The Government has introduced the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 – containing both the proposed reforms to the Part IVA general anti-avoidance regime and changes to the transfer pricing rules.
In relation to transfer pricing, the Bill proposes to implement an approach more consistent with the OECD's preferred approach, applying the arm's length principle to profit allocation in dealings between both associated and non-associated entities.
As expected, the proposed legislation will:
repeal Division 13, and will introduce new Subdivisions 815-B, 815-C and 815-D;
expressly allow the use of OECD guidelines to transfer pricing, thereby better aligning Australia with international practice;
introduce a "reconstruction" based approach, allowing the Commissioner to have regard to the economic substance of a transaction, and potentially construct a hypothetical transaction;
set out the type of documentation an entity should prepare with the aim of securing a reasonably arguable position in relation to transfer pricing.
Differences between the Exposure Draft and final version
Importantly, the Bill as introduced does contain some differences to the Exposure Draft released on 22 November 2012.
The main changes include:
a closer alignment between the reconstructive provisions to the OECD guidelines. In identifying the arm's length conditions, regard must be had to the commercial or financial relations in connection to the actual conditions that operated, as well as to the form and substance of those relations;
the inclusion of withholding tax as a basis for demonstrating a transfer pricing benefit;
a reduction to the amendment period from eight years to seven years;
a carve-out provision providing that certain Australian branches of foreign banks are not permanent establishments of those banks; and
a re-write of the penalties and documentation rules, which have also been transferred into the Taxation Administration Act 1953. Importantly, the rules now provide that a taxpayer will not be liable to an administrative penalty if its scheme shortfall amount is equal to or less than its "reasonably arguable threshold". The Bill goes on to provide that undocumented transfer pricing is not "reasonably arguable" – thereby affecting the taxpayer's ability to demonstrate that the scheme shortfall was less than or equal to its reasonably arguable threshold.
The new rules will apply to income years commencing on or after the earlier of 1 July 2013 and the day the Bill receives Royal Assent. In respect of withholding tax, the rules will apply in relation to income derived, or taken to be derived, in income years commencing on or after the earlier of the above two dates.