22. december 2008: Australia - Commissioner puts multinationals on notice

ATO warns taxpayers to manage tax affairs responsibly

Tax Commissioner Michael D'Ascenzo's speech to the Victoria Tax Bar Association on Monday 8 December has sent a clear message to Australian taxpayers: manage your tax affairs responsibly because the ATO is watching. And, not surprisingly, transfer pricing will feature prominently on the ATO's agenda.

It is clear from Mr D'Ascenzo's speech that securing Australia's tax revenue base in challenging and uncertain times will be a key focus area for the ATO in coming months.

As the global financial crisis deepens, so will the ATO's scrutiny on the tax and transfer pricing affairs of multinational companies. The ATO's strategy of "early intervention" is already being felt in the financial and manufacturing sectors by way of a marked increase in the number of ATO transfer pricing enquiries and review activity. Indeed, the depth and intensity of these reviews has also increased with client site visits and interviews almost always carried out as part of the enquiry.

An area of particular concern and focus for the ATO is the inappropriate transfer of business losses to Australia. The ATO considers that the relative strength of the Australian economy may induce multinational corporations to transfer business losses to Australia, hence creating a risk for the Australian tax revenue base.

The ATO acknowledges that whilst losses are to be expected in the current economic climate, this in no way negates taxpayers' obligation to demonstrate that its international dealings are conducted in accordance with arm's length principles and are fully supported with appropriate documentation. More than ever, it is imperative for multinational taxpayers to be in a position to substantiate the "commerciality" of their results as independent of transfer pricing influences.

What does this mean for multinationals in Australia?

Increased ATO scrutiny, current market volatility as well as the inherent and increasing complexity and uncertainty of transfer pricing concepts especially in relation to thin capitalisation, debt pricing and business restructures means that it is more important than ever for taxpayers to ensure that any transfer pricing positions taken are consistent with arm's length behaviour and are fully documented.

There is no better time than the present to review and evaluate your current transfer pricing practices and outcomes and to take corrective action if required. Prevention is certainly better than the cure in this regard when considering the time and resources required to effectively deal with a transfer pricing audit and the imposition of penalties and interest in the event of a transfer pricing adjustment.

What you should be doing

It is imperative for you to proactively manage your transfer pricing risks in the current volatile economic climate. The first step is to identify and prioritise potential areas that may require further attention and serve as triggers for an ATO enquiry (such as: losses for entities characterized as low risk - low return; foreign exchange losses for distributors purchasing in foreign currencies; and reliance on the arm's length debt test in the current market).

Furthermore, it is important to note that such a review may also reveal opportunities for multinationals to more effectively manage their transfer pricing in this challenging time. For example, has a critical assumption in your APA been breached, and if so, should it be renegotiated?

If you would like further information on identifying and managing your transfer pricing risks, please contact your regular PwC contact.