Taxation Ruling
TR 94/14
Income tax: application of Division 13 of Part III (international profit shifting) - some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied
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contents
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What this Ruling is about | 1 |
Date of Effect | 9 |
Ruling | 10 |
History | 10 |
The role and structure of Division 13 as it applies to separate legal entities | 13 |
The interaction between Division 13 and Australia's Double Taxation Agreements | 18 |
The interaction between subsection 51(1) and Division 13 | 19 |
Outline of the basic concepts | 23 |
The meaning of the term "taxpayer" | 25 |
Supply or acquisition of property | 26 |
The meaning of the term "property" | 30 |
The term "property" includes " services" | 31 |
What is an "agreement" for the purposes of Division 13? | 35 |
Provision of property under an "international agreement" | 49 |
Not dealing at arm's length | 50 |
The meaning of consideration | 62 |
Arm's length consideration | 64 |
The Commissioner may deem an amount to be the arm's length consideration (ss136AD(4)) | 79 |
What methodologies can be used to ascertain an arm's length consideration? | 86 |
Documentation | 101 |
Access to relevant information | 111 |
The Commissioner has a discretion whether or not to apply section 136AD | 114 |
Does a tax avoidance purpose need to exist before Division 13 can apply? | 119 |
Higher tax rates in foreign countries in themselves do not suggest an absence of profit shifting | 122 |
The source of income | 123 |
Transfers of property including trading stock and other goods and services | 126 |
Effects on the value of opening and closing trading stock where an adjustment is made under subsection 136AD(3) | 136 |
Existence of a business purpose is insufficient in itself to avoid Division 13 | 137 |
"Start up", "market penetration" and "obsolete stock" prices | 138 |
The treatment of joint venture arrangements | 142 |
The treatment of barter and countertrade arrangements | 149 |
Explanations | 154 |
History | 154 |
The role and structure of Division 13 as it applies to separate legal entities | 169 |
Division 13 has a broad scope | 179 |
The interaction between Division 13 and Australia's Double Taxation Agreements | 184 |
The interaction between subsection 51(1) and Division 13 | 187 |
Expenditure incurred not for the purpose of producing the assessable income of a taxpayer but for some other purpose | 189 |
Expenditure incurred on behalf of another | 194 |
Expenditure incurred in relation to the gaining or production of exempt income | 197 |
Expenditure otherwise deductible under subsection 51(1) | 200 |
Flowchart of Division 13 - for separate legal entities | 204 |
Outline of the basic concepts | 205 |
The meaning of the term "taxpayer" | 211 |
Supply or acquisition of property | 214 |
The meaning of the term "property" | 223 |
"Property" includes choses in action | 226 |
"Property" includes rights or powers in or over property | 227 |
"Property" includes any right to receive income | 228 |
The term "property" includes" services" | 229 |
"Services" includes benefits | 230 |
"Services" includes privileges | 234 |
"Services" includes the conferring of rights, benefits or privileges for which consideration is payable in the form of a royalty | 235 |
Other things covered by the term "property" | 258 |
What is an "agreement" for the purposes of Division 13? | 239 |
The meaning of agreement | 242 |
The meaning of arrangement | 245 |
The meaning of transaction 248 | 248 |
The meaning of understanding | 250 |
The meaning of scheme | 253 |
Determining the scope of an "agreement" | 257 |
Evidence of a course of conduct | 261 |
Division 13 is "agreement" based and is not limited to considering specific transactions | 264 |
On occasions, companies may be involved in more than one separate and distinct agreement | 266 |
Provision of property under an "international agreement" | 267 |
Not dealing at arm's length | 273 |
The meaning of "any connection between" | 274 |
The meaning of "any other relevant circumstances" | 278 |
The meaning of "not dealing at arm's length with each other" | 284 |
The meaning of consideration | 303 |
Arm's length consideration | 310 |
An arm's length consideration reflects commercial and market realities and the nature of business | 313 |
The Commissioner may deem an amount to be the arm's length consideration (136AD(4)) | 328 |
Division 13 can apply even where independent parties would not enter into such agreements | 341 |
What methodologies can be used to ascertain an arm's length consideration? | 343 |
The CUP method | 353 |
The resale price method | 359 |
The cost plus method | 363 |
Other methods which may be appropriate | 366 |
Documentation | 368 |
The use of contemporaneous documentation | 376 |
Ways companies can reduce the possibility of disputation | 378 |
Advance Pricing Agreements | 386 |
Access to relevant information | 387 |
The Commissioner has a discretion whether or not to apply section 136AD | 390 |
The arm's length consideration determined under section 136AD replaces the actual consideration | 396 |
The time of receipt of the arm's length consideration for the purposes of subsection 136AD(2) | 398 |
Does a tax avoidance purpose need to exist before Division 13 can apply? | 401 |
Higher tax rates in foreign countries in themselves do not suggest an absence of profit shifting | 410 |
The source of income | 412 |
Transfers of property including trading stock and other goods and services | 420 |
Where doubt exists about the financial capacity of an associate to pay for purchases | 430 |
Pricing of 'Baskets of goods' | 432 |
Effects on the value of opening and closing trading stock where an adjustment is made under subsection 136AD(3) | 439 |
Existence of a business purpose is insufficient in itself to avoid Division 13 | 441 |
"Start up", "market penetration" and "obsolete stock" prices | 445 |
Goods leaving Australia | 450 |
Goods entering Australia | 454 |
The treatment of joint venture arrangements | 458 |
The treatment of barter and countertrade arrangements | 468 |
Preamble
This Ruling, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.
