Last year the Australian Taxation Office (ATO) lost a transfer-pricing case it brought against French chemical multinational SNF. The ATO argued that SNF Australia was not paying an “arm’s length price” to its parent, SNF France, for the supply of chemicals; that is, it was paying too much, thereby turning SNF Australia into a loss-making subsidiary without any local tax obligations.
As is usual in transfer-pricing cases, SNF had provided evidence of comparable prices paid elsewhere for chemicals to show that it was paying a market price. The ATO argued, however, that the circumstances surrounding these prices were different, so they were not truly comparable. But this argument was rejected by the Federal Court, which said accepting them would set too high a bar of proof for companies in transfer-pricing cases.
“I’m not sure that [the ATO] is always well placed to see into business decisions that people make,” says Frank Drenth, executive director of theCorporate Tax Association. “With the SNF case, the Tax Office either failed to spot the facts or if they saw them they decided they weren’t relevant.”
Drenth says the ATO used the loss to argue to the federal government that tax revenue was under threat and to successfully lobby for a change in transfer-pricing laws: “They’re always in a position where it’s ‘heads we win, tails you lose’; if they lose too many cases they just go to the government to change the law by making all sorts of threats by perhaps not being able to collect the right amount of tax.”
Under current transfer-pricing rules, the ATO assesses whether a company has paid an arm’s length price – in essence, a true commercial price – for goods or services to a related entity in another country.
The proposed new laws adopt the Organisation for Economic Co-operation and Development (OECD) transfer-pricing guidelines, which give more precedence to determining whether a local subsidiary has made a fair share of the global company’s profits. Drenth says he is concerned that the ATO will take the OECD guidelines “as a licence to apply profits-based methods in every case if they think it will give them a better outcome, and that’s not what the guidelines say”.
In relation to the creation of IP, Walpole and Riedel found a general consensus that tax credits for research and development (R&D) were beneficial to business. But many companies felt that R&D tax credits missed the mark because they focused too much on innovation – or blue sky research – over the applied research that was most useful to business. There were concerns that the complexity of R&D tax credits had spawned a whole industry of consultants who would assist in collecting the credits in exchange for a contingency fee.
“Some respondents felt that on occasion the claiming of R&D tax credits involved describing what was being done already in such a way as to benefit from the credit,” the researchers note.
