6.1 Stakeholders were concerned that the recent changes to the transfer pricing law, including the enactment of Division 815 of the Income Tax Assessment Act 1997 (ITAA 1997), may increase the risk of retrospective application of ATO views and cause considerable uncertainty for taxpayers. Stakeholders were of the view that additional ATO advice and guidance should be provided quickly to avoid this risk. They identified the following issues as priorities for ATO advice:
- The ATO's reconstruction power under subdivision 815-A of the ITAA 1997 and the circumstances in which it will be used. Stakeholders were concerned that the ATO may impose unrealistic administrative requirements and that double taxation may occur where the competent authorities do not agree on what is a reconstruction or when a transaction should be reconstructed.
- A 'restructuring event' for the purpose of completing Question 17 of the IDS. Stakeholders comment that at present, the question and the related instructions do not clearly indicate the extent to which a transfer of functions, assets and risks would be needed to constitute such an event. SMEs were concerned that this lack of clarity was imposing an unnecessary compliance burden.
- The reasonably arguable position penalties under Subdivision 284-E of the ITAA 1997. Stakeholders were concerned that the existing Taxation Ruling TR 98/11 does not provide sufficient practical advice on what transfer pricing documentation would be accepted by the ATO.
6.2 Stakeholders also considered that the ATO's advice and guidance on transfer pricing issues were in need of updating, as they:
- did not adequately consider recent changes in international dealings and commerce, such as the use of the London Interbank Offered Rate (LIBOR) in the mining industry, the movement of SMEs' intellectual property into tax havens, the deferral of MNEs' dividends to their domestic countries and the combined use of debt and guarantee fees;
- had not been provided on areas foreshadowed in previous rulings, such as those in Taxation Ruling TR 2001/11 paragraph 6, Taxation Ruling TR 94/14 paragraphs 4, 5 and 408 and Taxation Ruling TR 97/20 paragraph 1.10;
- did not consider the interaction of the transfer pricing provisions with other areas of legislation, such as Taxation Ruling TR 2011/1 that does not consider capital gains, attribution or anti-avoidance issues; and
- did not fit seamlessly together as many older rulings appeared inconsistent in some ways with later public advice.
6.3 In addition to the content of the ATO's advice and guidance, stakeholders were concerned that a key forum to surface emerging transfer pricing issues, the NTLG International Sub-group, was ineffective in this respect. Stakeholders consider that the NTLG International Sub-group does not have the necessary degree of specialisation to discuss transfer pricing issues or the necessary middle market representation. Although the ATO has advised that such specialists and representatives may attend the sub-group's meetings in certain circumstances, stakeholders have questioned the logistics of doing so.
6.4 Lastly, stakeholders raised concerns that the ATO has, or will, change its approach to current transfer pricing cases or cases previously 'thought to be settled' as a result of the enactment of the new transfer pricing provisions.623
ATO materials and information
6.5 The ATO sets out its administration of transfer pricing laws in numerous binding advice and non-binding guidance products.624 Since 1992, the ATO has released a total of 39 advice products on transfer pricing issues. A non-exhaustive list of this advice and guidance is set out in Appendix 5.
6.6 The ATO considers that public rulings, a form of binding advice, are generally designed to cover a specific issue or area of law, but for practicality reasons of managing length and complexity, it can never cover every associated issue or matter that may intersect with the identified specific issue or area of law.625 Other advice or guidance must be used where this occurs. For example, in relation to paragraph 5 of Taxation Ruling TR 2011/1, relevant capital gains tax issues are the subject of other public rulings which can be applied widely, including the transactions described in Taxation Ruling TR 2011/1. Similarly, attribution is the subject of existing ATO advice and guidance.626 Overall, the ATO considers that its advice and guidance is comprised of a number of products on a number of different issues, which together are intended to be applied to taxpayer arrangements.
