Avoid Audits in Australia—XBS Reveals How!
There are plenty of things to fear in Australia: There are killer sharks (three species!); venomous snakes (100 species!); and poisonous jellyfish (we don’t know how many species!). But for transfer pricing executives, the scariest thing in Australia is the Australian Taxation Office. One of the most sophisticated and aggressive tax agencies in the world, the A.T.O. has never been shy about its efforts to keep corporate tax dollars in Aussieland. It was one of the earliest tax authorities to put multinational enterprises on notice with the early adoption of OECD Guidelines and the BEPS initiative, including country-by-country reporting. And let’s not forget about the 2016 introduction of the Tax Avoidance Taskforce, a group solely dedicated to scrutinizing the tax practices of MNEs, as well as large and private companies. Now infusing the taskforce with even more resources, the A.T.O. has become blatantly outspoken (rude, if you ask us) about the fact that investigating the transfer pricing practices of MNEs is one of its favorite pastimes—ahem—we mean, highest priorities.
But don’t break out the corporate checkbook just yet. If you’re a little proactive and a lot strategic, there are ways to stay on the A.T.O.’s good side. Here’s a start.
Wow them with your transfer pricing documentation: Sure, the A.T.O. doesn’t require the submission of transfer pricing documentation, but if you go through the painstaking process of preparing transfer pricing reports plus the OECD’s three-tiered defense—including, of course, the A.T.O.’s unique, everything-but-the-kitchen-sink local file, which we know with its high-level business descriptions, intercompany agreements, and financial details is a big ask. Still, given the reward is that you might avoid—or lessen—penalties and adjustments (not to mention, legal fees, exhaustive negotiations, and middle-of-the-night video chats—the time-change alone is exhausting!), it’s worth an earnest effort.
Keep up with Australia’s Practical Compliance Guidelines (PCGs): Hey, we know there are other things you’d rather be reading (your old phonebook, a pile of mortgage contracts, an iPhone App Store disclaimer), and granted, the PCGs can seem as long as the Great Barrier Reef. But there’s a reason that roughly 10 times a year, the A.T.O. puts in the effort. The PCGs take the mystery out of compliance and put you in the tax-behavior driver’s seat. “You’re at risk for our steep diverted profits tax if you do this.” “We want inbound distributors to do that.” Heed the advice, or at the very least, consider yourself warned.
Speak the language: Just because Australia is a member of the OECD doesn’t mean it can’t exercise a few liberties. Take the OECD’s nine steps to a solid transfer pricing narrative—the A.T.O. wrapped these pointers up in a five key-question framework. Sure, it’s the same nonsense; but the A.T.O. says it differently—and therefore, so should you. Words like “actual conditions,” “restructuring provisions,” and “arm’s length conditions,” aren’t exactly taking the rest of the transfer pricing world by storm. But a document full of local jargon makes the overall package more local, which you gotta admit never hurts, Mate.
Know your risk: How well do you know your tax position? If your answer falls somewhere along the lines of “kinda, sorta,” it’s time to get a handle on things. Fortunately, the A.T.O. makes it easy. Commissioner Jeremy Hirschhorn has been terribly vocal about the industries he’s targeting (Big Pharma? Big Tech? Big Risk.). IP transfers, offshore marketing hubs, and intragroup financing, you’re on his list, too. And if you are dealing with financial transactions, be sure to assess your risk in the A.T.O.’s color-coded system–courtesy of those Practical Compliance Guidelines you hate reading. Green is low-risk; red is high. Of course, knowing isn’t enough. To avoid the tax authority’s wrath, you’ll need to man-up, make changes, and go green.
Leave a little extra something in Australia: Sure, you’ve practiced good behavior—spent ridiculous amounts of time researching local comparables (should have used Fiona), bullet-proofing your documentation, and creating “arguable positions” as solid as the limestone formations in Nambung National Park. You even went so far as to negotiate an advanced pricing agreement. Well, guess what? Even given those efforts, if year after year, your Australian profits coincidentally turn up on the low side of your profit range, the A.T.O. will launch an investigation faster than you can say, “slip another shrimp on the barbie.” Our advice? Make your own strategic adjustment—and save the A.T.O. the trouble.
Want to learn more about transfer pricing in Australia? Check out The Fiona Show, Episode 25: The A.T.O: The Aggressive Taxation Office.