Strategizing Multinational Tax Risks

The Australian Taxation Office (ATO) has issued a draft transfer pricing law introducing subjective provisions that would be enforced via self-assessment.  PwC has provided relevant details in the following link:

Click to access Australia-ATO+draft+ruling+-reconstruction+of+transactions+04252014.pdf

Key Aspects of Ruling:

• Transactions would be reconstructed, with various exceptions
• Self-assessment mechanisms are required, based on consistency with 2010 OECD Transfer Pricing Guidelines, for three exceptions:

1. Form is inconsistent with substance
2. Independent entities would have instead entered into other transactions that differ in substance from the actual transactions
3. Independent entities would not have entered into commercial or financial relations at all

• The taxpayer needs to hypothesize what independent entities behaving in a commercially rational manner would have done.  If different from the actual transactions, identification of the arm’s length conditions must be based on what the independent entities would have done
• Thin capitalization reconstruction provisions are included in the self-assessment analysis
• Comments are due by 30 May 2014

All interested parties should review this ruling, including the Appendix that does not form part of the binding ruling.  There are many reasons why the draft ruling will be difficult to implement by multinationals and the ATO, primarily due to the subjective content and process of hypothesizing.  Additionally, double taxation issues should be addressed re: reconstructed transactions and corresponding adjustments, as well as alignment and intent of the OECD provisions cited.