment Guide states that operational case teams are to set up a TPRP for 'advice and guidance on the proposed documentation and commercial realism ratings prior to finalising the Preliminary Risk ratings'. The TPR Review Procedural Manual states that the recommendation should be 'presented' to the TPRP.237

1.240 The operational case team is responsible for preparing the TPRP minutes and the TPRP report which concludes with the 'agreed' risk rating. The TPRP report is to be emailed to the Internationals unit gatekeeper.238

1.241 For all cases, where a follow-up audit is proposed, the operational case teams must hold a finalisation interview, following the issuing of a draft finalisation letter, to discuss the risk findings and their implications. Relevant technical 'experts' may be involved in particularly 'complex' cases. No further guidance is provided. However, the LB&I TLG may be available to explain to taxpayers the technical decisions reached by the ATO.239

1.242 All finalisation letters 'should' be prepared in consultation with a PSP adviser. Following the finalisation letter, the decision as to the appropriate follow-up strategy 'will be endorsed' by the TPRP.240

Transfer pricing audits

1.243 The ATO's audit process for transfer pricing issues is generally to follow the four-step process outlined in Taxation Ruling TR 98/11.241 Further guidance is provided to operational case teams in the conduct of transfer pricing audits in the ATO's Streamlined Audit Manual for Transfer Pricing. Operational case teams, with assistance from the PSP and Economist Practice, are to adapt the audit process and prepare a specific audit plan that meets the circumstances of the case. Any economist or PSP adviser allocated to the audit 'should be consulted' and will assist the operational case teams to prepare appropriate audit plans and information gathering strategies.242 It should be noted that the approach to be taken in the auditing of a transfer pricing issue, including significant case management decisions related to the planning and conduct of the audit, must be referred to the TPRP for 'advice and guidance'.243

1.244 Once approval is granted to conduct a transfer pricing audit, there are a number of stages involved.

1.245 The first stage is pre-contact analysis. The pre-contact analysis involves two major tasks:

  • conducting a detailed review of the taxpayer's documentation using a number of checklists; and
  • obtaining publicly available taxpayer and industry data to assist in undertaking Step 1 of the four-step process in Taxation Ruling TR 98/11.

1.246 On the choice and implementation of methodology, if methods other than the Resale Price Method and TNMM are used, operational case teams are directed to obtain advice from their PSP adviser. In relation to evaluating the comparability analysis, it 'should be done in consultation' with the PSP adviser and economist, such as the economist reviewing the taxpayer's comparability search criteria and researching the comparables relied upon by the taxpayer.244 The PSP adviser and economist 'will be able' to supply much of the taxpayer's economic, industry and corporate information with the remainder to be collected as part of the audit plan. The PSP adviser will also assist operational case teams obtain relevant information from a number of sources.245

1.247 The next stage is the first step in the four-step process in Taxation Ruling TR 98/11. This first step is the functional analysis which requires accurately characterising the international dealings between the associated enterprises in the context of the taxpayer's business and defining the cross border dealings. This functional analysis generally requires completion of an analysis of the functions performed, assets contributed and risks assumed by the taxpayer.246 The economist and operational case teams prepare a preliminary functional analysis by reviewing:

  • public literature on the company;
  • the company's documentation; and
  • the ATO's notes of interviews with company personnel.247

1.248 The economist and operational case team will then complete the functional analysis report.248

1.249 The second step is to select the most appropriate transfer pricing methodology or methodologies. This step requires documented reasons for the choice of particular methodologies and the rejection of others.249 No further guidance is provided on the assistance that may be available to assist the operational case team at this stage.

1.250 The third step is to apply the most appropriate method and determine the arm's length outcome. In using statistical methods to establish arm's length ranges, the operational case team 'will be heavily reliant' on the advice provided by the Economist Practice.250 Operational case teams are also directed to the Economist Practice to help identify accounting differences that may necessitate adjustments to ensure comparability. The economist is to replicate the taxpayer's comparability search, their 'accept and reject' criteria and the integrity of the process.251 If the difference in the arm's length outcome is material, operational case teams are directed to go to the TPRP with a submission and gain advice from TPRP to commence drafting of the ATO position paper. In this regard, the operational case team is to 'liaise with PSP advisers and the Economist Practice on inputs to the position paper' and prepare the position paper. Operational case teams must then gain approval from the TPRP to issue the position paper.252

1.251 The final step is the finalisation of the position paper. The decision to make a transfer pricing determination or apply a corresponding Treaty Article must be referred to the TPRP.253

1.252 The role of support units other than the Economist Practice and the PSP are not specifically mentioned in the Streamlined Audit Manual for Transfer Pricing. However, other specialist units such as the LB&I TLG may advise on the technical interpretation of a provision of the legislation, attend taxpayer meetings to explain the technical decisions reached by the ATO and review and provide input into audit position papers.254

Advance Pricing Arrangements

1.253 The ATO has advised that under the APA process outlined in Practice Statement PSLA 2011/1, three key officers are involved in APAs:

  • APA case leaders who are responsible for managing all APAs and approving the terms of unilateral APAs and supported by case officers from the operational areas;255
  • economists; and
  • CARs who are responsible for negotiating the terms of a bilateral APA with the relevant treaty partner and approving its terms.256

1.254 The ATO has advised that the current role of its CARs in terms of the five step bilateral APA process is as follows:

  • During the pre-lodgment phase, taxpayers mostly communicate with the APA teams. Taxpayers are not able to engage with the TPRP or the CAR. The ATO considers that this may contribute to stakeholders' perceptions of the back-seat involvement of the CAR.
  • During the analysis and evaluation phase, the ATO's Economist Practice leads work on quality assurance or determining taxpayers' functional analyses and identifying comparables. The Economist Practice will produce a report which is included in the ATO's position paper. Any disagreement or tiebreakers between the ATO and taxpayers are dealt with, at first instance, by the APA officer or APA case leader. The CAR normally has the final say.
  • During the negotiation and agreement phase, the CAR will review the draft position paper prepared by the APA team.

1.255 Again, other specialist units that are available to provide advice are not specifically outlined.

Resourcing and scope of work

1.256 The ATO receives its funding for transfer pricing work through a combination of general budget allocations and specified government budgeted initiatives, such as the SCI.

General budget allocations

1.257 The total departmental expenditure, or general budget allocation, for the ATO for 2013-14 is $14.1 billion.257 Internal allocation of departmental expenditure is not allocated to any specific tax risks, such as transfer pricing, as resourcing is generally allocated to different areas within the ATO on a business line or program basis. The budget allocated to transfer pricing work depends on how the varying areas within the ATO allocate their work loads. Therefore, allocations of resourcing within business lines may be quantified as the number of FTE staff allocated to particular matters.

1.258 It should be noted that LB&I operational case teams are not allocated to work on any particular tax risks exclusively. Rather, the business lines select a number of prioritised cases and risks based on the case teams available and the time they need to allocate to differing work. These resources are therefore generally quantified as FTE staff, and not as numbers of actual staff.

1.259 The ATO advises that it is unable to readily quantify the results for transfer pricing adjustments outside of the TPSCI Project. However, further details on ATO resourcing are provided in Chapter 2.

Strategic Compliance Initiative — Transfer Pricing

1.260 In May 2009, the Government provided funding of $323 million to the ATO over four years for its SCI—with $50.7 million allocated to transfer pricing risks under the specific TPSCI Project. This funding was extended in October 2012 (MYEFO 2012 Funding) with a further $300 million,258 of which, $133.6 million (over four years) being allocated by the ATO to address profit shifting risks more broadly.259

1.261 The objectives of the TPSCI Project were influencing the market and 'levelling the playing field' by improving the ATO's transfer pricing capability and providing a return on investment to government.260 The focus of the TPSCI Project was 'medium' risk LB&I taxpayers with flow on effects to SME taxpayers.

1.262 The TPSCI Project teams focused on the following transfer pricing risks:

  • business restructures (including the transfer of intangible property);
  • services to the mining industry;
  • related party financing (including intra-group loans and guarantee fees);
  • economic/profit performance of companies and the impact of the GFC; and
  • foreign bank (profit allocations).261

1.263 The specific goal of the TPSCI Project was to collect $210 million in additional taxes and penalties by having 100 officers conduct 210 risk reviews, starting 7 APAs and 20 audits and finalising 3 APAs and 11 audits in 4 years.

1.264 The ATO advised that the TPSCI Project's compliance activities were conducted differently to the BAU case teams. In particular, a number of questionnaires, which focused on the project's particular risk areas such as business restructures, were issued to taxpayers at the commencement of TPR Reviews to assist with the targeting of information gathering and to minimise potential compliance costs. For similar reasons, experienced ATO officers conducted internal workshops early in these TPR Reviews.262

1.265 The TPSCI Project teams were also able to draw on the same support as the BAU case teams.

1.266 As at 31 March 2013, the ATO has advised that the project has spent $19.5 million and collected $123 million in tax and penalties. Two-hundred and eleven risk reviews, five APAs and four audits have been completed. Thirty-seven ATO officers were allocated to the project, although this number varied over the life of the project with up to a maximum of 60 officers at any one time.263

1.267 As at 30 June 2013, the ATO has advised that the project has collected $134.1 million.264

1.268 Although funding for these objectives was extended in October 2012, the ATO's project-based approach to this type of case work was discontinued on 30 June 2013.

Changes made during the review

1.269 Following the commencement of this IGT review, the ATO has made a number of additional changes to its governance, management and resourcing including in areas dealing with transfer pricing. Although the ATO has maintained focus on profit shifting, some of the ATO's internal arrangements are in a state of flux, presenting a number of challenges for ATO management and underlying a number of stakeholder concerns.

