Grant Thornton flags key trigger points for ATO transfer pricing reviews
The ATO has identified a number of focus areas in relation to transfer pricing that are likely to place businesses at increased risk of review, warns Grant Thornton.
Grant Thornton partner and national head of transfer pricing, Jason Casas, said with transfer pricing issues still firmly “in the ATO’s crosshairs” and the regulator likely intensifying its focus, there are several areas where businesses need to be paying extra attention.
Mr Casas said the ATO has more recently been focused on distributors specifically.
“The ATO has been concerned about distributors ever since transfer pricing became a thing but the ATO more recently has become emboldened,” said Mr Casas.
The ATO recently released some guidance around the risk assessment framework for distributors which breaks up distributors into different sectors.
“This provides a really good guideline as to what the expectations are from the ATO in terms of the levels of profitability that distributors should be receiving in Australia,” he said.
“We know that one of the areas that the ATO is particularly concerned about is around limited risk distributors. Often Australian distributors are set up as limited risk but the onus really is very much on the local company to demonstrate what risks have been limited but also more importantly that that’s reflected in legal agreements, and importantly in actions.”
Grant Thornton partner Christine Cornish said the number one risk that the ATO identifies is with financing transactions.
“This makes sense given it’s such a common transaction. So many of our clients enter into loans or some form of financing arrangement whether they’re starting out, due to an acquisition, whether its ongoing funding to keep their operations going or some other specific situation,” said Ms Cornish.
“This is an area where we’re seeing a lot of court cases come out and where the ATO has been successful with those court cases. Due to these cases, the ATO has a really clear idea of what to look for and what taxpayers should be doing when they’re pricing the interest rate on these financing arrangements.
“Conceptually, it’s really easy for the ATO to get their arms around something like a financing transaction. It’s really easy to see and to be able to figure out what the interest rate is on it and for those reasons, financing is by far the number one area that I see in terms of risk.”
Ms Cornish said the ATO has provided a lot of guidance around what they consider to be risky financing arrangements.
The accounting firm said the ATO will be looking at factors such as whether there are third-party funding arrangements and what the interest is for those, whether there’s a loan agreement in place, whether the related party loan arrangement has appropriate collateral in place, and whether a related party debt is subordinated to any other debt arrangement.
The Tax Office will also be looking to see whether there is the presence of exotic features or instruments to the related party loan.
Ms Cornish said businesses should identify areas that may be relevant to their businesses and self-assess their situation in terms of anything likely to be considered high risk by the ATO.
Grant Thornton director and tax specialist Keith To said that licensing and royalty arrangements are another area of concern and have the highest proportion of low assurance ratings based on the ATO’s review of its compliance programmes.
“The ATO’s main concern is the economic benefit received by the Australian taxpayer who are generally the licensee of the arrangements. The ATO is also concerned by the development, enhancements, maintenance, protection and exploitation (DEMPE) of the intangibles undertaken by the group in Australia and overseas.”
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