Transfer pricing: A complex and pervasive issue

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17 August 2011 | Reynah Tang

Transfer pricing refers to the pricing for tax purposes of supplies of goods and services made between members of a multinational enterprise (MNE). It is an issue that has become more complex and pervasive as a result of the increasing globalisation of business which transcends the borders of nation states; and the desire of those nation states to preserve their tax bases.

Traditionally the field has been dominated by “lore” based on the guidelines of the Organisation for Economic Co-operation and Development (OECD) and the rulings issued by the Australian Taxation Office (ATO) and its foreign counterparts.  However, in more recent times, taxpayers and tax authorities have been more willing to contest transfer pricing issues, leading to development of the “law”. 

In Australia, the decisions to date indicate a preference on the part of the courts and tribunals for applying direct transfer pricing methodologies. That is, determining pricing based on transactions involving the same or similar goods or services rather than indirect methods that focus on the profits that each party to the transaction can reasonably expect for undertaking the functions, risks and assets involved.  This suggests an emerging tension between the two dimensions of transfer pricing, being the administrative (ie. what a taxpayer needs to do to minimise adjustments by the tax authorities) and the legal (ie. the evidence required to discharge a taxpayer’s onus of proof in any dispute), and will require taxpayers to re-examine their approach to transfer pricing, as they have often defaulted to the indirect methods which have previously been accepted by the ATO.

It will also require further consideration of the merits or otherwise of seeking to enter an advance pricing arrangement (APA) with the ATO to mitigate any uncertainty. In this regard, recent changes made by the ATO to its APA program, including a streamlined process for smaller taxpayers, should facilitate wider acceptance.  However, taxpayers will need to balance the up-front costs against the potential for review and audit of their approach to transfer pricing down the track.

One issue that the courts and tribunals in Australia have yet to fully grapple with is the relationship between the domestic transfer pricing rules found in Division 13 of the Income Tax Assessment Act 1936 and the transfer pricing provisions in Australia’s double taxation agreements (DTAs).  In particular, different views have been expressed as to whether Australia may impose tax on transfer pricing adjustments made under a DTA where the domestic transfer pricing rules do not apply. The traditional view amongst the tax advisory community is that DTAs merely allocate taxing powers as between different jurisdictions, but do not permit the imposition of tax in the absence of a power to do so under domestic law.  If DTAs are found to have a broader application, as contended for by the ATO, this may have significant ramifications in relation to issues such as the ATO’s power to re-characterise a transaction. 

Ultimately, every MNE needs to make a decision about its approach to the thorny issue of transfer pricing.  This is likely to be influenced by the MNE’s size, the extent of its foreign related party dealings, its attitudes to risk and desired relationship with the tax authorities in each jurisdiction. 


Reynah Tang was the co-author of the Australian chapter of “Transfer Pricing and Dispute Resolution”, which is available at IBFD - the world’s foremost authority on cross-border taxation.



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Reynah Tang

Partner. Melbourne
+61 3 9672 3535

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