BDO in Australia hosted and was the lead sponsor for this year’s TP Minds Australia 2023 conference, which delivered an opportunity to delve into the latest trends, insights, and discussions shaping the transfer pricing landscape.
The event featured a line-up of keynote speakers and session leaders at the forefront of their respective fields, including policy makers from the OECD, IMF, United Nations, and the Australian Taxation Office (ATO), as well as industry representatives.
These speakers and session leaders emphasised a range of tensions inherent in transfer pricing-related matters, with each session identifying different competing priorities. For example, the balance between:
Elevating tax discussions in board meetings. While tax has started becoming a regular item on the agenda of quarterly board/committee meetings, dialogue on tax matters often remains cursory and usually tax is discussed in–depth only when a current tax risk is identified. The in-house tax function contends with pressure to comply, all while navigating stringent budgets. This challenge unfolds against the backdrop of public officers facing both civil and criminal penalties, which intensifies ownership and accountability.
Diverse focus across revenue authorities. Different revenue authorities bring various focal points to the conversation. Some delve deeply into transfer pricing documentation, others seek to focus on the risk of tax avoidance, while developing nations often scrutinise the deductibility of intragroup service fees. A multinational entity’s strategy should evolve depending on the jurisdictions in which it operates and an understanding of its sensitivities.
Shifting conversations towards commercial reality. Legal agreements often serve as a reference point – “a source of truth” -- in the complex landscape of a transfer pricing dispute, where evidence includes transfer pricing documentation and other documents, emails, board minutes, and historical commercial context. While this evidence remains pivotal, discussions with tax authorities often shift towards discussions on commercial reality.
The event featured a line-up of keynote speakers and session leaders at the forefront of their respective fields, including policy makers from the OECD, IMF, United Nations, and the Australian Taxation Office (ATO), as well as industry representatives.
These speakers and session leaders emphasised a range of tensions inherent in transfer pricing-related matters, with each session identifying different competing priorities. For example, the balance between:
- Inclusivity and. effectiveness
- Certainty and simplicity
- Regulator and taxpayer viewpoints
- Effort vs. utility of the information collated
- Optimism vs. scepticism and voluntary vs mandatory reporting of information
- Static approach vs. active approach (as changes arise)
Day one
- Data sharing challenges. A robust discussion about the CbC reporting regime exposed inequities in information sharing. The CbC reporting regime has been operating for its sixth year; however, some developing nations continue to face barriers in accessing essential data for shaping their future tax strategies. Addressing this information gap is crucial for promoting inclusive and effective tax reforms.
- Striking balance between simplicity and precision. The constant challenge of balancing simplicity and accuracy was underscored in the proposed measures, notably the introduction of Amount B of the OECD’s Pillar One and a standardised 8.5% mark-up for certain intragroup services. The application of these standardised measures provides much needed simplicity to complex transfer pricing policies; however, it may also create misalignment with the arm’s length principle.
- Evolution of the arm’s length principle. The discussion surrounding the life of the arm’s length principle has been reignited, with consensus that the principle remains relevant. However, its application may require flexibility and adaption – “the arm may be stretched” to address modern complexities.
- Narrowing the tax gap for multinationals. The ATO is strategically focused on closing the net tax gap of 7%, with a specific focus on multinational companies and private groups. This initiative entails an expansion of the ATO’s task force and the introduction of targeted compliance programs. These programs will address aggressive tax planning and profit-shifting arrangements, encompassing areas such as financing, intellectual property migration, and embedded royalties.
- Tax certainty in an uncertain world. Against the backdrop of an uncertain global environment, the ATO’s advance pricing arrangement (APA) program emerges as a beacon for multinational enterprises seeking tax certainty. This flagship program remains an attractive avenue for multinationals to establish clear and reliable transfer pricing arrangements and mitigate the potential of double taxation.
- Intragroup financing under scrutiny. The ATO will focus on intrafinancing arrangements of multinational companies that “remain” in the high-risk zone under PCG 2017/4. The ATO has advised that they will be targeting these arrangements and allocating compliance resources.
- Leading the way in Pillar Two implementation. The ATO is proactively leading the way in domestic Pillar Two implementation. The ATO’s approach is centred on ensuring effective implementation, with considerable emphasis on minimising the administrative burden.
- Navigating disputes in the era of new transfer pricing rules. The majority of ATO cases now revolve around the application of Subdivision 815-B. This emerging landscape raises questions about how the courts will interpret and implement these rules. Of particular interest is the extent to which the Commissioner’s authority to reconstruct transfer pricing arrangements will be exercised.
- Revenue authorities seeking to utilise artificial intelligence. The ATO is looking to explore the potential of artificial intelligence (AI) to assist with information automation and the efficient processing of data, which will ultimately assist case officers better manage the transfer pricing risk and mitigate against the base erosion of tax.
