Ms McFall’s comments followed the ATO’s release of draft guidance for taxpayers to clarify rules introduced in June 2013.
“The ATO has confirmed in its ruling that it will completely disregard transactions entered into by companies where they are not ‘commercially realistic’ or where, in its view, independent entities would not have entered into them,” Ms McFall said.
“This takes us into a space fraught with guess work, where ATO officers are hypothesising about what would have happened in ‘the real world’,” she added.
According to Ms McFall, the ATO’s stance on transfer pricing creates a number of concerns including that it allows the tax office to create transactions between multinational entities that are not there in reality, and that the ATO may try to use the reconstruction provisions with the benefit of hindsight, at times, many years after a transaction has been entered into.
Ms McFall said the draft documentation ruling also requires taxpayers to do much more than was previously required under the old transfer pricing rules.
“This is because the transfer pricing rules now operate on a self-assessment basis and there is now an onus on companies to show how they have applied the rules.
“Disappointingly, the draft ruling does not provide any concessions for small businesses and low-level transactions, instead making vague references to ‘prudent business management’ and exercising ‘good commercial judgement’ in determining the level of documentation required,” said Ms McFall.
“The ATO is considering concessions for low-level transactions and the possibility of safe harbours as part of a separate project, so we can only hope,” she added.
The ATO’s guidance takes the form of draft taxation rulings and practice statements setting out the ATO’s views on:
• Its power to reconstruct transactions between related parties (Draft Taxation Ruling TR 2014/D3)
• The transfer pricing documentation an entity should prepare and keep (Draft Taxation Ruling TR 2014/D4 and Draft Practice Statement Law Administration PSLA 3673) and
• Penalties applicable to transfer pricing adjustments and transfer pricing documentation requirements (Draft Practice Statement Law Administration PSLA 3672).