The Australian Taxation Office has issued draft guidance on the interpretation and implementation of the country's transfer pricing legislation that was enacted in 2013. The legislation was meant to bring Australia's transfer pricing rules in line with OECD guidelines.
The draft guidance confirms and clarifies the tax commissioner's authority to reconstruct a transaction when the parties involved do no conduct themselves in accordance with the written agreement or if the agreement does not confirm to the arm's length principle. In general, the authority granted the tax commissioner is more broad than what is provided under OECD guidelines.
When determining the pricing of a related party transaction, the taxpayer must consider whether the pricing should be done under basic arm's length pricing rules, or whether the transaction falls under one of three exceptions and must be partially or fully reconstructed. The three exceptions include:
- Where the form and substance of the actual commercial and financial relations differ
- Where independent entities would have entered into commercial or financial relations which differ in substance from the actual commercial or financial relations
- Where independent entities would not have entered into commercial or financial relations at all
Another key area of the guidance concerns documentation. One of the major points is that documentation must be prepared prior to the filing of the relevant tax return, and it must be sufficient to reasonably argue the position of the taxpayer. The existence of such supporting documentation will also determine a taxpayer's eligibility for reduced penalties in the event of an adjustment. If sufficient documentation is not prepared prior to a tax return, a standard penalty of 25% of the tax due will be applied. If sufficient documentation does exist, the penalty is reduced to 10%.