Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (101 of 2013)

Schedule 2   Modernisation of transfer pricing rules

Part 1   Main amendments

Income Tax Assessment Act 1997

2   At the end of Division 815

Add:

Subdivision 815-B - Arm's length principle for cross-border conditions between entities

Guide to Subdivision 815-B

815-101 What this Subdivision is about

This Subdivision applies if an entity would otherwise get a tax advantage in Australia from cross-border conditions that are inconsistent with the internationally accepted arm's length principle.

The entity is treated for income tax and withholding tax purposes as if arm's length conditions had operated.

Table of sections

Operative provisions

815-105 Object

815-110 Operation of Subdivision

815-115 Substitution of arm's length conditions

815-120 When an entity gets a transfer pricing benefit

815-125 Meaning of arm's length conditions

815-130 Relevance of actual commercial or financial relations

815-135 Guidance

815-140 Modification for thin capitalisation

815-145 Consequential adjustments

815-150 Amendment of assessments

Operative provisions

815-105 Object

(1) The object of this Subdivision is to ensure that the amount brought to tax in Australia from cross-border conditions between entities is not less than it would be if those conditions reflected:

(a) the arm's length contribution made by Australian operations through functions performed, assets used and risks assumed; and

(b) the conditions that might be expected to operate between entities dealing at *arm's length.

(2) The Subdivision does this by specifying that, where an entity would otherwise get a tax advantage from actual conditions that differ from *arm's length conditions, the arm's length conditions are taken to operate for income tax and withholding tax purposes.

815-110 Operation of Subdivision

(1) Nothing in the provisions of this Act other than this Subdivision limits the operation of this Subdivision.

(2) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to reduce, or further reduce, *debt deductions of an entity.

815-115 Substitution of arm's length conditions

(1) For the purposes covered by subsection (2), if an entity gets a *transfer pricing benefit from conditions that operate between the entity and another entity in connection with their commercial or financial relations:

(a) those conditions are taken not to operate; and

(b) instead, the *arm's length conditions are taken to operate.

Note 1: The conditions that operate include, but are not limited to, such things as price, gross margin, net profit, and the division of profit between the entities.

Note 2: There are special rules about documentation that affect when an entity has a reasonably arguable position about the application (or non-application) of this Subdivision: see Subdivision 284-E in Schedule 1 to the Taxation Administration Act 1953.

(2) The purposes covered by this subsection are:

(a) if the *transfer pricing benefit arises under subparagraph 815-120(1)(c)(i) - working out the amount (if any) of the entity's taxable income for the income year; and

(b) if the transfer pricing benefit arises under subparagraph 815-120(1)(c)(ii) - working out the amount (if any) of the entity's loss of a particular *sort for the income year; and

(c) if the transfer pricing benefit arises under subparagraph 815-120(1)(c)(iii) - working out the amount (if any) of the entity's *tax offsets for the income year; and

(d) if the transfer pricing benefit arises under subparagraph 815-120(1)(c)(iv) - working out the amount (if any) of *withholding tax payable by the entity in respect of interest or royalties.

815-120 When an entity gets a transfer pricing benefit

(1) An entity gets a transfer pricing benefit from conditions that operate between the entity and another entity in connection with their commercial or financial relations if:

(a) those conditions (the actual conditions ) differ from the *arm's length conditions; and

(b) the actual conditions satisfy the cross-border test in subsection (3) for the entity; and

(c) had the arm's length conditions operated, instead of the actual conditions, one or more of the following would, apart from this Subdivision, apply:

(i) the amount of the entity's taxable income for an income year would be greater;

(ii) the amount of the entity's loss of a particular *sort for an income year would be less;

(iii) the amount of the entity's *tax offsets for an income year would be less;

(iv) an amount of *withholding tax payable in respect of interest or royalties by the entity would be greater.

Absence of condition

(2) For the purposes of subsection (1), there is taken to be a difference between the actual conditions and the *arm's length conditions if:

(a) an actual condition exists that is not one of the arm's length conditions; or

(b) a condition does not exist in the actual conditions but is one of the arm's length conditions.

Cross-border test

(3) Conditions that operate between an entity and another entity in connection with their commercial or financial relations satisfy the cross-border test if:

(a) the conditions meet the overseas requirement in the following table for either or both of the entities; or

(b) the conditions operate in connection with a *business that the entity carries on in an *area covered by an international tax sharing treaty.

