Kelly + Partners: The changing landscape of international tax

Kelly + Partners

Tax Consulting

Level 4/73 Walker Street

North Sydney

Ph: 02 9923 0800

E: info@kellypartners.com.au

W: www.kellypartners.com.au

The proposed new transfer pricing legislation and International Dealings Schedule (IDS) signals the start of a new era for businesses with cross-border transactions. We expect to see an increase in disputes with the ATO, in particular, in businesses with related party funding arrangements and restructures, and businesses experiencing low profitability or losses. These risks are increased by the action plan of the OECD in relation to multinationals' base erosion and profit shifting (BEPS). This focus on transfer pricing globally is partly lead by the Australian Government and signals governments’ willingness to review and update tax policies, tax authorities' greater compliance activities and an increased scrutiny of multinational business’ cross-border tax arrangements.

Recent changes in Australia

On 13 February 2013, the Government introduced into Parliament tax law amendments that seek to re-engineer the transfer pricing law for international business transactions and to adjust the income tax general anti-avoidance rule. The proposed new transfer pricing rules make several changes to the transfer pricing rules, but there are three features that stand out:

• the Bill focuses on arm's length behaviour and conditions, not just transactional pricing;
• the ATO has new broad powers that enable it to replace actual arrangements with deemed arm's length conditions, to potentially reconstruct or unwind transactions;
• a self-assessment regime has been introduced for businesses but with stronger documentation requirements, including that businesses without contemporaneous documentation will not have a Reasonably Arguable Position (RAP), with tax penalty risks.

Further, last year the Australian Taxation Office (“ATO”) released its new International Dealings Schedule 2012 (“IDS-2012”) for all taxpayers, after trial running it with large businesses. The IDS-2012 is a new transfer pricing disclosure form that will be part of the 2012 income tax return, replacing the Schedule 25A form, thin capitalisation disclosure schedule and the Financial Services International Dealings Schedule 2011 that were previously required to be submitted along with the annual income tax return.

Australian companies, partnerships or trusts that have an aggregate amount of transactions or dealings with international related parties that is greater than $2 million will be required to complete the new IDS. In respect of transfer pricing, IDS-2012 requires taxpayers to provide more detailed disclosures of their international dealings than in previous years. It also requires the taxpayer to reveal the main transfer pricing method that is applied to each transaction, along with a disclosure as to the level of specific transfer pricing documentation held for that particular transaction or dealing. Thus the level of compliance required to complete the new IDS-2012 has risen significantly.

What does this mean for taxpayers?

The additional information provided by taxpayers in the IDS 2012 will enable the ATO to better assess the transfer pricing risk of each taxpayer and will allow the ATO to profile high risk transactions. Based on the additional data captured, we expect that the ATO will be performing increased data matching that will allow it to undertake more targeted and focused compliance activities.

Taxpayers should be preparing to update transfer pricing policies and documentation to meet the new legislative requirements. As a minimum, they should review the scope and quality of transfer pricing documentation, and the terms and conditions of all cross-border arrangements.

The international tax landscape is changing rapidly, not only here in Australia, but globally. It is critical that you stay informed of the important and far-reaching changes that are occurring in each jurisdiction as these may have a significant impact on your business’ cross-border transactions and international operations.