1.270 The areas affected by the additional changes made by the ATO during the review are outlined below.

Changes to the risk management function

1.271 During the review, the ATO made changes to aspects of its risk management function in a number of areas.

Risk managers

1.272 In the LB&I business line, there is no longer a risk manager for transfer pricing. This function has been subsumed, along with other profit shifting risks, into one position —the Profit Shifting Risk Manager.265 Non-profit shifting international risks fall under the responsibility of a separate risk manager.

1.273 The Profit Shifting Risk Manager's responsibility is to coordinate the risk assessment and treatment plans for profit shifting risks with other risk managers in business lines, such as SME and Indirect Tax (ITX).266 Through this coordination, the ATO aims to ensure the business line risk plans are complementary when signed-off by their respective risk committees.

1.274 The ATO has advised that the Profit Shifting Risk Manager will be relocated from the PSP to the ISPS unit.

Risk typologies

1.275 The ATO has also started work to develop a form of risk identification compendium. This work involved examining 170 past cases to identify common attributes that could be used as early indicators of a heightened risk of profit shifting.

1.276 Such an approach to develop more mature risk identification methodologies was recommended by the IGT in his Review into the ATO's use of Benchmarking to Target the Cash Economy.267 This approach reduces the scope and time taken in those circumstances where the ATO would otherwise conduct wide ranging enquiries. It takes a staged approach to risk identification and compliance verification by using known characteristics that indicate non-compliance.

1.277 As a result of this work in reviewing previous profit shifting cases, the ATO has identified a number of risk 'typologies', or common characteristics, which can be used to focus information gathering activities in future compliance activities.

1.278 The ATO is also making more use of information obtained from natural systems, such as those obtained from information exchange with overseas revenue authorities and other ATO and government activities to more quickly identify emerging issues.

Case selection

1.279 During this review, the LB&I business line modified its risk assessment and case selection process to include 'workshops' to profile lower consequence taxpayers before risk recommendations are made.268

1.280 These workshops are intended to achieve greater involvement of LB&I Operations staff in the:

  • development of risk filters;
  • case selection process through reviewing risk recommendations to reduce false positive cases; and
  • prioritisation of the lower consequence case pool.

1.281 It is also intended that the workshops increase the level of interaction and engagement between LB&I Operations staff and risk managers and increase the effectiveness of feedback loops.269

New budget initiative

1.282 As part of the Government's May 2013 budget, the ATO was allocated an additional $109.1 million over four years, to target restructuring activity that facilitates profit shifting opportunities. The Treasury estimates that this additional funding will allow the ATO to collect additional revenue of approximately $576.5 million.270

1.283 With the above new funding and the portion of the MYEFO 2012 Funding mentioned earlier, the ATO intends to establish an additional group of 30 FTE staff to form a central team, the ISPS, to work with the LB&I Operations SES group to allocate cases as part of the case selection process and to supervise all cases involving profit shifting and international restructuring risks. However, it is unclear whether the ATO intends to limit this group to only those larger business cases dealt with by the LB&I BAU case teams.

1.284 The group is intended to be headed by a single senior ATO officer and draw on legal, accounting and litigation expertise to ensure that each case dealing with international tax risks has the right focus at the outset by developing case specific plans with the operational case teams.

1.285 The ATO has already recruited two private sector people with experience in international legal issues and transfer pricing. A senior ATO officer will also be recruited to project manage the group's work. The ATO intends to recruit approximately twenty technical specialists.

'Dedicated international' case teams

1.286 Within LB&I Operations, there are a number of operational case teams dealing with large business taxpayers which are not dealt with by the BAU case teams. The ATO advises that after the expiry of the TPSCI Project on 30 June 2013, some of these case teams are now 'dedicated international' case teams.271 These teams will be 'available to undertake the international work' that will provide the commitments to Government required under the funding initiatives described previously.

Discontinuing the TPRP and TPR Reviews

1.287 During the finalisation of this review, the ATO has advised that it intends disband the TPRP.272 Following the LB&I Executive decision to move to the broader profit shifting strategy, an internal review was initiated by the Internationals unit that identified governance and work processes that were only conducted for transfer pricing risks, such as oversight mechanisms (TPRPs) and separate compliance products (TPR Reviews).

1.288 Regarding TPR Reviews, the SME business lines will instead use the CRR product but incorporate the TPR Review procedures for review of transfer pricing risks.273 Similarly, the LB&I business line intends to use a single risk review product for all risks identified through the case selection and profiling process, including transfer pricing. However, at the time of writing, the LB&I business line had not yet determined or established specific review procedures for transfer pricing risks, such as those under the TPR Review product.274

1.289 Regarding the TPRP, the ATO further advised that its ISPS unit currently being implemented as part of its new profit shifting and compliance strategies is a recognition that an early engagement model with specialists may yield better outcomes than a review in later stages of a case, such as those conducted by the TPRP. The ISPS will be involved in the case selection process through participation in the profiling workshops and later case planning workshops.275


1 United Nations Secretariat, Transfer Pricing: History - State of the Art - Perspectives, 10th mtg of Ad Hoc Group of Experts on International Cooperation in Tax Matters, ST/SG/AC.8/2001/CRP.6 (10-14 September 2001) p 1; Otto B Martinson, Ted D Englebrecht and Carla Mitchell, 'How Multinational Firms can Profit from Sophisticated Transfer Pricing Strategies' (1999) 10(2) Journal of Corporate Accounting and Finance 91, p 92.

