What attracts our attention
Entities engaged in cross-border non-commercial financing arrangements and related party financing arrangements involving non-arm's length terms or conditions that result in the reduction or elimination of Australian tax (known as a transfer pricing benefit) attract our attention. The transfer pricing rules also apply to cross-border dealings with unrelated parties that are not acting at arm's length.
Non-commercial financing arrangements
We are seeing instances of entities using or entering financing arrangements with international parties on non-commercial terms that cause excessive interest deductions or non-recognition of income in Australia. Such arrangements may not take place between related parties or associates.
Related-party financing arrangements
We are seeing instances of related party funding arrangements where the terms and conditions are non-arm’s length that result in:
- higher interest rates
- excessive debt deductions.
They include inbound financing for investments and projects in the property and construction industry and may create transfer pricing benefits. We review them on the facts and circumstances including:
- the features of the financing arrangements and other factors
- the conduct of the parties
- options realistically available to the entities at the time.
We are encouraging taxpayers to improve their compliance approach by:
- adopting behaviours consistent with keeping their cost of capital as low as possible having regard to the commercial objectives
- paying attention to income tax compliance, including transfer pricing by adopting arm’s length terms and conditions and documenting the substance of their related party financing arrangements
- monitoring funding arrangements including when circumstances change
- ensuring interest withholding tax obligations are met and reported on a timely basis including annual reporting
- paying greater attention to lodgement and disclosures required in the International Dealings Schedule on an annual basis, including those for thin capitalisation
- continue to monitor developments in the law and public advice and guidance to ensure ongoing compliance.
We also focus on outbound funding when on non-arm’s length terms, such as outbound interest free loans.
For information on our compliance approach, see PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.