The pharmaceutical industry is strategically significant to the Australian economy and tax base. Its size, with annual sales of approximately $42 billion, and the diverse nature of companies operating in it make it an important area of focus for the ATO.
As a result, we have a team of senior officers reviewing the tax performance and transfer pricing practices of the industry. This review seeks to ensure the pharmaceuticals sector is meeting their tax obligations under Australian law.
We are also assessing a range of domestic and international tax risks associated with related party financing, thin capitalisation, intellectual property migration, consolidation, business restructures and research and development.
Review of transfer pricing practices
We are conducting a broad review of transfer pricing practices of Australian-based multinational subsidiaries in the industry. This is being achieved through a series of reviews and audits, as well as cooperative compliance approaches through advanced pricing arrangements.
Of particular concern to us are non-arm's length conditions operating between entities in connection with their cross-border commercial and financial relations, resulting in the amount brought to tax in Australia not reflecting the contribution made by the Australian operations through functions performed, assets used and risks assumed. That is, the non-arm's length conditions don't reflect the economic contribution and value creation of Australian activities.
What we are doing
We are conducting the reviews to gain a detailed understanding of the pharmaceuticals industry and ensure the industry pays the right amount of tax.
We continue to consult widely in our review of industry practices. This includes regular meetings with relevant government departments, advisory firms, industry associations, contract research organisations, industry experts and overseas tax administrations.
What you should do
In order to reduce exposure to future compliance activity, we encourage you to:
- review your business structures and transfer pricing practices
- seek certainty from us through our Advance Pricing Arrangement program, see PS LA 2015/4 for further details
- seek independent professional advice or discuss your situation with us by emailing Grant.Leader@ato.gov.au or Ernest.Lui@ato.gov.au