| Transfer pricing Australia's transfer pricing provisions can be found in Part III, Division 13 (sections 136AA to 136AG) of the Income Tax Assessment Act of 1936, which provides a legislative framework for dealing with arrangements whereby profits are shifted out of Australia, primarily through the mechanism of inter-company and intra-company transfer pricing. The Australian Tax Office (ATO) has become increasingly aggressive over recent years in its enforcement of these rules. The ATO has issued many public rulings and other publications on the transfer pricing provisions. Similarly, revenue authorities around the world are actively pursuing strategies to collect what they regard as their proper share of tax on profits from the increasing volume of international trade. The 'Arm's Length Principle' In July 1995 the OECD released a report Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations which its members countries, including Australia, unanimously accepted the arm's length principle and a number of acceptable methodologies for determining arm's length price. The legislative purpose behind Division 13 is to counter 'non-arm's length transfer pricing' or 'international profit shifting' arrangements in order to protect Australian revenue. It provides a mechanism by which Australia adopts the internationally accepted 'arm's length principle' for taxation purposes as the basis for ensuring that Australia receives its fair share of tax by adjusting profits by reference to the conditions which would have existed between independent parties under comparable circumstances. Application of the arm's length principle requires that members of multinational enterprises ('MNEs') be treated as operating as separate entities rather than as inseparable parts of a single unified business ('the separate entity approach'). The application of the arm's length principle for the purposes of Division 13 would have regard to: the economic value added by the functions performed, the assets and skills used, and the degree and nature of any business or financial risks involved in the process of deriving income; in the same manner as independent parties would. It should result in prices being charged or paid for the supply or acquisition of goods and services, or assets of a capital nature, that would have been charged or paid between unrelated entities for comparable products under comparable circumstances. Division 13 is structured to achieve its legislative purpose in respect of non-arm's length dealings between separate legal entities by focussing on basic mechanisms through which Australia may be deprived of its fair share of tax through international profit shifting, whether deliberate or not. It covers:
Where international dealings between different parts of the same entity are concerned, Division 13 allows for the proper allocation of the appropriate part of the income, profits and expenses between the Australian and foreign operations. The effect of making adjustments under Division 13 is that amounts that otherwise would not be derived as income can be included in assessable income in accordance with the arm's length principle. Division 13 enables such amounts to be determined as having an Australian source or a foreign source, as appropriate. It also enables a determination of the extent to which expenses properly relate to the derivation of Australian income and the extent to which they relate to the derivation of foreign income. The application of Division 13 will result in the adjustment for taxation purposes of the actual consideration to an arm's length consideration. The actual terms, conditions and prices agreed upon between the parties are not affected for any other purpose. In considering the application of Division 13, the terms of any relevant double taxation agreement must be considered. The Commissioner may apply the provisions of Division 13 and/or the treaty provisions. In the event of any inconsistency, the treaty provisions will prevail unless the treaty itself gives precedence to the domestic law. More information The ATO has published many comprehensive documents in setting out their position on the operation of Division 13 including a transfer pricing guide on applying the arms length principle with links to related documents. |
