Encouraged by its recent win in the landmark Chevron court case, the Australian Taxation Office (ATO) has today released new compliance guidelines targeting intragroup loans and other financial arrangements of multinational companies.
This is an important development for the ATO, as it expects to raise significant tax revenue as a result, and it also means compliance costs will increase for taxpayers.
The guidelines introduce a self-assessment framework prescribed by the ATO to be used by taxpayers for the purposes of determining where their financing arrangements sit in terms of their level of perceived risk. The document sets out the ATO’s view on what is “reasonable” in terms of the interest rate multinational companies charge their subsidiaries (and vice versa) based on particular circumstances of the arrangement.
This ATO’s view is reflected in certain metrics (and quantitative and qualitative indicators prescribed for them). Those metrics are to be used by taxpayers for the purposes of their risk self-assessment. As a result of the risk self-assessment, taxpayers will determine their risk level referred to as a risk “zone” in the document.
The ATO has designed a colour-coded risk scale which includes six “zones” that reflect the degree of implied risk, with the red being the highest risk zone. For example, the White Zone applies to taxpayer’s arrangements which have already been reviewed by the ATO or a court, and no further review needs to be conducted.
The Green Zone is the ‘safe’ area where taxpayers probably want to be. The ATO will treat arrangements that fall in this zone as being at lower risk and will generally not apply compliance resources to these arrangements, minimising taxpayer’s compliance costs and providing practical certainty for the arrangement.
Finally, the Red Zone almost certainly means a review and audit, ineligibility for Advanced Pricing Agreements with the ATO, practical difficulties for dispute resolutions via settlement, and increased prospects for litigation. The ATO expects that dozens of companies fall into the highest risk “red zone”. Overall the ATO is looking to collects hundreds of millions of dollars in tax revenue as a result.
Although the self-assessment is not mandatory for taxpayers, some might be asked by the ATO to disclose whether they have self-assessed the risk rating of their related party financing arrangement. The results of self-assessment will be used by the ATO for the purposes of reviewing and assessing risks associated with related party financing arrangements. This enables the ATO to prioritise its compliance resources to deal with party financing arrangements which are assessed as having the highest risk of obtaining a transfer pricing benefit.
Taxpayers who disclose that such an assessment was not performed, or don’t reveal the results of their self-assessment, will increase the likelihood of being on the ATO’s radar. The assessment is designed to be applied separately to each financing arrangement. As a result, taxpayers with a large number of arrangements will be impacted by more compliance measures and costs.
Senior Tax Partner at Crowe Horwath Sam Neale, says: “Although the document is only a draft at this stage, it is likely that it will be finalised in some form, perhaps with a little (if any) change. Once in effect, the new guidelines may create extra compliance burden to our clients who are involved in intragroup cross-border financing transactions. Additionally, some taxpayers will be hit hard as a result if their risk zones happen to range from yellow to red. We encourage our clients and other taxpayers urgently review their arrangement and consider amending or unwinding them if required.”
Should you have any questions on how the new guidelines may impact you, please don’t hesitate to contact our Tax Advisory team on 02 9619 1654.
Written by Alexey Belousov, Manager – Tax Advisory and Transfer Pricing
More information on the new compliance guidelines can be found on the ATO website
You can read more on the Chevron court case here.