02 Nov 11 Government proposes more "robust" transfer pricing rules for multinationals
In media release No 2011/145, issued 1 November 2011, the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, announced that the Government will reform the transfer pricing rules in the income tax law and Australia's future tax treaties to bring them into line with international best practice, improving the integrity and efficiency of the tax system.
At the same time, Mr Shorten announced the release of a consultation paper relating to the proposed changes. The closing date for submissions on the consultation paper is Wednesday, 30 November 2011.
Mr Shorten said that a recent court case has highlighted some difficulties for Australia to appropriately assess transfer pricing cases in a way that is consistent with our major trading partners. Mr Shorten was presumably referring to the decision of the Full Federal Court in FCT v SNF (Australia) Pty Ltd  FCAFC 74 (1 June 2011) in which the taxpayer successfully argued that the consideration it had paid its suppliers was an arm’s length one for the purposes of Div 13 of Part III of ITAA 1936. By paying these prices (adjudged to be arm's length prices), the taxpayer incurred "persistent" losses.
"The Government is taking action to ensure multinationals pay the correct amount of tax in Australia on their income and to provide certainty on our transfer pricing laws," Mr Shorten said.
"International thinking on transfer pricing has moved on since the current transfer pricing rules were inserted in the income tax law," Mr Shorten said.
"Last year, for example, the OECD substantially updated its Transfer Pricing Guidelines, which are used by governments and business alike. Further, recent court decisions suggest our existing transfer pricing rules may be interpreted in a way that is out-of-kilter with international norms," Mr Shorten said.
"The Government has asked the Treasury to review how the transfer pricing rules can be improved, including but not limited to how to be more in line with international best practice. I urge all interested parties to participate in this consultation process," he added.
Mr Shorten indicated the Government will also address a related area of potential uncertainty: whether tax treaties provide a power to make transfer pricing adjustments independently of the transfer pricing rules in the ITAA1936.
"I'm therefore introducing amendments to the law to clarify that transfer pricing rules in our tax treaties operate as an alternative to the rules currently in the domestic law."
"The Parliament has indicated the law should operate in this way on a number of occasions, most recently in 2003. Therefore, the clarifications will apply to income years commencing on or after 1 July 2004 in treaty cases," Mr Shorten said.
"While there is a strong argument that tax treaty rules already operate independently of the domestic rules, the Government has decided to put this beyond doubt to promote consistency between Australia's rules and the international approach. These amendments will also clarify that the treaty rules are to be applied in a manner that promotes consistency with the OECD Guidelines. I intend to engage the Board of Taxation where appropriate in this review," Mr Shorten said.