Minister for Financial Services & Superannuation
14 September 2010 - 1 July 2013
Robust transfer pricing rules for multinationals
The Assistant Treasurer Bill Shorten announced today the Government will reform the transfer pricing rules in the income tax law and Australia's future tax treaties to bring them into line with international best practice, improving the integrity and efficiency of the tax system.
Transfer pricing refers to the prices charged when one part of a multinational group buys or sells products or services from another part of the same group in a different country. The prices charged will impact their level of profits, and therefore the amount of tax they have to pay, in the respective countries.
These rules require multinational firms to price intra-group goods and services to properly reflect the economic contribution of their Australian operations.
A recent court case has highlighted some difficulties for Australia to appropriately assess transfer pricing cases in a way that is consistent with our major trading partners.
"The Government is taking action to ensure multinationals pay the correct amount of tax in Australia on their income and to provide certainty on our transfer pricing laws."
"Multinational groups operating in Australia will not have to deal with transfer pricing rules that haven't kept pace with international practice to inform how they allocate profits around their group," Mr Shorten said.
Modernised transfer pricing rules will reinforce the integrity of the corporate tax base and align our rules more closely to international standards.
"International thinking on transfer pricing has moved on since the current transfer pricing rules were inserted in the income tax law," Mr Shorten said.
"Last year, for example, the OECD substantially updated its Transfer Pricing Guidelines, which are used by governments and business alike. Further, recent court decisions suggest our existing transfer pricing rules may be interpreted in a way that is out-of-kilter with international norms."
"The Government has asked the Treasury to review how the transfer pricing rules can be improved, including but not limited to how to be more in line with international best practice. I urge all interested parties to participate in this consultation process," he added.
Mr Shorten indicated the Government will also address a related area of potential uncertainty: whether tax treaties provide a power to make transfer pricing adjustments independently of the transfer pricing rules in the Income Tax Assessment Act 1936.
"I'm therefore introducing amendments to the law to clarify that transfer pricing rules in our tax treaties operate as an alternative to the rules currently in the domestic law."
The Parliament has indicated the law should operate in this way on a number of occasions, most recently in 2003. Therefore, the clarifications will apply to income years commencing on or after 1 July 2004 in treaty cases.
"While there is a strong argument that tax treaty rules already operate independently of the domestic rules, the Government has decided to put this beyond doubt to promote consistency between Australia's rules and the international approach."
These amendments will also clarify that the treaty rules are to be applied in a manner that promotes consistency with the OECD Guidelines.
I intend to engage the Board of Taxation where appropriate in this review.
A consultation paper is available at www.treasury.gov.au and consultations on the broad principles discussed therein will close on 30 November 2011. It is expected that further comments will be sought during the legislative drafting process.
1 November 2011