6.7 During the review, the ATO advised that it has commenced planning for the review and update of its transfer pricing advice and guidance.627 It aims to afford priority in delivering advice and guidance on the following list of topics with certain timeframes:
- reconstruction (no prior ruling), public ruling to be issued by September 2014;
- penalties (Taxation Ruling TR 98/16), practice statement to be issued by September 2014;
- documentation (Taxation Ruling TR 98/11), practice statement to be issued by September 2014;
- transfer pricing methods (Taxation Ruling TR 97/20), updated public ruling to be issued by September 2015;
- relief from double taxation (Taxation Ruling TR 2000/16), updated public ruling to be issued by September 2015;
- transfer pricing determinations (Taxation Ruling TR 2007/1), updated public ruling to be issued by September 2015;
- transfer pricing review work (Practice Statement PSLA 2005/14), revised practice statement to be issued by September 2014;
- Transfer Pricing Review Panel (Practice Statement PSLA 2004/13), revised practice statement to be issued by September 2014;
- Advance Pricing Arrangements (Practice Statement PSLA 2011/1), revised practice statement to be issued by September 2014; and
- referral of work to the International unit (Practice Statement PSLA 2006/9), revised practice statement to be issued by September 2014.628
6.8 The ATO advises that it has engaged with tax professionals to obtain input into the scoping of guidance products629 and to issue more detailed scoping documents for the Taxation Rulings on the application of section 815-130 and transfer pricing documentation requirements and the practice statement on penalties for transfer pricing.630
6.9 In respect of providing further advice and guidance on what constitutes 'restructuring events', the IDS 2012 instructions indicate that the IDS adopts a wider meaning of the term 'restructuring' which goes beyond the generally accepted financial definition.631 The instructions outline that 'restructuring events' for the purposes of the IDS is consistent with the definition of Taxation Ruling TR 2011/1632 and,
refers to arrangements whereby assets, functions and/or risks of a business are transferred between you and international related parties, or your branch operations.
This may include:
- reorganisation of your structure resulting in the disposal or acquisition of entities or the change in ownership of entities;
- establishing, expanding, downsizing, liquidating or relocating business operations or business lines, resulting in:
- the acquisition and/or the disposal of assets or liabilities (tangible or intangible);
- the transfer of functions or the significant modification of service arrangements between yourself and international related parties (for example, this may include transfer of agency, distribution, finance, information technology, insurance, logistics, marketing, sales, shared services, shipping, trading, transport and treasury functions);
- the transfer of risks between yourself and international related parties;
- the increase or decrease of rights or obligations; and
- where there has been a change in the nature of the business carried on through your branch operations — for example, you have commenced or ceased to use your property in your branch operations or you have commenced or ceased to perform functions or services through your branch operations.633
6.10 Division 815 of the ITAA 1997 explicitly incorporates the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the OECD's Model Tax Convention on Income and on Capital, and its commentaries as extrinsic material for the interpretation of the Division.634 In respect of reconstructing transactions, the OECD guidelines state:
A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter II [of the OECD Transfer Pricing Guidelines]. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.635
6.11 In relation to 'exceptional cases' the OECD outlines two situations where it may be appropriate for revenue authorities to reconstruct taxpayers' transactions.
6.12 The first is where the economic substance of a transaction differs from its form. In such circumstances, revenue authorities may disregard the parties' characterisation of the transaction and reconstruct it in accordance with its substance.
6.13 The second situation is where the form and substance of the transaction are the same, however the arrangements made in relation to the transaction when viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the revenue authority from determining an appropriate transfer price. In this case, while it may be proper to respect the structure and form of the transaction, it would nonetheless be appropriate for a revenue authority to reconstruct the terms of that transfer in its entirety. The reconstruction of the transfer should not be simply by reference to pricing that might reasonably have been expected had the transfer been the subject of a transaction involving independent enterprises.636
6.14 Other than the above, currently there is no further advice or guidance on what constitutes a reconstruction of a transaction, what are 'exceptional circumstances' necessitating a reconstruction637 and how the ATO's reconstruction powers should be applied.638
6.15 These issues were raised with the ATO by members of the Transfer Pricing Working Group (TPWG) in August 2012. During the meeting, the Chair of the TPWG indicated that from the ATO's point of view, with respect to the specific issue of reconstruction, Subdivision 815-A of the ITAA 1997 does not represent a change to the ATO view that the power to reconstruct a transaction was available under Division 13 of the ITAA 1936. Other members of the TPWG did not agree with this view of the law and indicated they would prefer guidance provided on the subject.639 Members raised the matter again during the October 2012 meeting of the TPWG.640
6.16 In respect of providing advice and guidance of what transfer pricing documentation taxpayers should prepare, Taxation Ruling TR 98/11 outlines the process of documenting the arm's length nature of transfer prices and generally, the nature and type of documentation that is relevant to supporting transfer prices between international related parties.
6.17 Taxation Ruling TR 98/11 also considers documentation issues for small business taxpayers and entities with low levels of international dealings in chapter 6, documentation relevant to the selection and application of particular pricing methodologies in chapter 7 and documentation issues for certain business strategies in chapter 8.
