Global

Details

  • Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 8/24/2012

Australia - Tax risk increases with new transfer pricing legislation 

August 23: In Australia, a new sub-division (815-A – Cross- border transfer pricing) is being added to the Income Tax Assessment Act 1997 by new legislation. Sub-division 815-A focuses on the concept of transfer pricing benefit, and applies to entities with cross-border transactions with countries within Australia’s treaty network.

The legislation—Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012—was passed by the Senate on 20 August 2012 without amendment, and now is pending Royal Assent for enactment.


A key provision authorizes the Commissioner of Taxation to make one or more determinations so that a transfer pricing benefit obtained by an entity can be “negated.” A determination can lead to an increase in taxable income, a reduction in a tax loss, or a reduction in a net capital loss.


Because the new legislation will create uncertainty in terms of the application of transfer pricing rules in Australia, there is an increased likelihood of double taxation.

Key issues

Key aspects of the legislation include:


  • Retrospective application: The amendments will apply to years of income beginning on or after 1 July 2004, providing the Australian Taxation Office (ATO) with the opportunity to apply the legislation retrospectively (retroactively).
  • Reconstruction power: The legislation provides the ATO with a very broad authority to “reconstruct” transactions, with an increased emphasis on the need to show that independent entities “would” have structured the arrangement that way.
  • Characterisation of adjustments: The Commissioner is required to provide details of how any adjustments to assessable income have been made unless it is not possible or practicable to do so. In practice, this has the potential to create a number of administrative issues with regard to the nature and characterisation of adjustments made by the Commissioner.
  • Interaction with thin capitalisation rules: The new rules will allow the Commissioner to challenge the extent of deductions taken for related party interest, consistent with the approach taken in Taxation Ruling 2010/7, when the Commissioner determines the level of debt is not commercially realistic, notwithstanding the thin capitalisation safe harbour limit.
  • Penalty provisions: In recognition of the retrospective nature of the provisions, for income years beginning prior to 1 July 2012, penalties will be calculated as though Sub-division 815-A had not applied (i.e., penalties will apply to the extent that they would have done under Division 13, and / or a transfer pricing provision in an applicable double tax treaty).

Read an August 2012 report [PDF 96 KB] prepared by the KPMG member firm in Australia: New Australian Transfer Pricing Legislation


September 8: The legislation (described above) received Royal Assent today.



Contact a tax professional with KPMG's Global Transfer Pricing Services.



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For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.
 

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