Transfer pricing is really about three elements: the economic analysis, the facts and the law.
Historically transfer pricing disputes were mainly focused on the first one, the economic analysis but in recent times the ATO has focused very strongly on the facts to make sure that the assumptions on which the economic analysis relies are correct and can be proven.
Now that we have new transfer pricing laws in Australia there is also a strong focus on the legal analysis and it will take some years for the law to be clarified. So that's the terms of the ATO inquiry at the first level.
At the second level, the ATO's expectations are much higher in terms of information requests, timing and intensity. The ATO is today looking to the global value chain of multinationals and therefore the information requests can extend well beyond Australia, and well beyond documents that are located in Australia.
The third element is, if you like, the culture of transfer pricing disputes, and the upshot of that is that the ATO is much more confident today. The law is a bit broader today and the ATO has recently won an important transfer pricing case which has increased the ATO's confidence not only in terms of the analysis of the factual issues, but also in terms of their interpretation of the law.
The landscape of transfer pricing is going to evolve and change. We're going to see much more emphasis on factual inquiries, and taxpayers are already adapting to give more strength and better support to the factual foundation of the transfer pricing position. In addition we see more emphasis on the legal analysis so what you have is an alignment of law, facts and economic analysis in order to come to a stronger transfer pricing position.
The ATO are also strengthening their transfer pricing expertise so we're going to see more interaction and maybe some more tension between the ATO and large multinationals around transfer pricing.
However, having said that I do not think we will see a significant increase in the numbers of cases that go to court. Transfer pricing is rarely litigated and there are some good reasons for that and those disputes are best resolved outside the courts. The ATO and taxpayers are already starting to work on specialist frameworks to resolve transfer pricing disputes. There is no one size fits all, it's about the flexible approach that you would adopt and design, or co-design, with the ATO in order to resolve the dispute. The building blocks will be direct negotiations, maybe some input of expertise, and perhaps the support of some mediation expertise if that is needed in order to bridge some gaps.
But the upshot of all of that is that we are going to see much stronger interaction between the ATO and taxpayers around facts, around the law and probably a more sophisticated way to resolve those differences.