In Australia, the approach used by tax professionals to analyze related party transactions has evolved beyond mere focus on transfer pricing. For entities with business connections to Australia, the forefront question is no longer about the right price, but more so what needs pricing.
The Australian Taxation Office (ATO) is increasingly integrating transfer pricing methods with other measures, especially the general anti-avoidance rules (GAAR) and the diverted profits tax rules. There are also challenges related to the characterization of transactions. The ability of the ATO to reconstruct transactions signifies an alternative transaction that didn’t occur can be put forward, challenging the pricing of this theoretical transaction.
In particular, payments linked to the usage of intangibles are becoming more contentious, as the ATO tends to have a broader perspective of what constitutes a [[royalty]](https://www.ato.gov.au/law/view/document?LocID=%22COG%2FPCG20241%2FNAT%2FATO%22&PiT=99991231235958), in comparison with the Organisation for Economic Cooperation and Development (OECD). This implies that positions accepted by other revenue authorities may not necessarily find agreement with the ATO.
The ATO’s take on intangibles is illustrated in their 2024 draft ruling on royalties in payments made under software agreements. Here, the ATO broadly asserts that the electronic distribution of software generates royalties. Its guideline for DEMPE activities also emphasizes the ATO’s comprehensive inquiries.
The ATO’s scope is not limited to taxpayer activities within Australia but also concerns itself with the significance of local operations to the global value chain. It is also of note that in Australia, the burden of proof in dispute proceedings is the responsibility of the taxpayer. This is pertinent even in GAAR disputes, with the ATO approaching audits to meet the proof requisition at that stage.
In addition to pricing deliberations, the ATO has developed practical compliance guidelines which spell out ATO’s view on the risk level associated with certain transactions. These guidelines demand the taxpayers to evaluate their activities and share the results with the ATO. For instance, the ATO has issued specific guidelines regarding DEMPE activities for Australian-based foreign-owned intangibles, related party financing arrangements, and inbound distribution arrangements.
These guidelines typically apply both to existing and new arrangements, and hence, taxpayers might have to use the ATO’s new risk assessment frameworks for transactions that took place years or even decades ago.
Companies and tax professionals should bear in mind that the ATO does not limit its considerations to the transfer pricing provisions. Tax reviews in Australia can be rigorous and lengthy. Thus, taking into account not only the issue at hand but also their overall tax position in Australia is vital. Furthermore, briefing stakeholders on the unique aspects of the Australian tax landscape reduces the likelihood of unexpected obstacles, aiding the organization to best support its tax function.
For ongoing transactions, frank dialogue and transparency regarding plans and processes with the ATO not only ensures future tax positions but also establishes an understanding of the parameters of ATO’s settlement procedures. Companies must be proactive in this approach, recognizing that there is no single concrete opportunity for settlement.
This article is based on input from Niv Tadmore, Benjamin Lancaster, and Brianna Steinochr, tax professionals at Jones Day.