• Tax alert: New transfer pricing tax ruling released

New social security agreement between Australia and India from July 2015

 

The new transfer pricing rules have effect from the first income year commencing on or after 29 June 2013, and apply to the transactions of all multinational companies operating in Australia.

As some aspects of the new transfer pricing rules have been controversial, the Australian Taxation Office (ATO) has released Taxation Ruling TR 2014/6 to clarify how they intend to apply certain sections of the new transfer pricing legislation. In particular, TR 2014/6 discusses the way in which the ATO intends to use reconstruction powers, in some cases, to disregard the terms and conditions of taxpayers’ actual intercompany transactions and substitute them for arm’s length conditions.

Taxation Ruling TR 2014/6 will apply to income years commencing on or after 29 June 2013.

Key aspects of this ruling include:

  • details on how the ATO will use its powers to combat aggressive profit shifting arrangements of multinational companies
  • a positive response by the ATO to taxpayers’ concerns raised during the consultation process
  • details on the circumstances that will prompt the ATO to reconstruct intercompany transactions, with profit margins or division of profits being one key area of focus

What does this mean for taxpayers?

  • taxpayers should consider ways to demonstrate to the ATO that their current related party dealings make commercial sense, as part of the compliance process
  • taxpayers should ensure that their legal agreements and transfer pricing policies reflect the substance of their actual operations
  • public officers should give consideration to the terms and conditions of their intercompany arrangements to ensure that they are arm’s length and avoid the application of the reconstruction powers by the ATO

The introduction of the new transfer pricing rules and the release of TR 2014/6 clarify how the ATO intends to apply in practice some contentious sections of the new transfer pricing legislation.

Taxpayers also need to ensure that the terms and conditions of their intercompany transactions are consistent with the terms and conditions that independent entities would agree upon or face the risk of the Commissioner reconstructing their related party dealings.