On 2 June 2014 the Federal Government published a report by the Inspector General of Taxation ("IGT") on the Australian Taxation Office's ("ATO's") management of transfer pricing matters.
The IGT found the ATO's capability to manage transfer pricing matters 'wanting' in a number of important areas. Whilst the 'headline' numbers look excellent (18 recommendations of which the ATO "agreed" with 17 [in whole or in part or in principle]) important considerations remain. This is so as 6 of the IGT recommendations have only been agreed to in part and the absence of agreed timelines to address some of the recommendations, to which the ATO did agree, is unfortunate.
Perhaps most notably, the ATO has refused to agree that transfer pricing decision-making authority should fall to officers that have a "...solid grounding in transfer pricing..." This coupled with the fact the ATO has not agreed to another IGT recommendation, that the ATO establish an "overseeing body" to consider transfer pricing issues at key stages during compliance activities will, in our opinion, result in significant and unnecessary compliance costs to taxpayers. In addition or in the alternative, Government may fail to collect revenue, whether inadvertently or otherwise, where inexperienced ATO personnel deal with complex transfer pricing matters.
Insofar as smaller enterprises are concerned, there is much to be disappointed with. The ATO response to the IGT recommendations (aimed at relieving these smaller businesses from the more complex transfer pricing compliance requirements) may be said to be something akin to a lack of sincerity in addressing taxpayer concerns. The IGT recommendations include: 'safe harbours', simplified transfer pricing documentation and the possibility of a simplified International Dealings Schedule ("IDS") for "Small and Medium Enterprise" ("SME") taxpayers. In our opinion, some may see the ATO response to these IGT recommendations as being disingenuous as there is no agreed timetable for implementation and many have been on-foot for years.
It is noteworthy that the IGT has drawn, not insignificantly, on the PwC Legal report to the ATO on its administration of the Advance Pricing Arrangement ("APA") Program. A number of the PwC Legal recommendations flow though into the IGT report. The IGT report includes, comments, recommendations or references to or from the PwC Legal report covering-off on some of the PwC Legal recommendations which included: "...all key transfer pricing decisions should be made by a specialist within the (ATO) TP Network..."; the recommendation for the publication of "...safe harbours or benchmarks on an industry basis for use by SMEs...: and the recommendation for an increased "....investment in, and the structure of, the training and development of ATO personnel." The great pity is the 'currency' of these 'old' recommendations, recommendations made to the ATO in May 2008.
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