Exclusive Q&A on Transfer Pricing with Zara Ritchie
Posted: 15th June 2017 08:56Can you talk us through the current transfer pricing landscape in your jurisdiction?
Australia’s transfer pricing landscape has changed dramatically over the past few years, partly as a result of the OECD’s BEPS project and partly because for a long time the Australian Taxation Office (“ATO”) has pursued multi-national groups perceived to be adopting aggressive transfer pricing practices. We have seen the introduction of new transfer pricing law, additional anti-avoidance law to counter perceived schemes entered into by Significant Global Entities, guidance in relation to expectations for marketing hubs and a significant increase in ATO investigations/scrutiny of multi-nationals operating in Australia. These are some of the many recent changes that have resulted in a lot more focus on MNC’s structures and transfer pricing practices.
Australia’s current transfer pricing rules make it important for taxpayers to document their transfer pricing position before they lodge their tax returns – to self-assess and to protect against penalties if the Tax Authority disagrees with positions taken. The transfer pricing rules have moved away from a focus limited to arm’s length “pricing” of transactions and take a broader commercial approach in assessing the conditions which exist between relevant parties.
There is increased focus on Significant Global Entities (“SGEs”). An SGE is an entity which is part of a group with global turnover of AUD$1bn or more (regardless of local turnover). Two important anti-avoidance provisions have been introduced to counter schemes undertaken by SGEs to artificially reduce their Australian tax base, i.e. the Multinational Anti-Avoidance Law (“MAAL”) and the Diverted Profits Tax (“DPT”). MAAL applies from 1 January 2016 whereas DPT applies for tax years starting on or after 1 July 2017, irrespective of when the scheme commenced. Additionally, increased administrative penalties have been introduced which impose a penalty of up to AUD$525k if required statements are not filed on time (e.g. tax returns, CbC reports etc.).
In addition to new and aggressive local laws, Australia has been one of the early adopters of many of the OECD’s BEPS recommendations resulting in a greater need for taxpayer focus on transfer pricing, compliance and transparency.
What are the transfer pricing documentation requirements in your jurisdiction?
Preparation of Australian transfer pricing documentation (“TPD”) is not mandatory. However, it is important because:
- Some level of local transfer pricing analysis is required to self-assess the arm’s length nature of local outcomes prior to lodging the income tax return;
- TPD which complies with local laws and guidelines is required for a taxpayer to be eligible for penalty protection in the event of an adjustment. It must be prepared before the income tax return is lodged to be eligible for penalty protection; and
- Penalty rates in Australia are high and have recently been doubled for SGEs. Where TPD is not prepared penalties of up to 150% of tax avoided can be imposed on an SGE. A typical penalty for a smaller company could be 25% of the tax avoided (assuming no tax avoidance purpose). Preparation of contemporaneous TPD can significantly reduce a taxpayer’s penalty risk (e.g. from 25% to 10% or possibly lower).
- What are the actual conditions that are relevant to the matter (or matters)?
- What are the comparable circumstances relevant to identifying the arm’s length conditions?
- What are the particulars of the methods used to identify the arm’s length conditions?
- What are the arm’s length conditions and is/was the transfer pricing treatment appropriate?
- Have any material changes and updates been identified and documented?
The five key questions and consideration of the reconstruction provisions are unique to Australia. In practice, this means a taxpayer will usually need to prepare specific Australian transfer pricing documentation or “localise” any centrally prepared OECD documentation.
How can multinationals better prepare themselves for the new country-by-country reporting (CbCR) requirements?
Whilst the objective of the OECD BEPS project has been to introduce a common standard under CbCR, the fact that the common standard must be implemented in each country has resulted in a wide variation of requirements across different countries. For example, what is required to be lodged (CbCR, Master File and/or Local File), what constitutes a Local File and when these reports must be filed. Therefore, it is very difficult for MNE Groups to track their requirements across the globe and requires close management.
As an example in relation to the CbC Report, the requirements are very similar in Europe where the rules have been harmonised across the different EU Member States via a EU Directive dictating a common framework (e.g. content, deadlines, definitions, etc.) which applies for financial years commencing on or after 1 January 2016. Compare this with the US where they have opted for a late adoption of the CbC Report (i.e. rules applicable for financial years starting on or after 1 July 2016.
Australia has adopted a filing period of within 12 months after the end of the financial year. Some countries have chosen a shorter period for filing.
Australia has introduced a unique Local File which is NOT the same as the OECD definition of a Local File. Therefore, groups with operations in Australia must prepare an additional report.
Australia may allow exemptions from providing one or all of the CbCR statements in particular circumstances whereas other jurisdictions may not. The US has not introduced the so-called “secondary mechanism” whereas Australia and the EU Member States have.
The collation of relevant data from different sources represents a considerable challenge and in some circumstances this will require the implementation of an efficient technology solution. There is no prescribed way on how MNE Groups should gather this information, but developing a standardised method/platform is crucial. Technology is also helping MNE Groups to analyse the story told by the CbC Report in terms of tax risks. This helps the MNE prepare for the inevitable enquiry from a number of Tax Administrations once information has been exchanged during 2018 and beyond.
Are there any noteworthy case studies or recent examples of new case law precedent?
In a landmark transfer pricing case, on 21 April 2017, the Full Federal Court in Australia held in Chevron Australia Holdings Pty Ltd (“CAHPL”) v Commissioner of Taxation FCA, that Chevron Australia did not prove the interest rate on a loan from a related foreign company was at arm’s length. Hence, the court denied CAHPL’s appeal related to the deductibility of interest on the Australian dollar equivalent of a US$2.5 billion loan from a wholly owned US-based Chevron subsidiary.