2 Charles T Horngren et al, Introduction to Management Accounting (Prentice Hall International Inc, 16th ed, 2012) p 336; Organisation for Economic Co-operation and Development (OECD), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Publishing, 2010) p 19; Committee of Experts on International Cooperation in Tax Matters, United Nations, Practical Manual on Transfer Pricing for Developing Countries, 8th sess, agenda item 3(b), E/C.18/2012/CRP.1 (15-19 October 2012) p 3.

3 Martinson, Englebrecht and Mitchell, above n 1, pp 91-92.

4 ibid p 91.

5 Rainer Lanz and Sebastien Miroudot, 'Intra-firm Trade: Patterns, Determinants and Policy Implications' (Trade Policy Papers No 114, OECD, 2011) p 2; OECD, Economic Outlook 2002 (2002) vol 1, ch IV.

6 UN Secretariat, 'Transfer Pricing History', above n 1, p 1.

7 Martinson, Englebrecht and Mitchell, above n 1, p 92.

8 ibid; UN Secretariat, 'Transfer Pricing History', above n 1, p 1.

9 Lanz and Miroudot, above n 5, p 2; OECD, 'Economic Outlook', above n 5, ch IV.

10 ATO, Compliance Program 2012-13 (2012) p 46; Mark Konza, 'Our Compliance Approach in the Large Market (Speech delivered at the Tax Institute 28th Annual Convention, Perth, 13 March 2013); Mark Konza (Speech delivered 17 July 2013); Bruce Quigley, 'Tax Administration in a Global Environment' (Speech delivered at the ICAA Conference, 22 November 2012).

11 Lanz and Miroudot, above n 5, p 2.

12 ibid pp 5-6.

13 Martinson, Englebrecht and Mitchell, above n 1, pp 91- 92.

14 UN Secretariat, 'Transfer Pricing History', above n 1, p 1.

15 Jack Hirshleifer, 'On the Economics of Transfer Pricing' (1956) 29(3) Journal of Business 172, p 172.

16 ibid.

17 UN Secretariat, 'Transfer Pricing History', above n 1, p 3.

18 Heath, Huddart and Slotta, 'Transfer Pricing' International Strategy WBA 434, p 3.

19 Martinson, Englebrecht and Mitchell, above n 1, p 99.

20 Heath, Huddart and Slotta, above n 18, p 3.

21 ibid.

22 ibid 4-5.

23 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, p 3; Wolfgang Schon, 'Transfer Pricing - Business Incentives, International taxation and Corporate Law' (Working Paper No 2011-5, Max Planck Institute for Tax Law and Public Finance, 2011) p 6.

24 Schon, above n 23, p 4.

25 ibid p 6-7.

26 Bernard Pulle (Economics Section), Bills Digest, No 160 of 2011-12, 19 June 2012, p 4.

27 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, p 3.

28 OECD, Addressing Base Erosion and Profit Shifting (2013).

29 United Kingdom (UK), UK Presidency of G8 2013, GOV.UK.

30 Russia, Russian Presidency of the G20: Outline, G20.

31 The Treasury, 'Implications of the Modern Global Economy for the Taxation of Multinational Enterprises' (Issue paper, March 2013); The Treasury, 'Risks to the Sustainability of Australia's Corporate Tax Base' (Scoping paper, July 2013); Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012; Explanatory Memorandum, Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013.

32 United States, Senate Committee on Homeland Security and Government Affairs, Permanent Subcommittee on Investigations, 'Offshore Profit Shifting and the U.S. Tax Code - Part 1' (20 September 2012); United States, Senate Committee on Homeland Security and Government Affairs, Permanent Subcommittee on Investigations, 'Offshore Profit Shifting and the U.S. Tax Code - Part 2 (Apple Inc.)' (21 May 2013).

33 Committee on Fiscal Affairs, OECD, Transfer Pricing and Multinational Enterprises: Report of the OECD (1979) p 6.

34 UN Secretariat, 'Transfer Pricing History', above n 1, p 4.

35 ibid.

36 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, pp 3-4.

37 OECD, Model Tax Convention on Income and on Capital: Condensed Version (OECD Publishing, 2010) art 9.

38 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, pp 2-3.

39 UN Secretariat, 'Transfer Pricing History', above n 1, p 5.

40 OECD, 'Model Tax Convention', above n 37, p 7.

41 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, pp 1-2.

42 UN Secretariat, 'Transfer Pricing History', above n 1, p 1.

43 OECD, 'Model Tax Convention', above n 37, p 7.

44 Schon, above n 23, p 2.

45 OECD, 'Model Tax Convention', above n 37, p 7.

46 Centre for Tax Policy and Administration, OECD, Manual on Effective Mutual Agreement Procedures (MEMAP) (2007).

47 League of Nations, Draft Convention on the Allocation of Profits and Property of International Enterprises (1936) art 6.

