On 22 November 2012 Treasury released the Exposure Draft of the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill 2013: Modernisation of transfer pricing rules (“Stage 2”) which proposes to update Australia’s domestic transfer pricing regime.

The key impacts of Stage 2 are expected to be:

  • The application of significant penalties to Transfer Pricing adjustments where the company does not maintain specific transfer pricing documentation
  • The intention of the ATO to apply the new Transfer Pricing rules to all cross-border transactions, including transactions between third parties
  • Shifting transfer pricing to a self-assessment basis, placing on the company’s public officer the responsibility of determining the company’s overall tax position arising from all cross-border dealings
  • The introduction of time limits of eight years on when the ATO can make Transfer Pricing amendments; and
  • The introduction of specific rules allowing the ATO to reconstruct transactions and arrangements

The proposed changes to Australia’s Transfer Pricing rules (Stage 2) are supplementary to those already introduced last September. Stage 1, which received Royal Assent on 8 September 2012, focused on the retrospective application of Transfer Pricing rules for companies dealing with foreign associated entities located in countries that have a double tax treaty with Australia.

In comparison, Stage 2 focuses on how Australia’s Transfer Pricing regime will operate prospectively for all taxpayers, including the application of significant penalties to Transfer Pricing adjustments where the company does not maintain specific Transfer Pricing documentation.

The proposed changes are directed to repeal Division 13 of Part III of the Income Tax Act 1936, and align the existing Transfer Pricing regime to the self-assessment taxation system operative in Australia, placing on the company’s public officer the responsibility of determining the company’s overall tax position arising from all cross-border dealings.  

What does this mean for you?

  • Increased responsibility on the public officer to ensure that all cross-border dealings follow the arm’s length principle
  • Increasing complexity and uncertainty for all businesses’ with cross-border dealings
  • The imminent need to prepare contemporaneous transfer pricing documentation to avoid substantial penalties; and
  • The need to review all transfer pricing positions, both prospectively and retrospectively

It is unclear whether the Government has estimated the full impact that these changes will have on both the Australian and international business community. Interested parties have been invited to comment on the exposure draft before 20 December 2012.

Grant Thornton will present its submission to Treasury outlining its views on the proposed changes (Stage 2), along with the main concerns of the business community. Please do not hesitate to contact us if you would like to provide comments.

Only over time will the true economic ramifications of this reform be revealed and the impact it will have on your business – don’t leave it too late to make the necessary changes.

Grant Thornton works closely with many multinational groups to ensure they comply with taxation regulations in a cost efficient and effective manner.