6.18 From 1999 until March 2011 the NTLG Transfer Pricing Sub-group (Transfer Pricing Sub-group) was a forum through which the ATO sought and obtained the views of professional advisers and industry groups on issues related to the administration of tax legislation on transfer pricing, particularly issues to be covered in future rulings or determinations.
6.19 Membership of the Transfer Pricing Sub-group comprised representatives from peak professional associations, industry groups and accounting firms involved in transfer pricing, representatives from the Department of Treasury and key ATO staff involved in transfer pricing strategy and casework. Other ATO staff attended as required.641
6.20 Membership from the accounting firms was limited to the top six Schedule 25A lodgers to keep membership numbers to a manageable level. Due to this limitation, the ATO stressed that it was important that representatives of the professional associations circulate information from the NTLG Transfer Pricing Sub-group meetings to their members to ensure that it is disseminated amongst the accounting firms who undertake transfer pricing work.642
6.21 During the ATO's reorganisation of its governance and coordination of international issues in 2010, the ATO considered that international tax issues can be complex and it is often not possible or desirable to deal with transfer pricing issues discretely. The ATO felt that a change in the NTLG sub-group arrangements would better cover the range of international issues. The ATO consulted various stakeholders in November and December of 2010. A decision at the NTLG was made on 14 December 2010 to trial the new International Sub-group by combining the then Transfer Pricing Sub-group and the Foreign Source Income Sub-group.643
6.22 Some early concerns were raised by the Transfer Pricing Sub-group members around adequately addressing such a wide ranging subject as international tax as firms are generally established with differentiation between international issues and transfer pricing issues.644
6.23 The ATO proposed that once the members have considered the agenda items, they will be free to invite an additional person as subject matter experts or market segment representatives that they consider will be more suited to dealing with or discussing a particular issue.645 The IGT notes that since the change in March 2011, no transfer pricing issues have been discussed in the NTLG Internationals Sub-group at the time of writing.
6.24 Further, the ATO stated that should a particular issue be considered significant or where ongoing consultation is required, a working group may be set up. This working group will be chaired by an appropriate ATO representative, and consist of appropriately experienced professionals and/or relevant industry body representatives as nominated by the members.646
6.25 Such a working group was set up in April 2012 to examine issues in relation to the administration and operation of Subdivision 815-A of the ITAA 1997 — the TPWG. However, the TPWG would not consider issues or activities requiring resolution by way of legislative or policy change. Where such issues are identified in the course of this working group's deliberations, the issues will be escalated to the Technical Issues Management Sub-group of the NTLG via the Internationals Sub-group.647
6.26 The ATO also advised members that while the TPWG was open to discussing many issues concerning implementation, the ATO could not provide advice or guidance on law prior to its enactment. Members were instead directed to Practice Statement PSLA 2004/6.648
6.27 The ATO has also acknowledged concerns that the new arrangements may exclude some transfer pricing practitioners from engaging in dialogue with the ATO in these forums. The ATO responded to this by stating that the NTLG Internationals Sub-group had undertaken to publish the minutes as soon as possible and that there should be no disadvantage to anyone who is not included in the meeting.649
6.28 However, the ATO has advised the timeframe for publishing the NTLG Internationals Sub-group minutes can take between 99 to 335 days. The IGT notes that details of the first meeting in August 2012 are unavailable.650
6.29 The ATO has advised that most delays can be attributed to either publishing congestion and backlogs, or lags in receiving comments and feedback from ATO members and external attendees. Members had copies of the draft minutes prior to the following meeting.
6.30 Previously, minutes were presented at the subsequent meeting for endorsement prior to being sent for publishing. In response to requests for more timely publishing of minutes by externals, the new Secretariat is trialling sending the draft minutes to members for review, updating these based on feedback then sending them for approval by the Chair ahead of submitting for publishing. The aim is to have the minutes published within six weeks of a meeting but this will be dependent on timely review of the minutes by members and ATO Publishing, which can take an additional two to three weeks.
6.31 Towards the finalisation of this review, the ATO has advised the IGT that it has disbanded both the NTLG International Sub-group and the TPWG as of 1 July 2013. Consultation in respect of the public rulings and advice being prepared by the ATO on Division 815 of the ITAA 1997 will occur through a newly proposed Division 815 Technical Working Group.651
6.32 ATO documentation describes the new intended consultation framework as follows:
The review is complete and we have agreed to implement a new consultation framework from 1 July 2013 which consists of:
- eight forums representing key relationships and systems, they are:
- tax professionals (NTLG)
- large business
- small/medium business
- ATO tax practitioner forum
- charities/not for profit
- a model where participants, methodology and timeframe are determined by the nature of the issue, and
- a corporate consultative intelligence hub. The hub will not perform a secretariat function but will add value by sharing best practice advice, facilitate a two-way clearing house for issues, and develop a 'pool of experts' with the relevant business areas.652
