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Transfer pricing – proposed changes to transfer pricing laws and increased ATO scrutiny
On 1 November 2011, the Assistant Treasurer released a consultation paper on proposed changes to Australia’s transfer pricing rules (which were originally introduced in 1982) to better align Australia’s domestic rules with internationally accepted arm’s length principles.
This reform is driven by recent judicial decisions in Roche Products Pty Ltd v Commissioner of Taxation  AATA 639 and Commissioner of Taxation v SNF (Australia) Pty Ltd  FCAFC 74, which highlighted differences between the application of the Australian domestic rules and that of internationally accepted arm’s length principles based on the OECD model.
While the intention is that any changes are to operate on a prospective basis, the Government will ‘clarify’ that transfer pricing rules in Australia’s tax treaties provide a separate taxing power and as such the changes in question may apply to years commencing on or after 1 July 2004.
Given the possibility of increased documentation for 2012 and beyond, businesses should review the quality of documentation they maintain for transfer pricing purposes. Businesses should also consider the impact of potential law changes (dating back to 2004) if they have international related party financial arrangements or business restructures.
ATO sets its views on ‘source’ and ‘fiscally transparent entities’ for inbound investors
On 26 October 2011, the ATO issued final tax determinations (TDs) in relation to inbound investment into Australia by managed funds and, in particular, private equity (PE) investors. The TDs dealt with:
- The source of PE gains (TD 2011/24)
- The availability of tax treaty relief for certain limited liability partnership (LP) partners (TD 2011/25)
TD 2011/24 outlines the ATO’s view that in some cases, gains on the disposal of an investment by a foreign owner can be Australian sourced, notwithstanding that the contracts for purchase and sale of shares are executed outside of Australia. Rather, in this situation, a number of factors are relevant in determining source, including:
- The activities undertaken by the fund, or on the fund's behalf, in making any improvements to the Australian corporate group
- Where those activities are undertaken
- The nature of any agreements between the entities
- The extent and nature of any control or involvement in the management of the Australian corporate group;
- Where the purchase contracts and sale contracts are executed
- The form and substance of the purchase payments
The final TD no longer raises the potential application of the general anti-avoidance provisions (which was included in the draft TD), other than to refer to a case where there was a pre-arranged plan to ‘avoid tax’ in Australia.
TD 2011/25 outlines the ATO’s views regarding investments made by foreign residents of countries with which Australia has a double tax treaty made through an interposed limited partnership (LP) that is tax transparent in the country of residence of the investor. The TD states that tax treaty relief may be available to the treaty investors under the business profits article in respect of gains on disposal, where the terms of the treaty are otherwise satisfied.
Government unveils plans to abolish tax free allowances for foreign nationals
The Federal Government has unveiled plans to effectively abolish tax free living-away-from-home-allowances (LAFHAs) for foreign nationals working in Australia. The reforms follow an extensive review by the ATO in response to concerns over the growing use and perceived abuse of LAFHAs paid to foreign executives. The proposed changes are intended to apply from 1 July 2012 for all new and existing arrangements.
Under the proposed reforms, living away from home (LAFH) benefits provided to temporary residents working in Australia will be fully taxable to the employee (if paid as an allowance) or fully taxable under fringe benefit tax (FBT) if paid or provided by the company. The intention is for temporary residents to be subject to the same Australian tax burden on their employment income as local employees.
Companies should review LAFHA arrangements and temporary resident employment contracts (existing and arrangements in the process of being negotiated) in order to understand the potential impact on wage costs if the LAFHA portion of compensation becomes taxable. Domestic and outbound LAFH arrangements should be reviewed to ensure the employee can substantiate actual expenditure on housing and food.
Investment Manager Regime – final element announced
The Government announced on 16 December 2011 that it would implement the third and final element of the investment manager regime (IMR).
The announcement means income, gains or losses, which have an Australian source and derived from portfolio interests or financial arrangements of a foreign managed fund, will be excluded from the calculation of the fund’s taxable income (and that of its non-resident investors). However, the exemption will not apply to the extent that withholding tax is currently payable on the income and will not cover income or gains from an interest in taxable Australian property (other than a portfolio interest in a publicly traded company).
The exemption will be restricted to foreign managed funds domiciled in countries that are recognised by Australia as engaging in effective exchange of information.
The Government will consult extensively with industry and tax professionals on the development of the legislation to implement the final element of the IMR. Foreign managed fund should monitor the development of these rules and the status of the consultation process.
Tax consolidation – announcement of long-awaited changes to tax consolidation laws
The Assistant Treasurer finally announced the long-awaited changes to Australia’s tax consolidation laws on 25 November 2011.
The proposed wide ranging changes primarily relate to changes to the tax consolidation treatment of rights to future income (“RTFI”) and residual revenue assets (for example, certain residual assets are to be treated as goodwill). The changes in question may affect recent and future transactions of consolidated groups as well as prior years’ tax returns, potentially dating back to the commencement of tax consolidation in 2002.
The Government has announced three time periods with differing impacts which require detailed consideration by affected taxpayers.
The Government also announced changes to the interaction between the Taxation of Financial Arrangements (TOFA) rules and tax consolidation. These changes will affect some groups’ TOFA projects.
For recent transactions including reorganizations, businesses should review the impact of these proposed changes with any accounting and continuous disclosure requirements requiring immediate action. Businesses should also assess the impact on any transactions currently being planned, negotiated or implemented as well as the impact on the income tax returns of prior years and prior positions adopted.
Groups should also continue to monitor developments in this area for further tax consolidation changes that may emerge in 2012.
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