These reviews are designed to provide assurance to the Government and the business community that taxpayers are meeting their tax obligations. Transfer pricing is a key focus area during these reviews, due to the significance of trade between multinationals and the increasing complexity of transfer pricing arrangements.
Assurance reviews occur across several ATO programs. Transfer Pricing is relevant to the following reviews: Top 100 justified trust program; Top 1,000 combined assurance program; Top 1,000 Next Actions Program; Top 500 Private Wealth Program; Next 5000 Private Wealth Program and Medium and Emerging Markets reviews.
Taxpayers with significant related party dealings or high-risk transactions (such as cross-border financing, intangible assets, or tangible goods) tend to receive more in-depth transfer pricing focus.
Many taxpayers have been through the ATO’s Streamlined Assurance Review and Combined Assurance Review programs since they commenced in 2016. The assurance ratings issued by the ATO on transfer pricing matters have not improved over this period. At the same time, there has been an upward trend with the ATO obtaining higher assurance on other tax matters. This reinforces the complexity of transfer pricing and the difficulty taxpayers face to effectively demonstrate to the ATO their dealings are arm's length.
Information requested
The ATO has developed a standard information request list for its assurance reviews. This list is exhaustive and includes:
- Transfer pricing documentation, including supporting economic analysis;
- Information on group structure, employee organisational charts and description of the taxpayer’s supply chain;
- Intercompany agreements;
- Workpapers supporting International Dealings Schedule and Local File disclosures;
- Workpapers detailing calculations of international related party dealings; and
- Assessment of transfer pricing risks the ATO has flagged to market, including assessing the applicability and risk rating outcomes of relevant Practical Compliance Guidelines and Taxpayer Alerts.
Of this list, the ATO places particular emphasis on contemporaneous transfer pricing documentation for taxpayers to evidence the arm’s length nature of their related party dealings. The ATO is also putting strong focus on internal governance processes and evidence taxpayers have implemented these effectively to manage their transfer pricing risks.
The ATO’s evidence-based approach creates a time consuming and resource intensive review process. It is common for the ATO to issue follow-up information requests and the detail requested can be beyond those available locally. Regional and global head offices are often needed to provide the documentary evidence requested by the ATO.
ATO Areas of Focus
The ATO continues to identify the following arrangements as high risk:
- Licence fees and royalties: Whether genuine economic benefits are received by Australian operations to justify the payments of licence fees and royalties. The ATO is also concerned with arrangements designed to reduce or avoid Australian taxable income and/or reduce or avoid royalty withholding tax.
- Financing: The structure and pricing of related party financing transactions is not consistent with third-party transactions. The ATO is also concerned with arrangements structured to avoid interest withholding tax or entities that do not meet the eligibility criteria for claimed exemptions from withholding tax.
- Inbound and outbound supplies of goods and services: The ATO is concerned with arrangements which fall within the high-risk zone based on their Practical Compliance Guideline.
Grant Thornton has prepared practical risk assessment frameworks based on the ATO’s key transfer pricing focus areas. The frameworks allow taxpayers to assess their risks based on the ATO’s criteria and can be provided upon request.
Be prepared
Being prepared is key to a successful ATO defence. The complexity of transfer pricing makes it difficult for taxpayers to support their positions where they do not have contemporaneous transfer pricing documentation. Challenges relating to people moving on in organisations and the difficulties this creates documenting historical facts and re-create data within the short time frame allowed by the ATO. If no documentation is prepared then taxpayers open themselves up to the ATO forming their own transfer pricing positions, potentially leading to reviews escalating to an audit and a higher risk of transfer pricing adjustments.
If you would like to discuss any of the information contained in this article, please get in touch.
