Multinational Corporations (MNCs) have made many positive contributions to the world in which we live and, in doing so, always enjoyed the benefit of operations that span jurisdictions. This has allowed them to instigate advanced tax planning and international structuring to optimise returns. In line with accounting standards and regulations, these organisations have done this primarily through careful structuring of their operations, resulting in profits being derived in low tax jurisdictions, despite the ultimate customers being based in countries with higher tax rates.
Over the past two decades, a substantial shift in sentiment has struck MNCs. What was once generally accepted tax planning, is now a battleground of tightening fiscal budgets and dissenting global citizens. The Australian Tax Office (ATO), and other tax authorities, have been forced into taking a stronger stance against international transactions between related parties, and improve measures to ensure transactions are priced in accordance with the arms-length principle.
This tougher stance is already starting to show, with the Federal Court ruling in favour of the ATO in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation . In this landmark case, which was upheld on appeal, the terms of Chevron’s 2003 loan arrangement were found not to be at arms-length and to have facilitated excessive interest deductions of $350 million.
There are lessons to be learnt if your company has transactions between related parties that cross sovereign borders, and they want to ensure they have protected and supported their tax position. Our PKF Transfer Pricing experts have recommended that the following should be key areas of focus:
- Has an inter-company pricing arrangement been put in place between the related entities, for any transfer of good or services, such as intellectual property, tangible goods, services, and loans;
- Are inter-company arrangement prices built on an arm’s length principle and calculated through identifying where value is created and transferred;
- Is there benchmarking and analysis of variables such as assets used, risks assumed and the functions of each related party;
- Has there been a review of any precedent historical rulings from the ATO and tax offices abroad, and an application of an appropriate economic method; and
- Is it appropriate and prudent to apply for an Advanced-Pricing-Agreement (APA) covering the transactions under review. An APA is a negotiated transfer price agreed with the ATO up front.
The publicity surrounding Chevron sends a clear message that the ATO is cracking down in this area. Directors and auditors should be seeing this as an emerging risk that will require appropriate and due consideration, in order to ensure there is no potential exposure to a material tax liability in the future.
What may not be as evident is that smaller entities that have international dealings with related parties, are also at risk of tax audits, and subsequently open to fines and penalties.
Never has there been a more crucial time to have your transfer pricing affairs in order, particularly given increased reporting requirements and exchange of information agreements with overseas tax authorities.