Category
Alerts

The Federal Government has recently passed Tax Laws Amendment Bill (No.1) 2012. The changes to cross-border transfer pricing have a retrospective effect that dates back to 1 July 2004.

The measures contained in the new laws are as follows:
1.Transfer pricing articles contained in Australia’s tax treaties are able to be applied independently of Australia’s domestic transfer pricing rules (specifically Division 13) through explicit incorporation into the Income Tax Assessment Act 1997;
2.Arms length principal to be interpreted as consistently as possible with the relevant OECD guidance;
3.For an associated entity a transfer pricing benefit will be determined by comparing the profits that have accrued to that entity with the profits that might have been expected to have accrued to that entity were the associated entities dealing with each other wholly independently;
4.For an Australian permanent establishment of a foreign entity a transfer pricing benefit will be determined by comparing the profits attributed to the permanent establishment with the profits that it might have been expected to make were it a distinct and separate enterprise; and
5.The new provisions only apply in respect of treaty cases, which means that the mutual agreement procedures can be applied to ensure that double taxation does not occur.

Impacts of the Changes

The new laws clarify the position of the Commissioner of Taxation. The Commissioner has the ability to use the provisions contained in Australia’s tax treaties as well as the domestic transfer pricing rules to make adjustments to profit on related party cross border transactions.

Although the intent of the domestic transfer pricing provisions and the tax treaties are similar, the new laws provide the Commissioner with broader powers to make transfer pricing adjustments. Specifically the Commissioner can now make an adjustment based upon the activities of the entity as a whole as opposed to the actual transactions between the parties.

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.