Subdivision 815 also provides broad powers of reconstruction which lack the explicit OECD caveat that such powers should only be used in 'exceptional circumstances'. In line with OECD work on Base Erosion and Profit Shifting (BEPS), these new rules well equip the Commissioner to combat perceived taxpayer 'profit shifting'.
In this regard, there has been a subtle shift in the nomenclature used by the Australian Taxation Office (ATO). Earlier in March, the ATO released a publication titled Overview of International profit-shifting risks and activities in the ATO, in which the ATO started referring to transfer pricing more broadly as ‘profit shifting’. This evocative language has since been retained in ATO publications and correspondence, including the newly commenced International Structuring and Profit Shifting (ISAPS) program started this month and requesting information on global group activity and profit by location.
It is clear that the ATO will continue to focus on transfer pricing in the traditional transaction pricing sense. However, the name change signals a shift to a broader examination of the relationships, structures and interactions with related parties outside the transactions.
In order to manage their tax exposure and reputational risk, taxpayers need to be vigilant in setting and documenting their transfer pricing policies. In particular, taxpayers should ensure their positions are commercial and well supported for the ATO’s stated focus areas:
- low profitability / losses
- financing transactions / structures
- marketing hubs and support payments
- unique arrangements with limited comparables