TR 2014/D3 details the commissioner's views on the application of section 815-130 of the Income Tax Assessment Act 1997 (ITAA 1997), which specifies the relevance of the actual commercial or financial relations to the identification of the arm's length conditions in related entity transactions.
The identification of these conditions is relevant to ascertaining whether an entity gets a transfer pricing benefit from the actual conditions which operate between the entity and another entity in connection with their cross-border dealings.
According to Ms Honey, the commissioner’s interpretation allows the ATO to reconstruct any transaction in which the tax office considers the underlying economic substance is different from the transaction’s form.
Ms Honey said this very broad interpretation introduces uncertainty for taxpayers and will ultimately cost businesses.
“Tax compliance will cost a lot more and red tape will increase. I think taxpayers will also have far greater uncertainty, meaning that taxpayers may be more wary of doing any sort of transaction,” she said.
Small to medium sized enteprises (SMEs) are expected to be hit hardest by the commissioner’s interpretation, according to Ms Honey, given they have fewer resources to direct towards compliance. The detail required and substantial documentation and analysis needed to comply with transfer pricing can be very costly.
“I think this is really increasing the bar significantly so it’s even more costly, it’s even more uncertain and I think that is just going to make it harder for SMEs,” she said.
Pitcher Partners are calling for the tax office to apply the reconstructive powers to a more limited range of transactions, and have said they intend to make an official submission saying as much.
“I think the view is that in some circumstances it is appropriate to reconstruct but that should really only be happening in very exceptional and quite extreme circumstances,” said Ms Honey.
“I think what people had hoped is that this ruling would have said there is a reconstruction power but it will only be applied in exceptional and fairly well defined circumstances, so that the taxpayers can have some feeling that as long as what they are doing is reasonable, that they don’t have to fear that the tax office,” she said.