(4) For the purposes of the table in subsection (3), treat any entity that is an Australian resident as not being an Australian resident if:

(a) the entity is also a resident in a country that has entered into an *international tax agreement with Australia containing a *residence article; and

(b) under that residence article, the entity is taken, for the purposes of the agreement, to be a resident only of that other country.

Nil amounts

(5) For the purposes of this section and section 815-145:

(a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and

(b) treat an entity that has no loss of a particular *sort for an income year as having a loss of that sort for the year of a nil amount; and

(c) treat an entity that has no *tax offsets for an income year as having tax offsets for the year of a nil amount.

Meaning of residence article

(6) A residence article is:

(a) Article 4 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953); or

(b) a corresponding provision of another *international tax agreement.

815-125 Meaning of arm's length conditions

(1) The arm's length conditions , in relation to conditions that operate between an entity and another entity, are the conditions that might be expected to operate between independent entities dealing wholly independently with one another in comparable circumstances.

Most appropriate and reliable method to be used

(2) In identifying the *arm's length conditions, use the method, or the combination of methods, that is the most appropriate and reliable, having regard to all relevant factors, including the following:

(a) the respective strengths and weaknesses of the possible methods in their application to the actual conditions;

(b) the circumstances, including the functions performed, assets used and risks borne by the entities;

(c) the availability of reliable information required to apply a particular method;

(d) the degree of comparability between the actual circumstances and the comparable circumstances, including the reliability of any adjustments to eliminate the effect of material differences between those circumstances.

Note: The possible methods include the methods set out in the documents mentioned in section 815-135 (about relevant guidance material).

Comparability of circumstances

(3) In identifying comparable circumstances for the purpose of this section, regard must be had to all relevant factors, including the following:

(a) the functions performed, assets used and risks borne by the entities;

(b) the characteristics of any property or services transferred;

(c) the terms of any relevant contracts between the entities;

(d) the economic circumstances;

(e) the business strategies of the entities.

(4) For the purposes of this section, circumstances are comparable to actual circumstances if, to the extent (if any) that the circumstances differ from the actual circumstances:

(a) the difference does not materially affect a condition that is relevant to the method; or

(b) a reasonably accurate adjustment can be made to eliminate the effect of the difference on a condition that is relevant to the method.

815-130 Relevance of actual commercial or financial relations

Basic rule

(1) The identification of the *arm's length conditions must:

(a) be based on the commercial or financial relations in connection with which the actual conditions operate; and

(b) have regard to both the form and substance of those relations.

Exceptions

(2) Despite paragraph (1)(b), disregard the form of the actual commercial or financial relations to the extent (if any) that it is inconsistent with the substance of those relations.

(3) Despite subsection (1), if:

(a) independent entities dealing wholly independently with one another in comparable circumstances would not have entered into the actual commercial or financial relations; and

(b) independent entities dealing wholly independently with one another in comparable circumstances would have entered into other commercial or financial relations; and

(c) those other commercial or financial relations differ in substance from the actual commercial or financial relations;

the identification of the *arm's length conditions must be based on those other commercial or financial relations.

(4) Despite subsection (1), if independent entities dealing wholly independently with one another in comparable circumstances would not have entered into commercial or financial relations, the identification of the *arm's length conditions is to be based on that absence of commercial or financial relations.

(5) Subsections 815-125(3) and (4) (about comparability of circumstances) apply for the purposes of this section.

815-135 Guidance

(1) For the purpose of determining the effect this Subdivision has in relation to an entity, identify *arm's length conditions so as best to achieve consistency with the documents covered by this section.

(2) The documents covered by this section are as follows:

(a) the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010;

(b) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph.

(3) However, the document mentioned in paragraph (2)(a) is not covered by this section if the regulations so prescribe.

(4) Regulations made for the purposes of paragraph (2)(b) or subsection (3) may prescribe different documents or parts of documents for different circumstances.

815-140 Modification for thin capitalisation

(1) This section modifies the way an entity to which section 815-115 applies works out its taxable income, or its loss of a particular *sort, for an income year, if:

(a) Division 820 (about thin capitalisation) applies to the entity for the income year; and

(b) the *arm's length conditions affect costs that are *debt deductions of the entity for the income year.

