The KPMG guidance herein provides background for the new transfer pricing recharacterisation/reconstruction provisions that enable the tax administration to conform the transaction in accordance with its substance, versus form.
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March 2: The Australian Taxation Office (ATO) in late February 2015 issued a practice statement that offers some guidance when an ATO transfer pricing audit team looks to apply reconstruction provisions.
While the ATO audit team may take a position that the reconstruction provisions in Australia’s new transfer pricing rules would apply—because the substance of the commercial or financial relations between the related parties is different to the form of those relations—the practice statement (PS LA 2015/3, issued 26 February 2015) sets out a new internal approval process for application of the reconstruction provisions.
Amongst other things, the practice statement requires ATO personnel to:
Seek approval from an Assistant Commissioner within their business line or from a Senior Tax Counsel in the Tax Counsel Network prior to the ATO’s adoption of any view that one of the reconstruction provisions applies, and provide the Assistant Commissioner with a position paper setting out the views proposed in relation to the application of any of the reconstruction provisions, including a clear explanation of the reasons for the application of the reconstruction provisions.
Although the ATO has new processes in place for this methodology, this practice should be limited to the most egregious transfer pricing transactions. Accordingly, it should not be interpreted as expanding/circumventing the arm’s length principle.
Other countries may lack adequate resources and processes enabling the formalities and diligence of the ATO, thus this transfer pricing mechanism should not become the norm for international transfer pricing legislation. Additionally, equal weight should be conferred upon appeal mechanisms and corresponding adjustments to avoid double taxation.