On 16 May 2017, the Australian Tax Office released a draft Practical Compliance Guideline PCG 2017/D4 (Guidelines) which sets out an arithmetical approach to assess the transfer pricing risks associated with international related party loans.
The new Guidelines, which came into effect on 1 July 2017, have implications for existing and newly created financing arrangements, structures and functions.
The amount of interest you can claim or include in your income can be adjusted under Australia transfer pricing rules. In general, if the interest amount is different or the loan is structured differently from how arm’s length parties would transact, a transfer pricing adjustment risk arises.
In recent landmark Federal Court case, part of the interest paid by Chevron Australia Holdings Pty Ltd (Chevron) to its US subsidiary was denied as a deduction. The resulting primary tax and associated penalty and interest were very substantial.
To read our article on the case, please click here.
Based on the ATO stated assessment criteria, it appears to us that many loans will fall into the red (very high risk) category.
The ATO stated approach for the ‘red’ category is:
most likely to commence reviews as a matter of priority or move directly to an audit
use formal information gathering powers
increased possibility of litigation
Regardless of the risk zone, all taxpayers that have transactions involving cross-border related party loans (Loans) should ensure that legal agreements evidencing terms and conditions of the Loans are prepared.
Introducing CTS REAL
CTS REAL is a transfer pricing risk evaluator developed by ShineWing Australia specifically for multinational companies.
CTS REAL is one of several products available via ShineWing Australia’s Complete Tax Solutions (CTS) software.
Using CTS REAL our Tax experts will perform a health check on your overseas related loans to:
assess the transfer pricing risks
understand the expected ATO approach
identify ways to mitigate risk where required.
If you would like to perform a risk assessment of your material international related party loans, please contact Daren Yeoh on +61 3 8635 1800 or at firstname.lastname@example.org or your ShineWing Australia relationship partner.
For other CTS software solutions, visit www.completetaxsolutions.com.au