48 OECD, Draft Double Taxation Convention on Income and Capital (1963) art 9.

49 OECD, 'Model Tax Convention', above n 37, p 7; Centre for Tax Policy and Administration, OECD, 'MEMAP', above n 46; UN Secretariat, 'Transfer Pricing History', above n 1, pp 6-7.

50 UN Secretariat, 'Transfer Pricing History', above n 1, p 6; OECD, 'Model Tax Convention', above n 37, p 7; Centre for Tax Policy and Administration, OECD, 'MEMAP', above n 46.

51 UN Secretariat, 'Transfer Pricing History', above n 1, p 7.

52 ibid.

53 Centre for Tax Policy and Administration, OECD, Transfer Pricing Methods (2010) pp 2-8; OECD, 'Transfer Pricing Guidelines', above n 2; Australian Taxation Office (ATO), Income Tax: Arm's Length Transfer Pricing Methodologies for International Dealings, TR 97/20, 5 November 1997, ch 3.

54 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, p 3; Martinson, Englebrecht and Mitchell, above n 1, p 98.

55 Schon, above n 23, p 6.

56 ibid.

57 ibid; Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, p 3.

58 Schon, above n 23, p 6.

59 UN Secretariat, 'Transfer Pricing History', above n 1, p 4.

60 Schon, above n 23, p 6.

61 Martinson, Englebrecht and Mitchell, above n 1, p 92.

62 ibid p 99.

63 UN Secretariat, 'Transfer Pricing History', above n 1, p 1.

64 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, para [1.3.9].

65 UN Secretariat, 'Transfer Pricing History', above n 1, p 1.

66 Ernst & Young, UN Releases Draft of the Transfer Pricing Practical Manual for Developing Countries (15 February 2013).

67 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2.

68 Department of Economic & Social Affairs, United Nations, United Nations Model Double Taxation Convention between Developed and Developing Countries (2011).

69 ibid art 9; Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2.

70 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, para [1.10].

71 Committee of Experts on International Cooperation in Tax Matters, United Nations, 'Practical Manual', above n 2, para [1.10].

72 Ernst & Young, above n 66.

73 OECD, 'Base Erosion and Profit Shifting', above n 28, p 5.

74 Lanz and Miroudot, above n 5, pp 25-26.

75 OECD, Action Plan on Base Erosion and Profit Shifting (2013).

76 Centre for Tax Policy And Administration, OECD, Multi-Country Analysis of Existing Transfer Pricing Simplification Measures (2012) p 6.

77 Income Tax Assessment Act 1922 clause 28.

78 Commonwealth, Parliamentary Debates, House of Representatives, 10 October 1922, p 1.

79 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, para [2].

80 Trevor Boucher, Blatant, Artificial and Contrived: Tax Schemes of the 70s and 80s (ATO, 2010) pp 167-168.

81 (1980) 143 CLR 646.

82 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, paras [4]-[6].

83 (1980) 143 CLR 646.

84 Income Tax Assessment Act 1936 ss 136AA-136AF.

85 Peter Koit and Jerry Reillys, Thomson Reuters, Income Tax Assessment Act 1936, paras [136AA.10] to [136AG.1].

86 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, para [7].

87 2008 ATC 10-036.

88 2011 ATC 20-265.

89 Commissioner of Taxation v SNF Australia Pty Ltd 2011 ATC 20-265; ATO, Decision Impact Statement: Commissioner of Taxation v SNF Australia Pty Ltd (20 September 2011).

90 Bill Shorten, 'Robust Transfer Pricing Rules for Multinationals' (Media Release, No 145, 1 November 2011); David Bradbury, 'Progressing Reforms to Australia's Transfer Pricing Rules (Media Release, No 144, 22 November 2012).

91 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012; Bill Shorten, above n 90; David Bradbury, above n 90.

92 Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012.

93 Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No. 1) 2012.

94 Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013.

95 Leigh Edmonds, Working for all Australians 1910-2010: A Brief History of the Australian Taxation Office (ATO, 2010) ch 8; OECD, Working Party 6 Membership includes Australia.

96 Pappas et al., Boston Consulting Group, ATO, 'Review of the Large Case Program: Australian Taxation Office' (1992).

97 Michelle Markham, Advance Pricing Arrangements: Past, Present and Future (Kluwer Law International, 2012) pp 23-24.

98 ATO, Communication 1 (17 April 2013).

99 John Braithwaite, Market in Vice, Markets in Virtue (Oxford University Press, 2005).

100 ibid pp 90-94.

101 ATO, 'Communication 1 (17 April 2013)', above n 98; ATO, Communication (24 October 2013).

102 Specific issues included, a 'hedge book dump' in Australia of losses arising from the Global Financial Crisis, pharmaceutical companies not returning the same EBIT/Sales ratio as they were in other jurisdictions and some taxpayers not generating a profit in Australia for a number of years.

