An approach to assessing the transfer pricing risk associated with your cross-border related party loans (Loans).
16 May 2017, the ATO released Draft Practical Compliance Guideline PCG 2017/D4 (Guidelines) “ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions”. The Guidelines should be seen as a risk assessment and warning tool but not a definitive guide to pricing Loans.
The Guidelines will apply from 1 July 2017 to existing and newly created financing arrangements, structures and functions.
The Guidelines provide an arithmetical approach for taxpayers to self-assess the risk of their international related party loans (Loans) from a transfer pricing perspective.
Based on this assessment, taxpayers can decide on any necessary risk mitigation strategies.
Taxpayers lodging a Reportable Tax Position Schedule will also need to disclose whether they have undertaken a self-assessment against the Guidelines.
ShineWing Australia is currently developing an assessment product for our clients to assess the risk profile of their Loans based on the Guidelines.
The ATO is commended for being proactive and transparent with their risk assessment methodology with respect to Loans. Having said that, the Guidelines do not provide taxpayers with safe-harbours and the risks associated with not preparing transfer pricing documentation remain.
It also does not mean that the tax authorities of other jurisdictions will hold the same view as that of the ATO.
The ATO’s compliance approach will differ depending on the risk rating of the Loans. The Guidelines outline six risk zones, reflected by a score calculated using the method set out in the accompanying schedule:
Where a Loan is assessed as low risk, the Commissioner will generally only fact check the risk rating and not apply compliance resources to review the arrangement. Conversely, the ATO is most likely to apply their compliance resources and review financing arrangements with a higher risk rating, as a matter of priority.
The table attached in Appendix 1 allows taxpayers to calculate their risk score and the zone in which they fall. The table reflects the ATO expectations that:
the pricing of Loans should reflect the commercial incentive of achieving the lowest possible “all-in” cost for the borrower and
in most cases, the pricing of Loans should align to the costs that could be achieved by the parent of the global group.
Where a taxpayer is in the Yellow zone or above, we recommend that:
the risk be highlighted at the executive or board level
the taxpayer work cooperatively with the ATO to resolve any differences
transfer pricing documentation be prepared to support the arm’s length nature of the arrangement
if necessary, re-evaluate the pricing of existing Loans.
Regardless of the risk zone, all taxpayers having transactions involving Loans should ensure that legal agreements evidencing terms and conditions of the Loans are prepared.
If you have any questions, please contact Daren Yeoh (+61 3 8635 1888), Yang Shi (+61 3 8538 2217) or your ShineWing Australia relationship partner.
T +61 3 8635 1888
E [email protected]
Senior Manager, Transfer Pricing
T +61 3 8538 2217
E [email protected]
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