- Broadening OECD’s focus beyond BEPS. The successful progress achieved with the BEPS two-pillar framework demonstrates the OECD’s commitment to addressing complex tax challenges. As the organisation sees the light at the end of the tunnel, they’re shifting their attention to other critical areas, including global mobility and the intricate decision-making integral to the overall tax framework.
Day two
Integrating transfer pricing into broader tax governance. Viewing transfer pricing alongside other tax considerations --VAT/ GST and customs duty reviews, for example -- ensures a holistic approach to a group’s tax environment. It provides a more decisive outcome to ATO compliance programs, with the ATO firmly focused on a taxpayer’s tax governance framework.Elevating tax discussions in board meetings. While tax has started becoming a regular item on the agenda of quarterly board/committee meetings, dialogue on tax matters often remains cursory and usually tax is discussed in–depth only when a current tax risk is identified. The in-house tax function contends with pressure to comply, all while navigating stringent budgets. This challenge unfolds against the backdrop of public officers facing both civil and criminal penalties, which intensifies ownership and accountability.
Diverse focus across revenue authorities. Different revenue authorities bring various focal points to the conversation. Some delve deeply into transfer pricing documentation, others seek to focus on the risk of tax avoidance, while developing nations often scrutinise the deductibility of intragroup service fees. A multinational entity’s strategy should evolve depending on the jurisdictions in which it operates and an understanding of its sensitivities.
Shifting conversations towards commercial reality. Legal agreements often serve as a reference point – “a source of truth” -- in the complex landscape of a transfer pricing dispute, where evidence includes transfer pricing documentation and other documents, emails, board minutes, and historical commercial context. While this evidence remains pivotal, discussions with tax authorities often shift towards discussions on commercial reality.
Advance pricing agreements
The APA panel discussion shed light on the dynamics of the APA process:- Renewal and transition benefits: Panel members underscored the efficiencies/advantages gained when renewing APAs or transitioning from bilateral to multilateral APAs. The presence of background facts and circumstances within revenue authorities fosters a more informed negotiation.
- Challenges amidst change: Some panellists shared their experience of prolonged APA negotiations, with renewal processes spanning over two years, often as a result of focusing on collateral issues. Personnel changes within the ATO were identified as contributors to inefficiencies in the process.
- Misalignment and improved expectations: Following a recent review of the APA program, the ATO is actively working on refining cycle times. However, there’s a noticeable disconnect between ATO and taxpayer expectations. The panel of experts noted that inquiries during the APA process should aim to validate facts, and not resemble an audit.
Financial services
During the financing panel, recent developments in the area were discussed:- Arm’s length debt precedence: Recent proposed legislative amendments emphasise the continued importance of transfer pricing considerations in the thin capitalisation regime. Under proposed legislation, the allowable amount of debt will be a subject of transfer pricing analysis and provisions first, before the thin capitalisation provisions will apply.
- APA prospects amid complexity: Intragroup financing APAs are not discounted (and are even encouraged) by the ATO, yet intricacies persist. The stability of the financial environment and extended negotiation timelines pose challenges to implementing an APA in the context of financial transactions.
- Implicit support position: Debate remains as to the relevance of implicit support, with panel members evaluating the level of importance this concept holds when analysing intragroup financing arrangements.
- ATO is paving the way in financing: Unity prevailed among the panellists that the ATO is one of the most sophisticated tax authorities in financing. With an unwavering focus, exercise caution.
Intangible Assets
During the intangible assets panel, the recent developments in the area were discussed:- Identifying intangible assets: Discussions relating to intangible property focused primarily on the challenges faced in identifying intangible assets within the business. Notably, panellists discussed the notion that in a dynamic business the intangible related transactions are sometimes implemented without realising the consequences.
- Importance of contemporaneous evidence: The panellists unanimously agreed that contemporaneous evidence, including documents used by the business to make commercial decisions, as well as transfer pricing analysis and documentation are incredibly valuable.
- Importance of “why”: When dealing with intangibles, the importance of “why” and “the business story” cannot be underestimated.
- Blockchain and artificial intelligence: Increasing use of emerging technological developments such as artificial intelligence and blockchain technology are expected to raise several transfer pricing issues relating to intangible assets.
The overarching message from day two was the importance of proactive management of transfer pricing risk, and that tax risk must be balanced and should preclude disputes from emerging.
Disputes in this uncertain area are very likely, and as taxpayers navigate dispute resolution, they should remember the multifaceted considerations that should shape their approach. Whether the goal is to resolve historical positions or to secure certainty for future arrangements through initiatives like the APA program, consideration should be given to the jurisdictions involved and the potential for double taxation. Careful consideration of these will empower taxpayers to tread confidently, ensuring compliance and strategic success in a complex and interconnected global tax landscape.
Jonathon Lee
Zara Ritchie
BDO in Australia