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Transfer Pricing & Anti-Avoidance rules in Australia

Transfer Pricing Rules in AustraliaTransfer Pricing Rules in Australia
Legislation is accompanied by a series of ATO rulings that set out the framework of Australia’s transfer pricing regime. Essentially prices charged between related parties must be broadly in line with those that would be charged between arm’s length parties. Critically, documentation to support the pricing mechanism should be put in place contemporaneously with the transaction. Ideally, the price will be consistent with the comparable uncontrolled pricing between unrelated parties where that can be determined. Otherwise, other methods can be used but they need to be clearly documented.

Anti-Avoidance Provisions in Australia
Australia has a variety of anti-avoidance rules targeted especially at international transactions.
Most particularly these include attribution rules (including controlled foreign company, transferor trust and foreign investment fund rules); thin capitalisation; and transfer pricing rules. There is also a general anti-avoidance provision which, while not specifically directed at international transactions, can also have an impact there.

Thin Capitalisation & other Interest Deductibility Rules
There are complex rules designed to ensure that borrowings to fund cross-border transactions do not exceed three-quarters of the value of Australian located assets. If they do, there is a commensurate reduction in the amount of interest that can be claimed as a deduction against Australian assessable income.

Controlled Foreign Company (CFC) Rules in Australia
Australia has a complex set of CFC rules which essentially mean that passive income and certain related party income of a foreign resident company can be taxed to Australian resident shareholders of that company, if the Australian resident shareholders either alone or together with others control that foreign company. The control can either be real (i.e. owning 50 percent or more of the shares) or de facto. In the case of foreign companies resident in the US, the UK, Canada, France, Germany, Japan or New Zealand this will only arise if the income is specifically designated and not taxed at the normal company tax rate the foreign country.

For companies resident in other foreign jurisdictions, passive and certain related party income can be taxed to the Australian-resident central shareholder unless that income is less than 5 percent of the turnover.
There are also back up rules dealing with Foreign Investment Funds (FIFs) and offshore trusts.
There is currently a proposal to reform this area of law to simplify its application. One aspect of this proposal will be the repeal of the existing FIF rules.

In the 2009-10 budget, it was announced that this area of law would undergo reform to simplify its application. As part of this reform, rules dealing with Foreign Investment Funds (FIFs) were repealed by the Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010.

In February 2011, an exposure draft was released detailing the reform of the CFC rules. The key changes involve rewriting the CFC rules using coherent principles and reducing the length of legislation; better targeting of CFC rules; and the introduction of Foreign Accumulation Fund (FAF) rules.


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Posted by on May 21 2013. Filed under Transfer Pricing & Anti-Avoidance Rules. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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