Transfer pricing is a recurrent them arising from the ATO's recently published data about its reviews of Australia's top 100 public and multinational taxpayers, and the disclosures made by taxpayers in their Reportable Tax Position (RTP) schedules.
The ATO's observations on these topics are important reading for all large taxpayers in Australia. Any taxpayers which have not recently been reviewed by the ATO can prepare for the likely areas of scrutiny in the near future. Preparedness for ATO interactions is critical to managing tax risk, and can happen well in advance of receiving a notification letter.
Top 100 taxpayers: one in five trigger ATO's interest
This report shows the outcomes of the ATO's reviews of the top 100 taxpayers during the year ended 30 June 2021. The top 100 population is selected by the ATO based on a combination of factors including tax contribution and business size.
The proportion of taxpayers given a low assurance rating remained stable (FY21 18%, FY20 20%). This is a significant cohort, and these taxpayers can expect highly targeted attention from the ATO on the particular tax issues which have dragged their rating down. Although many more taxpayers obtained a high assurance rating this year (FY21 49%, FY20 29%), this improvement largely came from taxpayers moving from medium to high assurance.
From an income tax perspective, the specific issues of concern identified by the ATO were:
- transfer mispricing, with related party loans and marketing hubs being the top two issues for which the ATO did not obtain sufficient assurance that the correct amount of tax has been paid; and
- other structured arrangements to reduce Australian tax, including intangible migrations, permanent establishment (PE) avoidance and inversions.
From a GST perspective, the ATO cited risks arising from food misclassification, various issues relating to financial services including apportionment methodologies, and the GST obligations of non-residents who make supplies connected with Australia.
Taxpayers' views in the Reportable Tax Position report: it's risky business
RTP schedules summarise taxpayers' own views on the application of the ATO's administrative guidance as published in Tax Alerts (TAs) and Practical Compliance Guidelines (PCGs), including their self-assessment of the level of risk in their lodged positions.
Category C of the RTP contains 26 questions focused on specific arrangements of ATO concern. The questions generally ask whether a TA applies to a taxpayer (15 questions) or how the taxpayer has assessed its risk rating under a PCG (6 questions). The RTP disclosures are reviewed by the ATO in its assurance activities, such as Combined Assurance Reviews (CARs). Making an incorrect RTP disclosure, such as that a TA does not apply, can result in penalties being imposed.
The ATO's RTP Schedule report identifies that:
- the most frequent disclosures concerned related party financing, reflecting how common related party debt funding is for taxpayers as well as the high number of guidance products issued on this topic by the ATO; and
- other common topics for disclosures related to the ATO's PCGs on offshore hubs and inbound supply chains.
Within the disclosures on related party financing, half of taxpayers disclosed having a high or medium risk self-assessment. The ATO will be particularly interested in understanding these arrangements, and it is well prepared for these interactions, leveraging the work it has done in other reviews to identify the features of arrangements which make certain scenarios higher risk.
Transfer pricing risk to remain front and centre
The clear message is that transfer pricing continues to be the hottest topic for the ATO by some margin, making proactive dispute management not just prudent, but necessary.
The ATO expects a high degree of transparency from taxpayers, both through disclosures in their RTP schedule and through its rolling assurance programs. In this climate, taxpayers need to be ready in advance to defend positions taken in tax returns in order to cut the ATO off at the pass, and avoid protracted processes and disputation.
Obvious evidentiary and technical challenges arise in relation to transfer pricing. This has been apparent in all transfer pricing litigation in Australia to date, including in the Chevron, Glencore and Optus Singtel proceedings in the Federal Court. Judgment has been reserved in the Optus related party financing dispute which was heard by Justice Moshinsky in August 2021. It is relatively clear that transfer pricing jurisprudence is still in its infancy, with more guidance expected from the Courts in the coming years. With each dispute highly dependent on its own facts, those tempted to draw general principles of construction and interpretation of transfer pricing legislation must proceed with extreme caution.
In addition to the word of caution above, the ATO has publicly mentioned several times recently that it will more frequently review taxpayers' pricing positions from both a transfer pricing and general anti-avoidance rule (both Part IVA and/or the Diverted Profits Tax) perspective. This clearly raises the stakes considerably for taxpayers possibly caught in this net.
We have assisted many clients to successfully navigate ATO reviews, audit and objection processes in relation to both transfer pricing and anti-avoidance issues. Contact us if you need to manage these themes and want to understand how the ATO is likely to approach these issues, how to get onto the front foot and find an effective and efficient path to formal dispute avoidance.