International Tax Newsletter - Spring/Summer 2012 - Australia
PROPOSED TRANSFER PRICING REFORMS
In November 2011, a proposal to reform the current transfer pricing rules was announced. The proposed amendments are designed to address inconsistencies between the current Australian legislation and the approach to transfer pricing based on the revised OECD Guidelines.
Australia’s current transfer pricing rules use the internationally accepted arm's length principle and focus on pricing individual transactions. Consequently, the overall profits may not reflect the economic contributions of the various parties. As part of the proposed revision, the pricing of transactions will be broadened to incorporate the arm's length outcome for the full dealings between parties to appropriately reflect the contributions of each party. This reflects the 2010 revision to the OECD Guidelines.
The new rules are also expected to resolve a number of uncertainties by:
- Providing a clearer legislative pathway for the use of the OECD Guidelines.
- Confirming that the tax treaties operate as an alternative to the domestic rules.
- Clarifying that the application of the tax treaty articles should be done in a manner that is consistent with the OECD Guidelines. This aspect of the reforms will operate retroactively from 1 July 2004.
The Government is currently consulting stakeholders in relation to these reforms and the actual legislation may yet be a few years away. However, the application date for these changes may be retroactive. Practically, the alignment of Australia's transfer pricing rules with international transfer pricing standards should be a positive step as it is expected to reduce uncertainty, minimise compliance and administrative costs, and reduce the risk of double taxation for multinational enterprises.
More information on this development can be provided by David Blake and Kaajiri Vaughan, PKF Australia, through the EisnerAmper contacts listed at the end of this Newsletter.
GENERAL ANTI-TAX AVOIDANCE REGULATIONS (GAAR)
The Australian Government has announced its intention to introduce amendments to the GAAR to protect the integrity of Australia’s tax system.
The genesis for this announcement appears to be the recent success enjoyed by various taxpayers in successfully defending their commercial transactions from the current GAAR. The most recent case was decided by the Full Federal Court in RCI v FCT  FCAFC 104 in August 2011.
RCI involved a restructure of the U.S. assets of the James Hardie Group. The Group wanted to move its U.S. assets within the group but the transfer of the assets could result in substantial taxable capital gains. As an alternative, a dividend of US$318 million (equal to the increase in value of the assets reflected in the asset revaluation reserve) was paid to the taxpayer. This dividend was not taxable in Australia. This resulted in a significant reduction in the value of the assets, thereby reducing the capital gain realised on the transaction. The Tax Office argued that GAAR applied because a taxable gain was converted to a non-taxable amount.
The Court rejected the Tax Office’s contention.
Soon after the final appeal in the RCI case, the Government announced the intention to amend the GAAR to counter the argument that a taxpayer did not obtain a " 'tax benefit' because, without the scheme, they would not have entered into an arrangement that attracted tax.”
Although the announcement contains very little detail of the proposed amendments or any specifics of what form they will take, they will apply to schemes entered into or carried out after 1 March 2012.
Taxpayers are on alert to be extremely careful if contemplating any business group restructures or reorganisations pending the release of further details on the GAAR amendments.
More information on this development can be provided by Lance Cunningham and Marinda Waller, PKF Australia, through the EisnerAmper contacts listed at the end of this Newsletter
International Tax Newsletter - Spring/Summer 2012 Issue