103 The Treasury, Budget Measures: Budget Paper No. 2 (2009) p 388; Note: The TPSCI Project had a maximum of 70 officers, but averaged between 40 and 50 officers over the life of the project.

104 ATO, Communication 2 (15 March 2013); ATO, Communication (12 March 2013); ATO, Communication 2 (17 April 2013).

105 ATO, 'Communication 1 (17 April 2013)', above n 98.

106 ATO, 'Communication 1 (17 April 2013)', above n 98.

107 Markham, above n 97, p 31.

108 ATO, ATO Response to PwC Legal Report on the APA Program Review (4 July 2009).

109 PricewaterhouseCoopers Legal, ATO, Review of Advance Pricing Arrangement Program (2008) app C.

110 ibid pp 2, 5, 21.

111 ATO, 'Response to PwC Legal Report', above n 108.

112 ibid.

113 ibid.

114 ibid.

115 ATO, 'Communication (12 March 2013)', above n 104.

116 ATO, 'Communication 1 (17 April 2013)', above n 98.

117 ATO, 'ATO Executive Meeting - Submission Paper: International Review - Proposed Changes to, and Options for, Organisational Structure and Staffing' (4 October 2012) Internal ATO Document, p 9.

118 ATO, 'Communication 1 (17 April 2013)', above n 98.

119 Note: The ATO advises that the report for this review is the proposal put to the ATO Executive in October 2010. However, this proposal sets out what changes are needed to implement the previous ATO Executive decision and not the findings of the review on which that previous ATO Executive decision was based.

120 ATO, 'Communication 1 (17 April 2013)', above n 98.

121 ATO, 'Communication 1 (17 April 2013)', above n 98.

122 ATO, 'International Review', above n 117, p 3.

123 ATO, 'Communication 1 (17 April 2013)', above n 98.

124 ATO, 'Communication (12 March 2013)', above n 104.

125 ATO, 'International Review', above n 117, p 9 (refers to an undated ATO Executive decision to approve the recommendations).

126 Note, the Charter states that the ISC is a new Committee, however, the submission to the ATO Executive states that it is an existing Committee: ATO, International Steering Committee Charter (4 April 2012) Internal ATO Document; ATO, 'International Review', above n 117.

127 ATO, 'International Review', above n 117, pp 4-5, 10.

128 ATO, National Tax Liaison Group (NTLG) Internationals Sub-group Minutes (July 2012) app 3.

129 ibid.

130 ATO, National Tax Liaison Group (NTLG) Internationals Sub-group Minutes (November 2011).

131 ATO, SME Communicator - December 2011 (17 February 2012).

132 Michael D'Ascenzo, 'Risk: The Framework, the vision, the Values'(Speech delivered at the CPA Public Sector Finance and Management Conference, Barton, 12 August 2010).

133 Note, the ATO has recently re-characterised its business lines.

134 ATO, Risk and Issues Management, PS CM 2003/02, 28 May 2013.

135 ATO, 'ISC Charter', above n 126.

136 ibid.

137 ATO, Communication 1 (1 November 2013).

138 ATO, 'PS CM 2003/02', above n 134.

139 ATO, Communication (31 October 2013).

140 ATO, 'Internationals, LB&I - About us' (27 November 2012) Internal ATO Document.

141 ATO, 'S&ME International Strategic Unit (ISU) Overview' (24 January 2013) Internal ATO Document; ATO, Communication (7 November 2013).

142 ATO, 'Communication (24 October 2013)', above n 101; ATO, 'Communication (31 October 2013)', above n 139.

143 ATO, 'LB&I Case Selection and Approval Guide' (21 February 2013) Internal ATO Document; ATO, 'Communication (24 October 2013)', above n 101.

144 ATO, 'Case Selection and Approval Guide', above n 143; ATO, 'Communication (24 October 2013)', above n 101.

145 ATO, 'TPRR Procedural Manual' (23 July 2012) Internal ATO Document.

146 ATO, Communication (19 July 2013).

147 ATO, 'ISC Charter', above n 126.

148 ATO, Transfer Pricing Review Work, PS LA 2005/14, 14 May 2007; ATO, 'TPRR Procedural Manual', above n 145; ATO, 'Streamlined Audit Manual for Transfer Pricing' (October 2005) Internal ATO Document; ATO, ATO's Advance Pricing Arrangement Program, PS LA 2011/1, 7 May 2012, ch 11.

149 ATO, 'PS LA 2005/14', above n 148; ATO, 'TPRR Procedural Manual', above n 145; ATO, 'Audit Manual', above n 148; ATO, 'PS LA 2011/1', above n 148, ch 11; ATO, Communication 1 (14 March 2013).

150 ATO, 'LB&I Executive Minutes: Proposal - LB&I Governance Sessions' (January 2013) Internal ATO Document.

151 ATO, 'LB&I Governance Sessions: Overview of LB&I Governance Sessions' (March 2013) Internal ATO Document.

152 ATO, Communication (10 May 2013).

153 This was the term used in: ATO, 'Communication (19 July 2013)', above n 146.

154 ATO, Communication (18 April 2013).

155 ibid.

