The ATO flagged that it will target instances of non-arm’s length pricing between related entities, as it is these transactions that enable profits to be moved between tax jurisdictions. Businesses that do not price their arrangements at a commercial arm’s length rate will be subject to ATO scrutiny.
While the program is not limited to any particular types of cross-border transactions, the ATO is particularly focussed on restructures involving the movement of assets and intangibles offshore, and the formation of marketing hubs in low tax jurisdictions which charge the Australian side of the business for the performance of services. The ATO considers that these transactions create little wealth for the business independent of the tax savings.
It is believed that the ATO will scrutinise restructures that occurred over the past few years, including more recent restructures when assets were undervalued as a result of the global financial crisis. Businesses identified as presenting a risk will face questioning from the ATO and may have their tax affairs audited. It is understood that audit activity will be directed towards the treatment of transactions under the Australian transfer pricing and capital gains tax provisions.
Another significant area of focus is cross-border funding arrangements involving inter-company loans between related entities. The ATO considers that such arrangements can give rise to multiple deductions in the form of interest deductions and capital allowance deductions depending on the use made of the borrowed funds. In addition to reducing tax payable in Australia, the ATO considers that these arrangements can generate substantial interest income for related offshore lenders.
It is understood that the ATO will be sending out letters to businesses in the coming months requesting detailed information in relation to their cross-border transactions.
Who does this affect? All Australian businesses with cross-border arrangements and all foreign residents with related entities in Australia.
What do you need to do? Review your cross-border arrangements and identify any areas that could be subject to ATO scrutiny. We can assist.