EY’s Global Tax Alert of 13 April 2015 sets forth the latest summary of OECD BEPS developments, including the recent discussion drafts under BEPS Actions 3 and 12.
Additionally, the Alert also notes the copycat tactics of Australia re: the UK Diverted Profits Tax (DPT) that went into effect 1 April 2015. More news on this development should be forthcoming in the 2015-16 Australian Budget expected mid-May.
The recent BEPS discussion drafts, Action 3 re: CFC rules and Action 12 re: Aggressive tax planning arrangements, are of paramount importance for all MNE’s and tax administrations.
Australia’s tactics re: a UK DPT mechanism also highlights the controversial manner in which each jurisdiction is fighting for its fisc to the detriment of other tax administrations. However, what is not transparent in the rules provided to date for the UK DPT is the intent to avoid double taxation. It is hopeful that Australia will provide a balanced approach to this newfound mechanism for gaining tax revenues in a scheme that asks for full payment by a MNE prior to relevant appeals being filed and discussed.
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.
Global- KPMG- Research
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.
The Australian Tax Office (ATO) has provided a concise summary of its framework by which four broad risk categories are categorized for each type of tax (income tax, GST, excise). This classification framework will be used to provide their service focus.
The framework distinguishes key taxpayers and taxpayers with high, low and medium risk classifications. Higher risk taxpayers will merit a continuous tax review, key taxpayer relationships will be developed focused on the MNE’s risk management and governance framework, medium risk taxpayers will fact reviews/audits, and lower risk taxpayers will be monitored to confirm its ongoing risk characterization.
A link to the ATO Fact sheet is provided for reference:
This initiative is valuable in providing insight into a taxpayer’s risk characterization, although the review frequency and transparency details leading up to a relevant classification are not provided. All taxpayers with Australian operations should be knowledgeable about the risk classification assigned to them for purposes of efficiently engaging with the ATO in a collaborative relationship.
This exercise is also helpful in identifying potential trends in other countries as the OECD’s country-by-country template guidelines are finalized and legislative actions are taken to formally assess risk using relevant data.
Australia’s new transfer pricing rules require that officers signing the corporate tax return must sign off for transfer pricing arrangements on a self-assessment basis. The self-assessment process would affirm that the transfer pricing is pursuant to arm’s length consideration that would be transacted between unrelated parties. Details of the new self-assessment regime are referenced at the attached link:
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:
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:
Form is inconsistent with substance
Independent entities would have instead entered into other transactions that differ in substance from the actual transactions
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.
The referenced PwC Alert highlights the proactive efforts by the Australian Tax Office (ATO) to initiate dispute resolution mechanisms in the audit process, as well as focus on relevant internal training to successfully accomplish these objectives.
The ATO is committed to the following objectives:
Early engagement and direct negotiation with taxpayers
Improving all dispute resolution processes starting with the assessment
ADR utilization at every stage of the dispute resolution process
Independent review of the audit position prior to conclusion of the audit aimed to narrow / reconsider the issues
Internal ADR training
Focused “risk-focused” approach to managing disputes
The ATO’s initiatives are timely, relevant and a welcome effort to adopt Best Practices to resolve disputes prior to costly and time-consuming formal unilateral, bilateral or multilateral appeal avenues via domestic legislation and/or double tax treaty relief.
From a OECD perspective, Would penalties be applicable when a Country-by-Country (CbC) template is not completed, if such information is part of the Transfer Pricing Master File?
The Australian Tax Office (ATO) has already started its process to collect similar information as the CbC template, with 125 review notification letters to be sent to taxpayers, requesting detailed international data and a presentation to the ATO.
The ATO review would include details of global corporate value chains, including sales, profits, and taxes paid in every jurisdiction, payments to / from low tax jurisdictions, e-commerce and tax risk governance. The ATO should ensure that confidential information is only shared with other tax authorities in alignment with confidentiality protocols judicially established in each respective jurisdiction. Additionally, it will be interesting to note how such information is defined, or not defined, by the ATO to ensure information that is collected from taxpayers will be consistent for analyses.
These actions bring forth additional questions re: the OECD proposals, the ATO’s response and advance warnings to taxpayers of how such information will be collected and provided in advance of the OECD’s timelines. To the extent procedures are enacted by taxpayers to collect such data, while the OECD and other tax authorities provide different rules, definitions and timelines, it will substantially increase time and cost by multinationals to respond to multiple initiatives.
Another point of consideration is the symmetry of ATO’s CbC request with that of the OECD: Will the ATO change their rules to coincide with that of the OECD when such rules are issued, and will the separate country’s legislation trump / override the OECD’s final recommendations?
Australia has enacted tax return disclosures into law via amendments referenced in Schedule 5, Tax secrecy and transparency. The Commissioner must, as soon as practicable after the end of the income year, make publicly available the following information for corporate tax entities with reported total income of $100 million or more, according to information reported in the entity’s tax return:
Total income for the income year
Taxable income or net income (if any) for the income year
Income tax payable (if any)
All multinationals should develop an action plan, if not already in place, outlining the method by which tax return disclosures are to be reported in Australia and other countries around the world. The methodology should be aligned with the CFO, Board of Directors and senior leaders of the business.
The tax return information chosen for disclosure will not provide reasons why there may be significant differences between total income, taxable income and the resulting income tax payable (if any), and will likely provide a forum for public scrutiny and questions surrounding noted variances.
Accordingly, critical decisions re: additional voluntary disclosures, responses to questions generated by the disclosures, and other relevant factors should be considered within the context of the global Tax Risk Framework. Valuable information can be obtained from tax disclosures of the extractive industries, including the impact of indirect taxes and non-tax contributions.
Tax transparency is a rapidly growing trend for which global strategies and Best Practices should be adopted to timely address current and future developments.