The court decided that the transaction did not satisfy arm’s length requirements because independent parties in the same situation would not have “loaned out” the quantum of money at that interest rate without a guarantee and also there was a complete lack of commercial justification for the overly steep interest rate. Chevron group policy was to minimise the interest cost on borrowings and so the fact that CAHPL did not adhere to the group policy for this loan (which would have required a parental guarantee) was also considered to lack sufficient arm’s length requirements.
The decision against Chevron will require every multinational in the country to re-examine its transfer pricing arrangements, particularly as they relate to inter-company loans. It is also likely to have repercussions around the globe as the OECD and other Tax Authorities consider its relevance and potential impact.
What trends are you seeing in relation to tax planning strategies?
With increased focus and transparency measures as a result of BEPS, tax planning has become more complex and riskier than ever before. MNEs need to consider new/additional disclosure obligations, anti-avoidance provisions, exchange of information, penalties and reputational risk.
Within this framework, MNEs are becoming more cautious in relation to their tax planning strategies. This is not only to avoid costly and lengthy tax disputes in jurisdictions in which they operate, but also to limit the consequences that litigation may have on their reputation in the corporate community. In recent years, the media and press have significantly shifted their attention towards tax affairs of multinational enterprises (e.g.
Luxembourg Leaks, Panama Papers), making available to the public confidential information about multinational enterprises’ financial and tax matters, compromising their public reputation. In response, we are seeing some MNEs restructure their operations to remove potentially aggressive tax schemes. In this context, competition amongst countries is resulting in the move towards a lower statutory tax rate and tax incentives to attract genuine business activity in country (e.g. the UK intend to lower their corporate tax rate to 18% in the coming years to attract headquarters of multinational enterprises to establish in the UK). Australia is out of step with this trend with a current rate of 30% and a recent Budget announcement to move to 25% (whether this succeeds remains to be seen).
Notwithstanding this new landscape, tax savings should continue to be considered a legitimate cost to manage as with any other business cost and shareholders will continue to demand this. However, tax savings cannot be the only reason for business structuring. The quality and comprehensive nature of transfer pricing analysis, particularly around economic substance and business rationale, will play a key role in supporting (and defending) structures going forward.
In your opinion, what are the biggest transfer pricing challenges currently facing multinationals?
A major risk for MNEs will be how Tax Administrations use (or abuse) the information contained within CbCr reports and whether this information is properly used for risk assessment purposes rather than forming views on transfer pricing outcomes before adequate analysis is undertaken. There is likely to be an increase in tax disputes and it is questionable whether any Tax Administration has or will have sufficient resources to manage this increase. The same could be said for MNEs themselves due to the significant cost of increasing internal resources or managing the cost of seeking external support. It’s likely MNEs will operate under a cloud of uncertainty for many years to come.
How can multinationals utilise technology to minimise risk and efficiently manage resources?
There are numerous software providers in the market who are able to assist multinationals efficiently manage resources and minimise risk in several ways. For example, some solutions will automatically detail the compliance obligations in relation to transfer pricing in various jurisdictions globally, allowing multinationals to be aware of their global compliance requirements. Software should enable companies to effectively organise and store documentation in an efficient manner. Having the information efficiently organised allows multinationals to understand and manage transfer pricing exposure and risks globally, as they are able to retrieve documentation in the event of a transfer pricing audit, and store such documentation for the period legally required in each jurisdiction, in an organised manner.
Software providers not only provide tools that assist in efficiently storing information, they also offer tools that assist in creating/preparing/drafting transfer pricing documentation itself. Standard information required for each document can be completed (using software created templates) and then combined to produce reports or parts of reports in a more efficient manner. This cuts down on the amount of work required to complete the documentation as well as maintain or update it.
However, no software can replace the “analysis” required as part of any transfer pricing documentation and companies will need to carefully consider how they use software.
Several software providers also offer workflow management tools. This allows multinationals to assign responsibility and internally track the progress of transfer pricing documentation or any other document being prepared so as to ensure deadlines are able to be met efficiently and effectively manage internal resources.
Another important role for software is to facilitate electronic lodgement of CbC reports using the required .xml format.
In an ideal world what would you like to see implemented or changed?
An ideal world would see greater alignment of transfer pricing laws and Tax Administration practices globally. Whilst many countries follow OECD guidelines, it’s often with a local twist. Action 13 is a good example of this. Varying practices and local interpretations increase risk and compliance costs and increase uncertainty for multinationals.
Zara Ritchie is the Head of Global Transfer Pricing Services at BDO and is based in Melbourne, Australia. Zara has specialised in transfer pricing for more than 20 years, advising clients on complex transfer pricing matters, resolving transfer pricing disputes and negotiating bilateral and unilateral Advance Pricing Agreements. Zara’s experience covers the full transfer pricing life cycle across the areas of planning, controversy, compliance, documentation, benchmarking and policy setting. Zara has negotiated more than a dozen Advance Pricing Agreements (APAs), as well as more than 30 transfer pricing risk reviews and audits for Australian clients. Zara has a degree in Business (Accounting). She is a Fellow of the Institute of Chartered Accountants in Australia, a Chartered Tax Adviser and a Member of the Taxation Institute of Australia.
Zara can be contacted on +61 3 9605 8019 or by email at firstname.lastname@example.org