(2) If working out what those costs would be if the *arm's length conditions had operated involves applying a rate to a *debt interest:

(a) work out the rate as if the arm's length conditions had operated; but

(b) apply the rate to the debt interest the entity actually issued.

Note: Division 820 may apply to reduce or further reduce debt deductions.

815-145 Consequential adjustments

(1) The Commissioner may make a determination under subsection (2) in relation to an entity (the disadvantaged entity ) if:

(a) *arm's length conditions are taken by section 815-115 to operate; and

(b) the Commissioner considers that, if the arm's length conditions, instead of the actual conditions, had operated:

(i) the amount of the disadvantaged entity's taxable income for an income year might have been expected to be less than its actual amount; or

(ii) the amount of the disadvantaged entity's loss of a particular *sort for an income year might have been expected to be greater than its actual amount; or

(iii) the amount of the disadvantaged entity's *tax offsets for an income year might have been expected to be greater than their actual amount; or

(iv) an amount of *withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and

(c) the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly.

(2) For the purpose of adjusting an amount as mentioned in paragraph (1)(c), the Commissioner may make a determination stating the amount that is (and has been at all times) the amount of the disadvantaged entity's:

(a) taxable income for the income year; or

(b) loss of a particular *sort for the income year; or

(c) *tax offsets, or tax offset of a particular kind, for the income year; or

(d) *withholding tax payable in respect of interest or royalties.

(3) The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section.

(4) The Commissioner must give a copy of a determination under this section to the disadvantaged entity.

(5) A failure to comply with subsection (4) does not affect the validity of the determination.

(6) To avoid doubt, the Commissioner may include all or any determinations under this section in relation to a particular entity, including determinations of different kinds, in the same document.

(7) An entity may give the Commissioner a written request to make a determination under this section relating to the entity. The Commissioner must decide whether or not to grant the request, and give the entity notice of the Commissioner's decision.

(8) If the entity is dissatisfied with the Commissioner's decision, the entity may object, in the manner set out in Part IVC of the Taxation Administration Act 1953, against that decision.

815-150 Amendment of assessments

(1) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment of an entity for an income year if:

(a) the amendment is made within 7 years after the day on which the Commissioner gives notice of the assessment to the entity; and

(b) the amendment is made for the purpose of giving effect to section 815-115.

(2) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment at any time for the purpose of giving effect to section 815-145.

Subdivision 815-C - Arm's length principle for permanent establishments

Guide to Subdivision 815-C

815-201 What this Subdivision is about

This Subdivision applies the internationally accepted arm's length principle in the context of permanent establishments (PEs).

Table of sections

Operative provisions

815-205 Object

815-210 Operation of Subdivision

815-215 Substitution of arm's length profits

815-220 When an entity gets a transfer pricing benefit

815-225 Meaning of arm's length profits

815-230 Source rules for certain arm's length profits

815-235 Guidance

815-240 Amendment of assessments

Operative provisions

815-205 Object

The object of this Subdivision is to ensure that the amount brought to tax in Australia by entities operating *permanent establishments is not less than it would be if the permanent establishment were a distinct and separate entity engaged in the same or comparable activities under the same or comparable circumstances, but dealing wholly independently with the other part of the entity.

815-210 Operation of Subdivision

(1) Nothing in the provisions of this Act other than this Subdivision limits the operation of this Subdivision.

(2) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to reduce, or further reduce, *debt deductions of an entity.

(3) For the purposes of this Subdivision, a branch to which subsection 160ZZW(2) of the Income Tax Assessment Act 1936 (about certain Australian branches of foreign banks) applies is taken not to be, and not to have been at any time since its establishment, a *permanent establishment in Australia of the bank.

815-215 Substitution of arm's length profits

(1) For the purposes covered by subsection (2), if an entity gets a *transfer pricing benefit from the attribution of profits to a *PE of the entity:

(a) the amount of profits actually attributed to the PE is taken not to have been so attributed; and

(b) instead, the *arm's length profits are taken to have been attributed to the PE.

Note: There are special rules about documentation that affect when an entity has a reasonably arguable position about the application (or non-application) of this Subdivision: see Subdivision 284-E in Schedule 1 to the Taxation Administration Act 1953.