156 ibid.

157 ibid.

158 ibid.

159 ATO, 'PS LA 2005/14', above n 148; ATO, 'TPRR Procedural Manual', above n 145; ATO, 'Audit Manual', above n 148; ATO, 'PS LA 2011/1', above n 148, ch 11; ATO, 'Communication 1 (14 March 2013)', above n 149.

160 ATO, 'Communication (19 July 2013)', above n 146.

161 ATO, 'The Jurisdictional Income Practice - About us' (20 January 2012) Internal ATO Document.

162 ibid.

163 ATO, 'TPRR Procedural Manual', above n 145.

164 ATO, 'Audit Manual', above n 148.

165 ATO, 'Referral to Internationals: Request for Assistance' (1 March 2013) Internal ATO Document.

166 ATO, 'PS LA 2011/1', above n 148, ch 11; ATO, 'E-wiki: Transfer Pricing' (29 November 2012) Internal ATO Document; ATO, Communication (22 March 2013); ATO, Communication 1 (13 March 2013). Work Processes for Mutual Agreement Procedures refers to: Centre for Tax Policy and Administration, OECD, 'MEMAP', above n 46, pp 10-11.

167 ATO, 'JIP - About us', above n 161; ATO, The Transfer Pricing Review Panel (TPRP), PS LA 2004/13, 17 December 2004.

168 ATO, 'Transfer Pricing Network Charter' (October 2012) Internal ATO Document.

169 ibid.

170 ibid.

171 ibid; ATO, 'E-wiki', above n 166, Transfer Pricing Network.

172 ATO, 'E-wiki', above n 166, Compliance Technical Networks.

173 ATO, Communication (21 May 2013).

174 ibid; ATO, 'TPN Charter', above n 168.

175 ATO, 'TPRR Procedural Manual', above n 145; ATO, 'Transfer Pricing Risk Assessment Guide' (May 2012) Internal ATO Document.

176 ATO, 'Communication (12 March 2013)', above n 104.

177 ATO, 'TPN Charter', above n 168.

178 ibid; ATO, 'E-wiki', above n 166, Transfer Pricing Network.

179 ATO, 'PS LA 2004/13', above n 167, para [18].

180 ibid para [19].

181 ibid.

182 ibid.

183 ibid paras [16]-[17].

184 ibid paras [1], [4].

185 ibid para [10]; ATO, Referral of Work to International Strategy and Operations, PS LA 2006/9, 9 November 2010; ATO, 'International Review', above n 117; ATO, 'JIP - About us', above n 161; ATO, 'PS LA 2011/1', above n 148, ch 11; ATO, 'Communication 2 (15 March 2013)', above n 104.

186 ATO, 'PS LA 2006/9', above n 185; ATO, 'International Review', above n 117; ATO, 'JIP - About us', above n 161; ATO, 'PS LA 2004/13', above n 167; ATO, 'PS LA 2011/1', above n 148, ch 11; ATO, 'Communication 2 (15 March 2013)', above n 104.

187 ATO, 'PS LA 2004/13', above n 167.

188 ATO, 'Economists - About us' (12 April 2012) Internal ATO Document; ATO, 'Communication 1 (14 March 2013)', above n 149; ATO, 'Organisational Chart for Economist Practice' (11 March 2013) Internal ATO Document.

189 ATO, Provision of Accredited Economic Advice, PS LA 2013/2, 20 June 2013.

190 ibid.

191 ATO, 'TPRR Procedural Manual', above n 145.

192 ATO, 'Audit Manual', above n 148.

193 ATO, 'PS LA 2013/2', above n 189.

194 ibid.

195 ATO, 'Communication 1 (14 March 2013)', above n 149; ATO, 'Referral to Economist Practice' (undated) Internal ATO Document.

196 ATO, 'PS LA 2013/2', above n 189.

197 ATO, 'Case and Topic Leaders - About us' (27 August 2012) Internal ATO Document.

198 ibid; ATO, 'Communication 2 (15 March 2013)', above n 104.

199 The callover process was modified as part of LB&I's governance shift to 'national strategy, local delivery'. The governance processes are now based around the different ATO sites and managed by site SES and includes active compliance, interpretative advice and internationals. They look at case plans as well as risk spots around capability. Site SES ask about specific cases. If needed, there is follow up with case workshops with site leaders or TLG.

200 ATO, 'LB&I Technical Leadership Group' (16 November 2012) Internal ATO Document; ATO, Communication 2 (13 March 2013); ATO, 'Communication 2 (15 March 2013)', above n 104; ATO, Communication 1 (19 March 2013); ATO, 'Communication (10 May 2013)', above n 152.

201 ATO, 'Law and Practice - What we do' (6 February 2013) Internal ATO Document.

202 ATO, Management of High Risk Technical Issues and Engagement of Tax Technical Officers in Law and Practice, PS LA 2012/1, 31 August 2012.