6.33 The intended operation of how the consultative intelligence hub will operate is reproduced in Appendix 15.
6.34 In relation to the issue of whether the ATO will change its approach to cases as a result of the new law, the Second Commissioner, Compliance, has publicly stated that the ATO will not reopen any cases settled by deed, any concluded advance pricing arrangements and also any settled mutual agreement procedure cases.653 It is important to note, however, that there is a distinction between cases settled by deed compared with cases where 'no further action' was taken. In this respect, the ATO has advised that it is not possible to be definitive that years previously looked at by the ATO will not be re-examined, but the ATO has advised that cases will not be started or re-examined due to the introduction of Subdivision 815-A of the ITAA 1997.654
6.35 Since the ATO's first public ruling in 1992, there have been major changes in MNE structures and arrangements, the global economic environment and the associated taxing regime. Australia's focus has also moved to a broader profit shifting approach as has those of its trading partners, such as the United States655 and United Kingdom (UK).656 It is therefore necessary to reconsider the currency of ATO's existing advice and guidance.
6.36 The IGT is of the view that the ATO now has an ideal opportunity to also ensure its advice and guidance are sufficient and provide practical advice that is integrated with other areas of law, updated and released in a timely manner.
6.37 The IGT notes that the ATO has commenced a process to revise and update its existing advice and guidance. Broadly, the topics raised by stakeholders, which require guidance as a result of the new laws, appear to have been incorporated into the scope of the ATO's plans. The ATO is seeking input from tax practitioners on the scope of the ATO's work. Furthermore, input from others can be provided during the ATO's consultation process for issuing public rulings and practice statements.
6.38 The ATO has also consulted on the timeframes for the release of its intended advice and guidance, which generally accord with its existing advice development processes.
6.39 As part of these processes, the IGT considers that consolidating the ATO's international tax advice and guidance, including all relevant Taxation Rulings, Taxation Determinations, Practice Statements, transfer pricing booklets and relevant speeches, into a single document will have many efficiency benefits as well as ensuring coherence. The IGT notes that other revenue authorities such as, the UK Her Majesty's Revenue and Customs657 and the New Zealand Inland Revenue Department658 have issued consolidated international tax or transfer pricing advice.
6.40 The TPWG previously comprised transfer pricing specialists for the purpose of consulting on the issues arising from Subdivision 815-A of the ITAA 1997. In this respect, with the restructure of the ATO's external consultation forums and the limited scope of the proposed Division 815 Technical Working Group, the IGT considers that it is important to maintain the TPWG for at least five years, with its membership reviewable every one to two years, as not all issues come to the surface immediately and some may be best considered after a passage of time.
6.41 Furthermore, transfer pricing issues that fell outside the scope of the TPWG previously may have been raised in the NTLG International Sub-group. Again, as a result of the restructure of the ATO's external consultation forums, many different domestic and international tax issues may be discussed at the restructured forum and there may not be sufficient time and resources to address all major transfer pricing issues. For example, when the ATO previously moved from the specialised NTLG Transfer Pricing Sub-group to the broader NTLG International Sub-group, the ATO did not appear to have communicated developments arising from the OECD Working Party 6659 as regularly.
6.42 As many revenue authorities believe that transfer pricing may be a key risk to sovereign revenues, the IGT considers that it is critical to maintain appropriate and focused consultation between the ATO and private sector transfer pricing specialists. The TPWG should be maintained and its scope widened to also consider existing issues that arise from Division 13 of the ITAA 1936 and the second tranche of the modernised transfer pricing rules.
6.43 Furthermore, recent administrative changes have brought approximately 11,000 SME taxpayers within direct focus of the ATO's transfer pricing compliance activities, such as through the IDS.660 The transfer pricing issues they encounter are likely to be dissimilar to those of large business. Therefore, the expanded TPWG should also ensure appropriate middle market representation.
The IGT recommends the ATO:
- update and consolidate its advice and guidance on transfer pricing matters;
- issue future advice and guidance on transfer pricing issues in a timely manner; and
- maintain the Transfer Pricing Working Group for another 5 years to assist the ATO in the application of the new and existing law and, in particular, ensure the views of SMEs are appropriately considered.
Agree in part
The ATO agrees with parts 1 and 2.
