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Recently released draft legislation will give the Australian Taxation Office (ATO) broader powers to reset losses to profits as a part of Australia’s transfer pricing rules. The proposed changes make it clear that the ATO is able to use “the tax treaties” powers or double tax agreements to apply a profits test to determine whether companies are overpaying for goods to reduce profits and ultimately tax in Australia.

The proposed legislation will have retrospective effect to adjust profits under the transfer pricing rules as far back as 1 July 2004. The law will allow the ATO to benchmark what a company’s profitability should be in determining the transfer price as opposed to simply comparing the price for the provision of the product or service.

The draft legislation appears to be in response to a recent case where a taxpayer was able to prove the prices they were paying were reasonable and could be supported by arms length third party transactions, even though the company continued to make losses in Australia.

Submissions on the draft legislation closed on 13 April, 2012 and we anticipate that final legislation would form part of the federal budget process released in May.

If you are concerned about the impact of these proposed changes on your business please contact Murray Howlett of our Taxation Services Division on (07) 3023 1300.