Australia: Proposed retroactive adoption of updated OECD transfer pricing guidance

The Australian government on 31 January 2024 released exposure draft legislation and supporting explanatory materials that would retroactively update Australia’s transfer pricing laws to the most recent version of the Organisation for Economic Cooperation and Development’s (OECD) Transfer Pricing Guidelines published on 20 January 2022.

The current transfer pricing guidance within Division 815 refers to the 2017 version of the OECD Transfer Pricing Guidelines. The updates made in the 2022 version of the OECD Transfer Pricing Guidelines relate to:

• Revised guidance on the transactional profit split method, which becomes the new Chapter II, Section C. The updates clearly link to other modifications made as part of the BEPS Action Items 8-10, including the risk control framework set out in Chapter I and the development, enhancement, maintenance, protection and exploitation (DEMPE) framework set out in Chapter VI. The three key changes made to updated profit split chapter relate to circumstances in which application of the profit split method may be appropriate, including when the related parties:
  • Share “unique and valuable contributions,” when “contributions” may take the form of functions or assets (importantly, this removes the emphasis on intangibles so that contributions can relate to both functions and assets equally)
  • Engage in “highly integrated operations,” when the functions, assets, and risks undertaken by the parties to the arrangement are interlinked and cannot reliably be considered or priced in isolation
  • Share in the “assumption of economically significant risks,” when each party to the arrangement shares the assumption of one or more of the economically significant risks (this is a key link to the risk control framework set out in Chapter I)
• Guidance on financial transactions, which becomes the new Chapter X. The new guidance covers the accurate delineation of financial transactions, including both pricing (e.g., interest rates) and capital structures (e.g., volume of debt) for intragroup borrowings, as well as broader issues related to the pricing of cash pooling, hedging, guarantee and captive insurance arrangements. This guidance comes at a time of upheaval in the Australian financing and thin capitalization space, with the planned removal of protections (in s815-140) that historically have prevented transfer pricing from challenging the quantum of debt on which an arm’s length interest rate will apply. For example, the concepts in Chapter X relating to “accurate delineation” may otherwise have had little role to play but will now require careful consideration given the transfer pricing rules’ potential to limit the quantum of debt on which deductions may be taken (and not just the interest rate). In addition, Chapter X makes the assumption that benefits provided by guarantees should be compensated “as given” (i.e., supporting the principle of guarantee fees as payable between related parties), which was a key source of controversy in both the Chevron and SingTel court cases.
• Guidance for tax administrations on the application of the approach to hard-to-value intangibles, which forms the Annex II to Chapter VI. This guidance suggests that tax administrations can consider ex-post outcomes (i.e., the actual revenue outcomes achieved that are associated with the intangible) as presumptive evidence as to the appropriateness of the pricing at the time of the transfer. Taxpayers may be able to rebut a tax authority’s presumptive evidence if they can demonstrate the reliability of supporting data adopted at the time when pricing occurred. This guidance must be read in conjunction with the recently released PCG 2024/1 relating to intangible arrangements. Read TaxNewsFlash

As mentioned above, the updates to Division 815 would have retroactive application for income years starting on or after 1 July 2022. Taxpayers with intra-group financing arrangements need to revisit their supporting documentation, particularly in light of expected changes to the thin capitalization regime and the likely increased focus from the tax authority on the arm’s length “quantum” of debt.

Similarly, given the tax authority’s ongoing focus on intangibles arrangements, taxpayers need to review such arrangements and their related documentation, as well as arrangements in which an Australia entity is a party to “unique and valuable” contributions, highly integrated activities, and/or shares in the assumption of economically significant risks.

For more information, contact a KPMG tax professional in Australia:

Sophie Lewis | sophielewis@kpmg.com.au

Sam van Berkel | svanberkel@kpmg.com.au