The ATO disagrees with part 3 as this would not be consistent with the streamlined approach to consultation that we have recently implemented at a corporate level. That approach is designed to ensure that we are consulting appropriately with the right stakeholders at the right time and on the right issues. We further note that a working party has been established, under our new consultation approach, to support stakeholder engagement during the drafting of rulings relevant to the administration of Division 815.
623 ATO, 'Draft Transfer Pricing Working Group Minutes' (29 August 2012) Internal ATO Document, p 3.
624 ATO, 'IGT-TP-TOR2-REQ1' (8 November 2012) Internal ATO Document.
625 ATO, 'Public Rulings Manual' (7 August 2013) Internal ATO Document.
626 ATO, Communication (7 June 2013).
627 ATO, Communication (13 December 2012).
628 ATO, 'Tier 3 Project Outline: Division 815 ITAA 1997 Implementation Project' (5 August 2013) Internal ATO Document.
629 ibid p 13.
630 ATO, 'NTLG TPWG - Scoping Document: Taxation Ruling: Income Tax - Transfer Pricing - Application of Section 815-130 of ITAA 1997' (3 September 2013) Internal ATO Document; ATO, 'NTLG TPWG - Scoping Document: Taxation Ruling: Income Tax - Transfer Pricing - Documentation' (3 September 2013) Internal ATO Document; ATO, 'NTLG TPWG - Scoping Document: PS LA: Income Tax - International Transfer Pricing - Penalty Tax Guidelines' (3 September 2013) Internal ATO Document.
631 ATO, 'IDS Instructions 2012', above n 483, Question 17.
632 ATO, Income Tax: Application of the Transfer Pricing Provisions to Business Restructuring by Multinational Enterprises, TR 2011/1, 9 February 2011.
633 ATO, 'IDS Instructions 2012', above n 483.
634 Income Tax Assessment Act 1997 s 815-20.
635 OECD, 'Transfer Pricing Guidelines', above n 2, para [1.64].
636 ibid para [1.65].
637 ATO, 'TPWG Draft Minutes (29 August 2012)', above n 622, p 3.
638 ATO, 'IGT-TP-TOR2-REQ1', above n 623; ATO, 'Draft Transfer Pricing Working Group Minutes' (10 October 2012) Internal ATO Document; ATO, 'Draft Transfer Pricing Working Group Minutes' (14 November 2012) p 3.
639 ATO, 'TPWG Draft Minutes (29 August 2012)', above n 622, p 3.
640 ATO, 'TPWG Draft Minutes (10 October 2012)', above n 637, Item 4.
641 ATO, NTLG Minutes (31 March 2010); ATO, NTLG Minutes (14 November 2012) p 25.
642 ATO, 'NTLG Minutes (31 March 2010)', above n 640; ATO, 'NTLG Minutes (14 November 2012)', above n 640, p 25.
643 ATO, 'NTLG Minutes (31 March 2010)', above n 640; ATO, 'NTLG Minutes (14 November 2012)', above n 640, pp 24-25; ATO, NTLG Transfer Pricing Sub-Group Minutes (29 March 2011) pp 2-4.
644 ATO, NTLG Internationals Sub-group Minutes (16 May 2011) p 5.
647 ATO, 'Draft Transfer Pricing Working Group Charter' (undated) Internal ATO Document, pp 1-3.
648 ATO, 'TPWG Draft Minutes (29 August 2012)', above n 622; ATO, 'TPWG Draft Minutes (14 November 2012)', above n 637, p 2.
649 ATO, NTLG Internationals Sub-Group Minutes (19 July 2011).
650 ATO, 'Communication (21 May 2013)', above n 173.
651 ATO, 'Communication (24 October 2013)', above n 101.
652 ATO, 'Office Minute: Review of ATO Consultative Arrangements - New Arrangements to Commence from 1 July 2013' (30 May 2013) Internal ATO Document.
653 Commonwealth, Parliamentary Debates, Senate, 26 July 2012, pp 53-62 (Bruce Quigley); Quigley, above n 10.
654 ATO, 'TPWG Draft Minutes (10 October 2012)', above n 637, p 4.
655 US Office of Management and Budget, Living Within Our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction (September 2011) pp 50-51; US Department of the Treasury, General Explanations of the Administration's Fiscal Year 2013 Revenue Proposals (February 2013) pp 88-90.
656 David Cameron, 'David Cameron Sets Out the Main Priorities for the UK's Presidency of the G8: Trade, Tax and Transparency' (speech delivered at the World Economic Forum, Davos, 24 January 2013).
657 HMRC, 'International Manual', above n 383.
660 ATO, 'SME Communicator', above n 131.