203 These two dedicated teams were previously within the SME Internationals unit before the unit was disbanded and those teams became 'dedicated teams' within SME General Compliance.

204 ATO, Communication (15 July 2013).

205 ATO, 'About Technical and Case Leadership' (22 February 2013) Internal ATO Document.

206 ibid.

207 ibid.

208 ibid.

209 ibid.

210 ATO, 'S&ME Risk Management Committee (RMC)' (28 June 2012) Internal ATO Document.

211 ATO, 2008-9 Compliance Program (2008).

212 ATO, Communication (11 February 2013).

213 In the SME business line, its compliance products also include, Preliminary Risk Reviews and Comprehensive Risk Reviews.

214 ATO, 'TPRR Procedural Manual', above n 145.

215 ibid; ATO, 'Transfer Pricing Risk Assessment Products - Overview of Procedural Steps' (undated) Internal ATO Document.

216 ATO, 'Audit Manual', above n 148, p 6.

217 ATO, 'TPRR Procedural Manual', above n 145; ATO, 'Transfer Pricing Risk Assessment Products', above n 215.

218 ATO, 'TPRR Procedural Manual', above n 145.

219 ATO, 'E-wiki', above n 166; Centre for Tax Policy and Administration, OECD, 'MEMAP', above n 46.

220 Centre for Tax Policy and Administration, OECD, 'MEMAP', above n 46, para [25].

221 OECD, 'Model Tax Convention', above n 37, art 25.

222 ATO, 'TPRR Procedural Manual', above n 145.

223 ATO, 'Risk Assessment Guide', above n 175.

224 ATO, 'TPRR Procedural Manual', above n 145.

225 ibid; ATO, 'Risk Assessment Guide', above n 175.

226 ATO, 'Risk Assessment Guide', above n 175; ATO, 'TPRR Procedural Manual', above n 145.

227 ATO, 'Risk Assessment Guide', above n 175; ATO, 'TPRR Procedural Manual', above n 145.

228 ATO, 'PS LA 2013/2', above n 189; ATO, 'JIP - About us', above n 161.

229 ATO, 'TPN Charter', above n 168.

230 ATO, 'JIP - About us', above n 161.

231 ATO, 'Risk Assessment Guide', above n 175.

232 ATO, 'TPRR Procedural Manual', above n 145.

233 ibid.

234 ibid.

235 ATO, 'Technical Leadership Group', above n 200.

236 ATO, 'TPRR Procedural Manual', above n 145.

237 ATO, 'Risk Assessment Guide', above n 175; ATO, 'PS LA 2004/13', above n 167.

238 ATO, 'TPRR Procedural Manual', above n 145.

239 ibid; ATO, 'Technical Leadership Group', above n 200.

240 ATO, 'TPRR Procedural Manual', above n 145.

241 ATO, 'Audit Manual', above n 148, p 5.

242 ibid pp 5, 8.

243 ATO, 'PS LA 2004/13', above n 167.

244 ATO, 'Audit Manual', above n 148, pp 11, 13-14.

245 ibid p 13.

246 ibid p 20.

247 ibid p 39.

248 ibid.

249 ibid p 20.

250 ibid p 63.

251 ibid p 70.

252 ibid p 71; ATO, 'PS LA 2004/13', above n 167.

253 ATO, 'PS LA 2004/13', above n 167.

254 ATO, 'Technical Leadership Group', above n 200.

255 ATO, 'Communication (22 March 2013)', above n 166.

256 ATO, 'PS LA 2011/1', above n 148, ch 11.

257 The Treasury, Portfolio Budget Statements 2013-14: Treasury Portfolio (2013) p 181.

258 The Treasury, Mid-Year Economic and Fiscal Outlook: 2012-13 (2010) pp 10, 46, 181.

259 ATO, 'Communication 1 (1 November 2013)', above n 137.

260 ATO, 'Tier 2 Project Plan: Transfer Pricing Strategic Compliance Initiative Project' (June 2010) Internal ATO Document.

261 ibid.

262 ATO, 'Communication 2 (17 April 2013)', above n 104.

263 ibid; ATO, 'TP SCI Project Update: Governance Meeting' (17 April 2013) Internal ATO Document.

264 ATO, Communication (11 November 2013).

265 ATO, Communication (19 March 2013).

266 ATO, 'Communication (19 July 2013)', above n 146.

267 IGT, Review into the ATO's use of Benchmarking to Target the Cash Economy (2012) Recommendation 4.1.

268 ATO, 'Communication (24 October 2013)', above n 101; ATO, Communication 4 (1 November 2013).

269 ATO, 'Communication (24 October 2013)', above n 101.

270 The Treasury, Budget Paper No. 2: 2013-14 (2013) p 36.

271 ATO, 'Communication (19 July 2013)', above n 146.

272 ATO, 'Communication (24 October 2013)', above n 101.

273 ATO, Communication 5 (1 November 2013).

274 ATO, Communication (5 November 2013); ATO, Communication (6 November 2013).

275 ATO, 'Communication (6 November 2013)', above n 274.