On 1 November 2011, the Assistant Treasurer, Bill Shorten, released a consultation paper addressing proposed reform of Australia's transfer pricing rules with the objective of making those rules consistent with international standards. Some reform is to apply to income years commencing on or after 1 July 2004! The Government says that its objective is to improve the integrity and efficiency of the tax system and to minimise profit-shifting between multinational enterprises.

Since the introduction of transfer pricing rules in Division 13 of the Income Tax Assessment Act 1936 (Act) nearly 30 years ago, there has been little change to the legislation. During this time, at the international level, transfer pricing has been evolving. In 2010 the Organisation for Economic Co-operation and Development (OECD) released revised Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations reflecting changes to the internationally accepted approach to transfer pricing. The Federal Government is, in large measure, using these changes to justify the present proposed 'reform'.

The Commissioner of Taxation in his 2011 Annual Report voiced concern at the effectiveness of Division 13 and recommended a modernisation of the Act. The lack of uniformity between Australia's domestic transfer pricing rules with the OECD's current thinking was highlighted in the Commissioner's Annual Report particularly in reference to the Full Federal Court decision of FCT v SNF. In light of this decision (and the earlier Roche Products decision) the Government has recognised that Australia's current transfer pricing rules may not be interpreted in a way that is consistent with international norms.

In particular, the Government has stated that it will address the uncertainty regarding whether tax treaties have the power to enforce transfer pricing adjustments independent of our domestic transfer pricing legislation. This is an area of concern as many believe the purpose of a tax treaty is to act as a 'shield' against double taxation and not as a 'sword' (or separate taxing mechanism).

The 'reform' that the Government is addressing will, we expect, largely focus on endorsing the ATO historic approach which is to focus upon "profitability" or 'commercial outcomes' of an organisation and less on the" pricing" of individual transactions or groups of transactions. Taxpayers should therefore anticipate an invigorated ATO in applying profits-based methods and the application by the ATO of their so-called "commercial realism" test when reviewing a taxpayer's financial performance for income years commencing on or after 1 July, 2004.

Multinational enterprises that have sought comfort from the outcomes of the SNF and Roche Products cases, indeed most taxpayers with significant international related party transactions and no protection (such as an Advance Pricing Arrangement) should consider reviewing their transfer pricing documentation to ensure that the outcomes achieved are commercially realistic and/or justified have regard to ATO or other appropriate benchmarks.

Moore Stephens has developed a specialised software based Transfer Pricing Risk Assessment Tool Kit ("TP Toolkit") which can be used by multinational enterprises to determine whether their operating performance appears commercially realistic having regard to ATO benchmarks. For more information regarding the TP Toolkit, please contact Daren Yeoh on 03 8635 1994 or Stuart Edwards on 8635 1967.

The Government consultation paper, titled: 'Income tax: cross border profit allocation-Review of transfer pricing rules' can be viewed at: http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=2219

Interested parties should make a submission to Treasury on or before 30 November 2011. In this regard we note that Moore Stephens will be making a submission to Treasury in relation to the consultation paper and we encourage taxpayers that would like to contribute to this submission to email Stuart Edwards with details of their issues or concerns. Stuart may be contacted via email at: sedwards@moorestephens.com.au

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