Australian Taxation Office issues guidance on Advance Pricing Agreements

Transcription

1 23 July 2015 Global Tax Alert News from Transfer Pricing EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Australian Taxation Office issues guidance on Advance Pricing Agreements Executive summary On 23 July 2015, the Australian Taxation Office (ATO) released its revised policies and procedures for the Advance Pricing Agreements (APA) program. The updated guidance has been provided in the form of Practice Statement Law Administration PSLA 2015/4, which is administratively binding on the ATO and replaces PSLA 2011/1. PSLA 2015/4 confirms that the ATO is open to the use of APAs and provides further clarity on the ATO s administrative approach and the necessary stepping stones for acceptance of an APA application into the program. Some of the key changes concern the establishment of a formal APA Program Management Unit, the formation of an ATO triage function, insight into the three broad stages of the APA process and additional clarification of the internal ATO decision-making process as to when an application is more likely to be accepted in to the program. The ATO has also reiterated that the APA teams will effectively be applying the whole of tax code principle to APA applications, including collateral issues, and has the expectation that corporate profits will reflect the true economic contribution made by the Australian enterprise. The revised PSLA sends a strong signal that the ATO wants to encourage taxpayers to pursue APAs. However, the PSLA is also making it clear an APA is not appropriate for all taxpayers and that there will be a greater level of ATO due diligence than before.

2 Detailed discussion Background The previous PSLA was recognized as a key point of reference for the lodgment and treatment of APA applications. It was relied on by both ATO officers and external stakeholders for guidance. Generally speaking the ATO administered the previous PSLA in a fair and reasonable manner which encouraged taxpayers to enter into the program. It was considered that the previous document served its intended purpose quite well. Yet there was a pressing need to update the content to reflect the current climate of greater focus on multinational businesses, to provide a greater sense of direction and to formalize current ATO practices, which in recent times have appeared to lack an element of consistency between APA teams. Refined APA process The refined process as outlined by the ATO is potentially more robust and challenging to applicants. For instance key employees may be subject to detailed interview and the ATO will focus particular attention to the global supply chain and not just the Australian activities. Yet on reflection the APA mechanism is a widely accepted way of gaining the necessary level of certainty for transactions in real time and in a non-hostile environment and the ATO guidance highlights the value of APAs. On balance the APA program continues to reduce the risk of double taxation and is likely to either eliminate or significantly mitigate the imposition of penalties. Getting accepted into the program The ATO is more likely to enter into an APA where the following indicators are present: The transfer pricing (TP) methodology proposed best achieves consistency with the Organisation for Economic Cooperation and Development (OECD) guidelines The cross border conditions are unlikely to change significantly in the period of the APA A proposed arrangement is under serious contemplation and the actual conditions are unlikely to change significantly in the APA period The TP issues are complex and there is uncertainty as to how the TP rules apply Without an APA the probability of economic double taxation is high Commercial benefits to the Australian entity are supported Key stages of the APA process There are now three stages of the APA process. The first stage is labelled the early engagement stage which incorporates ATO triage review of the application, preliminary discussions and an ATO internal workshop on the request. This stage has an indicative maximum timeframe of six months. This was formerly called the pre-lodgment process and has many similarities. The next stage, subject to meeting the conditions of the early engagement process and subject to the above indicators for acceptance into the program, sees the ATO invite the taxpayer to formally lodge the APA application which is subject to a maximum timeframe of 18 months for completion. The final part of the process is an Annual Compliance report which is part of the monitoring stage. In summary the overall timeframe for the completion of a complex APA has not substantially changed. However, there is clearly more up-front work and documentation required before being accepted into the APA program. Interaction of APA process with audits It is positive to hear that the ATO will not undertake active compliance in relation to cross border dealings which are the subject of an APA unless there is a valid reason to believe the taxpayer has omitted or provided incorrect information that is of a material relevant nature. Although it is generally the case that active compliance products (e.g., risk reviews and audits) and APAs are to be treated separately there are still opportunities. More specifically, it would appear that an APA could assist in resolving 2 Global Tax Alert Transfer pricing

3 active compliance reviews in circumstances where the taxpayer s facts and circumstances are sufficiently similar to enable the methodology used in the APA to be applied to the income years under such review. Interaction with prior year positions The ATO is only likely to seek roll back of issues rated as high risk and more likely to seek roll back for a lesser number of years in the case of a voluntary APA request compared to a case initiated via ATO compliance activity. Escalation avenues for APA matters There are formal points of escalation in the process to provide a sense of natural justice in the process. The key milestones are where the ATO: Does not accept the APA request Does not reach agreement on the scope of the APA Wishes to withdraw from the process Or The taxpayer has reached a standstill in the APA process It should be noted that this does not prohibit taxpayers from making representations to senior ATO management if the process runs awry. Obviously this should be undertaken in a considered prudent manner. Encouraging ATO signs While the PSLA is a somewhat lengthy document (19 pages), the guidance is relatively easy to follow and provides a clear road map for taxpayers wishing to pursue an APA. There is very encouraging language in PSLA 2015/4 that the ATO is back in business and is taking a reasonable approach when it comes to pursuing APAs with taxpayers. For instance the following extracts are noteworthy:. APA should be a practical and commercial outcome for the Australian entity and for the ATO.. the ATO commits to fostering constructive working relationships with mutual trust. ATO staff are to tailor an APA to address the taxpayer s circumstances in a practical way. each APA request will be treated on its merits according to its own facts ATO staff are to build the cooperative relationship essential to the entire APA process Importantly, the ATO has indicated that the TP matters and the possible application of the anti-avoidance provisions e.g., Part IVA will be dealt with by the ATO concurrently. The ATO has acknowledged that Part IVA will only arise in rare instances. In the situation where the ATO denied access to the APA program, the taxpayer would still have access to the Mutual Agreement Procedure (MAP) program assuming there was the incidence of double economic taxation. As well, on specific tax technical issues there may be scope to obtain interpretative assistance in certain circumstances from another area of the ATO. Global Tax Alert Transfer pricing 3

4 For additional information with respect to this Alert, please contact the following: Ernst & Young (Australia), Sydney Jesper Solgaard jesper.solgaard@au.ey.com Paul Balkus paul.balkus@au.ey.com Jason Vella jason.vella@au.ey.com Danielle Donovan danielle.donovan@au.ey.com David Tracey david.tracey@au.ey.com Ernst & Young (Australia), Melbourne Julian Hine julian.hine@au.ey.com Keir Cornish keir.cornish@au.ey.com Rob Janes rob.janes@au.ey.com Chris Thomas chris.thomas@au.ey.com Ernst & Young (Australia), Perth Joe Lawson joe.lawson@au.ey.com Ernst & Young (Australia), Brisbane Kevin Griffiths kevin.griffiths@au.ey.com Ernst & Young LLP, Australian Tax Desk, New York Andrew Nelson andrew.nelson@ey.com 4 Global Tax Alert Transfer pricing

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. EYG No. CM5633 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com