The draft TD provides that support payments (defined very broadly) made by an Australian parent entity to its overseas subsidiaries are not deductible but rather capital in nature and are included in the cost base of the parent entity’s direct or indirect investment in the subsidiary.
It has however been a common international transfer pricing practice for many years for:
- year-end true-up adjustments to be made so a subsidiary’s profitability falls within an arm’s length range determined by an economic benchmarking analysis
- market start-up and other support payments to be made to ensure intangibles are legally or economically owned by the entity in the group making the support payments.
Many overseas tax authorities accept these types of support payments. The ATO has also required these types of year-end adjustments in many Advance Pricing Agreements.
Moreover, the draft TD is silent as to the treatment of receipts by an Australian parent where its overseas subsidiary’s profitability is reduced by a year end adjustment so it falls within an arm’s length range. The draft TD also does not address where an Australian subsidiary makes a payment to a foreign-based parent entity under an arrangement to achieve an arm’s length outcome for the Australian subsidiary.
KPMG is discussing the draft TD with the ATO and will keep you apprised of the developments. Submissions on the TD are due by 24 May 2013.