The Inspector-General of Taxation's (IGT) review into the Australian Taxation Office's (ATO) management of transfer pricing matters was prompted by concerns raised by taxpayers, tax professionals and their representative bodies. Broadly, these concerns related to unnecessary costs and protracted timeframes involved, lack of ATO communication on issues of concern, inadequate public advice and guidance and ineffective use of consultative forums.
The key underlying theme was insufficient ATO capability to deal with transfer pricing matters. The ATO capability in this area had been stretched further in responding to the ongoing evolution of globalisation, recent international collaboration on base erosion and profit shifting (BEPS) emerging from OECDi and G20ii forums as well as changes to domestic transfer pricing legislation.
At the start of this review the ATO acknowledged that improvement was required notwithstanding the relatively recent changes to its internal governance arrangements and management structures, including its 'decentralised' compliance model, whereby transfer pricing specialists no longer conducted case work with generalist operational teams making decisions on all technical issues drawing on specialist advice as required.
During the review, the ATO made significant changes to its compliance approach, such as moving from a discrete focus on transfer pricing tax risks to a broader focus which incorporated transfer pricing within a range of international and domestic tax risks. Although the resulting ATO administrative arrangements were progressively developed during the course of the review, certain elements remain in a state of flux at the time of finalising this report. Whilst such development may have provided the IGT with opportunity to influence and assist in shaping aspects of the ATO's approach, it has also been a challenge to identify specific improvement actions due to the ATO's uncertainty with some of the details of its approach.
Nevertheless, the review has made important findings including that inadequate succession planning and resource management were key reasons for the capability deficiency. Many experienced and specialist officers had left and their knowledge was not effectively disseminated across the organisation.
The ATO has agreed with a number of the IGT's recommendations aimed at developing improved organisational capability such as:
- the recruitment and retention of transfer pricing 'specialist' officers, the identification and development of the key abilities of those 'specialists' and the ongoing capture and dissemination of knowledge and experience gained from case work;
- improving the ATO's identification, assessment and management of risk in transfer pricing matters as well as their interaction with the operational functions; and
- developing terms of engagement for the ATO's operational and specialist units which would explicitly identify the decision maker, the decision to be made and the escalation process in the event that the decision was not followed.
Improved organisational transfer pricing capability will take time to develop, especially as the ATO also expects its operational officers to focus on a broader range of international and domestic tax issues. Therefore, the IGT has also made a number of recommendations aimed at optimising the use of the ATO's current resources while further capability is being developed. In this regard, the ATO has agreed to match the scope and scale of transfer pricing compliance activities with the available specialist capability. In addition, it has also agreed to limit the use of wide-ranging enquiries to identify emerging risks and give priority to project-based compliance activities that target the highest revenue risks. These recommendations are expected to reduce the protracted timeframes and excessive costs that taxpayers experience in transfer pricing compliance activities.
In addition to responding to ATO enquiries, taxpayers' transfer pricing tax obligations, such as documenting the evidence for arm's length pricing outcomes, impose substantial costs. These costs have a regressive effect, particularly for Small and Medium Enterprises (SMEs). As a result, the ATO has agreed to a number of recommendations which are aimed at reducing the compliance burden for SME taxpayers, including the increased use of safe harbours for lower value and more common transactions, reducing documentation requirements and considering a simplified International Dealings Schedule.
Improved project management of transfer pricing matters was also identified as an area providing opportunity to reduce compliance costs both for the ATO and taxpayers. The ATO has agreed with a number of the recommendations in this respect, including that it establish and adhere to more accurate timeframes for its compliance activities, ensure that case officers understand taxpayers' reasons for their financial performance before commencing audit activities and develop more refined comparables for use in risk reviews.
The review also focused on the administration of the Advanced Pricing Arrangement (APA) program which provides opportunities to reduce overall compliance costs by reaching a common understanding of views through a cooperative process. The IGT observed that the use of APAs for more complex arrangements was critical to maintaining taxpayer and broader perceptions of the utility of the program and therefore identified a need for greater ATO transparency on the reasons for 'audit-like' approaches in APA processes and the circumstances which would justify a transition to an audit. It was also noted that such APAs are expected to provide valuable intelligence on emerging business practices and issues. In this respect, the ATO has agreed to promote the use of the APA program, provide the criteria for the withdrawal from APA negotiations and improve communications with taxpayers on issues of concern. However, the ATO has not agreed to certain suggested improvements with respect to APAs including better resourcing and a 'stage and gate' process.
Overall, the IGT has made 18 recommendations which are an integrated package of improvements. The ATO has agreed to 17 recommendations, in whole, part or principle, the implementation of which should result in significant and enduring benefits. However, as the ATO has disagreed with certain recommendations or aspects thereof, the full benefit of the package may not be realised.
The IGT is particularly concerned that despite the ATO's agreement to Recommendation 2.1 which requires the development of case teams that have a particular focus on international tax issues, the combined effect of the ATO's disagreement to Recommendations 2.6, 3.4(2) and 5.2(1) increases the risk of costly and unnecessary disputation as generalist officers, with limited transfer pricing experience or expertise, may make decisions without an early opportunity for the ATO's specialists to challenge those decisions or for taxpayers to address any misunderstanding of facts before the ATO formulates its views.
The ATO has also disagreed with the IGT's recommendation to provide a consultative forum for transfer pricing issues. This disagreement is consistent with the ATO's relatively recent rationalisation of all its consultative forums. Whilst the IGT has not reviewed this broader change, more dialogue is generally better than less dialogue. In this review, however, the IGT is, specifically concerned with the ATO's reduced collaboration with the tax profession on transfer pricing issues particularly in the light of international developments as well as recent changes to domestic legislation. Such a forum not only allows the tax profession and the ATO to discuss and address areas of uncertainty collaboratively but it is also a source of information on emerging risks.
i Organisation for Economic Co-operation and Development.
ii Group of Twenty Finance Ministers and Central Bank Governors.