(2) The purposes covered by this subsection are:

(a) if the *transfer pricing benefit arises under subparagraph 815-220(1)(b)(i) - working out the amount (if any) of the entity's taxable income for the income year; and

(b) if the transfer pricing benefit arises under subparagraph 815-220(1)(b)(ii) - working out the amount (if any) of a loss of a particular *sort for the income year; and

(c) if the transfer pricing benefit arises under subparagraph 815-220(1)(b)(iii) - working out the amount (if any) of the entity's *tax offsets for the income year.

815-220 When an entity gets a transfer pricing benefit

(1) An entity gets a transfer pricing benefit from the attribution of profits to a *PE of the entity if:

(a) the amount of profits (the actual profits ) attributed to the PE differs from the *arm's length profits for the PE; and

(b) had the arm's length profits, instead of the actual profits, been attributed to the PE, one or more of the following would, apart from this Subdivision, apply:

(i) the amount of the entity's taxable income for an income year would be greater;

(ii) the amount of the entity's loss of a particular *sort for an income year would be less;

(iii) the amount of the entity's *tax offsets for an income year would be less.

Nil amounts

(2) For the purposes of this section:

(a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and

(b) treat an entity that has no loss of a particular *sort for an income year as having a loss of that sort for the year of a nil amount; and

(c) treat an entity that has no *tax offsets for an income year as having tax offsets for the year of a nil amount.

815-225 Meaning of arm's length profits

(1) The arm's length profits for a *PE of an entity are worked out by allocating the actual expenditure and income of the entity between the PE and the entity so that the profits attributed to the PE equal the profits the PE might be expected to make if:

(a) the PE were a distinct and separate entity; and

(b) the activities and circumstances of the PE, including the functions performed, assets used and risks borne by the PE, were those of that separate entity; and

(c) the conditions that operated between that separate entity and the entity of which it is a PE were the *arm's length conditions.

(2) The conditions to which the *arm's length conditions mentioned in paragraph (1)(c) relate are the conditions that would operate between the separate entity and the entity of which it is a *PE if the assumptions in paragraphs (1)(a) and (b) were made.

(3) For the purposes of subsection (1):

(a) the actual expenditure of an entity is taken to include losses and outgoings; and

(b) the actual income of an entity is taken to include any amount that is, or is to be, included in the entity's assessable income.

815-230 Source rules for certain arm's length profits

(1) The *arm's length profits for a *PE in Australia are taken, for the purposes of this Act, to be attributable to sources in Australia.

(2) The *arm's length profits for a *PE in an *area covered by an international tax sharing treaty are taken, for the purposes of this Act, to be attributable to sources in that area.

815-235 Guidance

(1) For the purpose of determining the effect this Subdivision has in relation to an entity, work out *arm's length profits, and identify *arm's length conditions, so as best to achieve consistency with:

(a) the documents covered by this section; and

(b) subject to paragraph (a), the documents covered by section 815-135.

(2) The documents covered by this section are as follows:

(a) the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010, to the extent that document extracts the text of Article 7 and its Commentary as they read before 22 July 2010;

(b) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph.

(3) However, the document mentioned in paragraph (2)(a) is not covered by this section if the regulations so prescribe.

(4) A document covered by section 815-135 is to be disregarded for the purposes of this section if the regulations so prescribe.

(5) Regulations made for the purposes of paragraph (2)(b), subsection (3) or subsection (4) may prescribe different documents or parts of documents for different circumstances.

815-240 Amendment of assessments

Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment of an entity for an income year if:

(a) the amendment is made within 7 years after the day on which the Commissioner gives notice of the assessment to the entity; and

(b) the amendment is made for the purpose of giving effect to section 815-215.

Subdivision 815-D - Special rules for trusts and partnerships

Guide to Subdivision 815-D

815-301 What this Subdivision is about

This Subdivision provides special rules about the way Subdivisions 815-B and 815-C apply to trusts and partnerships.

Table of sections

Operative provisions

815-305 Special rule for trusts

815-310 Special rules for partnerships

Operative provisions

815-305 Special rule for trusts

Subdivisions 815-B and 815-C apply in relation to the *net income of a trust in the same way those Subdivisions apply in relation to the taxable income of an entity other than a trust.

815-310 Special rules for partnerships

(1) Subdivisions 815-B and 815-C apply in relation to the *net income of a partnership in the same way those Subdivisions apply in relation to the taxable income of an entity other than a partnership.

(2) Subdivisions 815-B and 815-C apply in relation to a *partnership loss of a partnership in the same way those Subdivisions apply in relation to a *tax loss of an entity other than a partnership.