Australia: Transfer pricing guidance; ATO response to COVID-19

Australia: Transfer pricing guidance

Changes being made to transfer pricing policies in a coronavirus (COVID-19) environment are coming under closer scrutiny by the Australian Taxation Office (ATO).

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The ATO on 19 June 2020 released the following guidance items: COVID-19 economic impacts on transfer pricing arrangements and Changing related-party arrangements.

Overview

The guidance provided by the ATO addresses how to evidence the impact of COVID-19, and the approach is aligned with how the ATO’s advanced pricing arrangements (APA) unit is looking to proactively address the impact of COVID-19 with taxpayers in “real time.” The new guidance follows earlier guidance on thin capitalisation and COVID-19, in which the ATO highlighted the option to use more frequent valuation points to smooth the COVID-19 impacts on balance sheets.

The ATO has indicated that it would not apply compliance resources when certain taxpayers exceeded their safe harbour debt limit due to COVID-19 and are required to use the “arm’s length debt test” approach to justify their pre-COVID-19 debt amounts and/or any short-term debt facilities required.

The ATO’s transfer pricing and COVID-19 guidance, among other things, provides the following.

  • How the ATO will assess the economic impacts of COVID-19 on transfer pricing arrangements. The ATO will place emphasis on gathering contemporaneous evidence to support any changes to, or impacts on the business as a result of COVID-19. Taxpayers need to consider documenting these changes as they are considered and implemented, and measuring any impacts with reference to actual or budgeted data.
  • Guidance regarding supporting the arm’s length nature of the transfer pricing outcomes. The ATO has acknowledged analysis of current comparable company benchmarking data may not reliably support arm’s length outcomes of continuing transfer pricing arrangements impacted by COVID-19, particularly in the short term. In other words, the ATO will seek to understand the financial outcomes that taxpayers would have achieved “but for” the impact of COVID-19.
  • PCG 2019/1 and COVID-19 implications. The Practical Compliance Guideline (PCG) outlines the ATO’s approach to risk-rating based on profit level and functional factors for Australian inbound distributors, and at what profit levels it may dedicate resources to investigate further their transfer pricing arrangements. The ATO is not currently seeking to review PCG 2019/1 due to COVID-19—not surprising at this stage, given limited publicly available data is available regarding the pandemic’s impact. Tax professionals expect that the ATO may issue more detailed or updated guidance pertaining to PCG 2019/1 later this year.
  • Breaching an APA due to COVID-19. If critical assumptions have been breached when the taxpayer has an APA, the ATO has recommended early engagement to practically resolve the issue.
  • Higher-risk fact patterns. In this regard, the ATO has flagged that changes to transfer pricing arrangements to achieve a “tax advantage” such as changes to crystallise foreign exchange losses, contractually increase risks (and global losses) allocated to Australian taxpayers, or otherwise reduce taxable income, will be of high focus.

KPMG observation

With the ATO signaling a continued focus on transfer pricing, it is important that taxpayers continue to determine that any changes to their transfer pricing arrangements are appropriately considered, supported by contemporaneous evidence, and documented using transfer pricing principles accordingly.


For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Australia:

Tim Keeling | +61 2 9455 9853 | tkeeling1@kpmg.com.au

Tony Gorgas | +61 2 9335 8851 | tgorgas@kpmg.com.au

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