Cross-border transfers get more complex

Money moves ... Any company that’s contemplating a business restructure, such as moving something offshore, might be hit by new transfer pricing laws. Photo: Reuters

Small to medium enterprises involved in cross-border transactions may be hit harshly by new “transfer pricing” laws ushered in by the federal government.

While much media attention has focused on the impact the new laws will have on companies including Google, GE, Chevron and BHP Billiton, it’s the SMEs that often lack resources to fight the Australian Taxation Office if it picks a bone with them.

Transfer pricing basically allows companies to shift money between certain tax jurisdictions to avoid paying tax twice on the same amount. Under the new laws, which passed parliament in late August, the aim, according to Assistant Treasurer David Bradbury, is to make sure that “multinational companies are not able to avoid paying their fair share of tax by shifting their profits offshore”.

While the government and the ATO deny this is a revenue-raising exercise, the laws were introduced following the ATO losing a number of high-level court cases and recently a treasury official told a Senate committee that arguments over transfer pricing put $1.9 billion in revenue in dispute.

Officials have not put a number on how many people will be affected but the Tax Institute estimates that at least 12,000 individuals and companies use cross-border transfers of at least $1 million could be hit.

Aside from the debate about whether this in an unfair grab for more revenue, the retrospective nature of the laws is causing much angst. The changes apply to income years starting on or after July 1, 2004, leaving the potential for the Tax Office to open up a number of old cases.

The ATO second commissioner Bruce Quigley has said the ATO won’t reopen settled cases but tax experts and industry groups are calling for written assurance. They say the laws grant Tax Commissioner Michael D’Ascenzo broad powers to do as he wants.

PwC transfer pricing expert Peter Calleja says there needs to be clarification. “Representatives from the ATO can make comments . . . but the black letter of law is what is interpreted by the courts and will be what drives the commissioner’s powers,” he says.

There’s a further problem. The law is complex and as a result, Ernst & Young transfer pricing leader Paul Balkus believes there will be a much more subjective application.

“The ATO says, ‘We won’t use that power inappropriately. We won’t willy-nilly re-characterise what people have done’. The worry, from some people, is, that they have heard this before.”

Balkus says global businesses such as technology companies and financial institutions potentially are at risk: “Anybody with cross-border financial arrangements, particularly those that have relatively high interest rates that have a significant impact on financial performance. In the case of technology companies, those with low profits and losses are of concern [to the regulator].”

More broadly, any company that’s contemplating a business restructure, such as moving something offshore, might also be hit.

“Say you’ve got an SME that wants to scale back their operations further and move some of it offshore,” says Balkus. “This legislation will say, ‘Tell me why you’re doing this’. What’s the rationale. The business will say, ‘I want to be more efficient and productive’. But the ATO may say, ‘Well if you’re going to change those things, just be careful that you consider it in the context of the new legislation’. That’s where that subjectivity comes in.”

The Institute of Chartered Accountants had wanted SME taxpayers “completely carved out of the transfer pricing rule” but that hasn’t been accepted by the government.

The institute’s tax counsel, Paul Stacey, says the new laws will bring an additional cost to businesses that deal with related businesses cross border. He says that besides engaging the services of a good accountant, SMEs will have to ensure there’s proper documentation surrounding all transactions (see story, “SMEs – what to watch out for”).

The Inspector-General of Taxation Ali Noroozi has already identified transfer pricing as one of the programs he will focus attention on in the coming year.

“If the ATO’s subjectivity leads to inappropriate outcomes on a systematic basis, then that could provide a basis for referral to the inspector-general or a further law change,” Stacey says.

CPA Australia’s head of business and investment policy, Paul Drum, who is also concerned about the onerous burden that will be placed on SMEs, says it has already been flagged as a “priority matter” for Noroozi to look into.

“The law is inherently complex, subjective and highly specialised,” Drum says.

“Moreover, taxpayers are required to source detailed economic data on competitive behaviour, which is not generally publicly available. For example, taxpayers whose international related party transactions exceed $2 million must now review and apply a 75-page highly technical instruction kit to complete a 12-page schedule which unnecessarily ratchets up compliance costs.”

Drum says there’s still many unanswered questions about how the Tax Commissioner will apply the new laws. “Are there specific cases he’s after?,” Drum asks. “Does he have filing cabinets full of cases where there’s been inter-group transactions? It’s quite murky now.”

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