[Note: This is a consolidated version of this document. Refer to the Tax Office Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.]
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What this Ruling is about
1. This Ruling is the first in a series of
Rulings/Determinations which will provide guidelines on the operation of
Division 13 of Part III ("Division 13") of the Income Tax
Assessment Act 1936
("the ITAA") and the Associated Enterprises and Business Profits
Articles of Australia's double taxation agreements.
2. This Ruling provides guidelines on:
- ·
- some of the basic concepts underlying the operation of Division
13; and
- ·
- some of the circumstances in which section 136AD of Division 13
will be applied resulting in an arm's length consideration being deemed
in respect of transfers of property under international agreements
between separate legal entities.
3. In broad terms, this Ruling provides guidance to
taxpayers and ATO staff, based on the principles contained within
Division 13, to assist them to price, for tax purposes, their
international dealings, particularly any international dealings between
related parties so that the right amount of Australian income tax and
withholding tax is payable. In providing these guidelines, it is not
being suggested that taxpayers must adopt the principles contained
within Division 13 for any purpose unconnected with the calculation of
their taxation liabilities. Apart from the taxation implications, the
legal rights and obligations of the parties to such international
dealings between non-arm's-length parties will be unaffected.
4. The guidelines provided in this Ruling are relevant to
the supply and acquisition of all forms of "property". They apply
primarily to goods and other tangible assets, and only discuss in broad
terms:
- (a)
- the treatment of service fees, management fees, administration
fees, interest and other expense allocation issues; and
- (b)
- the treatment of transfers of technology, trademarks and other
intangible assets and their royalty income flows,
which will be the subject of more detailed later
Rulings
5. In considering the guidelines provided in this Ruling,
on the application of Division 13, the terms of any relevant double
taxation agreement must also be considered. The interaction of Division
13 and double taxation agreements will be the subject of later Rulings (also see paragraphs 184 - 186)
.
6. It is not the purpose of this Ruling to deal with
matters already explained in TR 92/11 ("Application of the Division 13
transfer pricing provisions to loan arrangements and credit
balances").
7. This Ruling is stated in relation to dealings between
separate legal entities, with a particular focus on dealings between
companies, and does not address dealings between different parts of the
same legal entity (e.g. branch offices, divisions and permanent
establishments of a single legal entity). While the main focus of the
Ruling is in respect of companies, the same principles apply where
individuals, partnerships and trusts engage in dealings with separate
legal entities. Where the word "associate" has been used in examples in
the Ruling, this has been done for ease of explanation and should not be
interpreted as implying that Division 13 cannot be applied unless
companies are associated in some way (see also paragraphs 274 -
283)
.
8. In providing these guidelines, there is no intention of
laying down any conditions to restrict officers in the exercise of any
discretion. Each case must be decided on its
merits.
Date of effect
9. This Ruling sets out the current practice of the
Australian Taxation Office and is generally not concerned with a change
in interpretation. It therefore applies to years commencing both before
and after its date of issue. However, this Ruling does not apply to the
extent that it conflicts with the terms of a settlement of a dispute
agreed to before the date of issue of this Ruling (see paragraphs 21 and
22 of Taxation Ruling TR 92/20).
Ruling
History behind the introduction of Division 13 and adoption
within it of the "arm's length principle"
10. The legislative purpose behind Division 13 is to
ensure Australia can counter "non-arm's length transfer pricing" or
"international profit shifting" arrangements in order to protect the
Australian revenue. It provides a mechanism by which Australia adopts
the internationally accepted "arm's length principle" for taxation
purposes as the basis for ensuring that Australia receives its fair
share of tax by adjusting profits by reference to the conditions which
would have existed between independent parties under comparable
circumstances (paragraphs 154 - 157).
11. Application of the arm's length principle requires
that members of multinational enterprises ("MNEs") be treated as
operating as separate entities rather than as inseparable parts of a
single unified business ("the separate entity approach") (paragraph
158)
.
12. The application of the arm's length principle for the
purposes of Division 13 would have regard to: the economic value added
by the functions performed, the assets and skills used, and the degree
and nature of any business or financial risks involved, in the process
of deriving income; in the same manner as independent parties would. It
should result in prices being charged or paid for the supply or
acquisition of goods and services, or assets of a capital nature, that
would have been charged or paid between unrelated entities for
comparable products under comparable circumstances (paragraphs 159
- 168)
.
The role and structure of Division 13 as it applies to
separate legal entities
13. Division 13 is structured to achieve its legislative
purpose in respect of non-arm's length dealings between separate legal
entities by focussing on basic mechanisms through which Australia may be
deprived of its fair share of tax through international profit shifting,
whether deliberate or not. It covers:
- (a)
- the underpricing of goods, services or other property supplied by
companies;
- (b)
- the overpricing of goods, services and other property acquired by
companies; and
- (c)
- the inappropriate allocation of global, headquarters or other
expenses against Australian income
(paragraphs 169 - 171)
14. Unless specific provisions have been made (as in the
case of offshore banking) dealings between branches of the same entity
or between a branch and its head office are not recognised under
Australian general law or taxation law since under the general law an
entity cannot deal with itself or make a profit out of itself. This is
reflected in the concept of an "international agreement" on which
section 136AD is based and in the specific reference in paragraph (b) of
subsections 136AD(1), (2) and (3) to "two or more parties" (paragraph 172)
.
15. Where international dealings between different parts
of the same entity are concerned, section 136AE of Division 13 allows
for the proper allocation of the appropriate part of the income, profits
and expenses between the Australian and foreign operations (paragraph 173)
.
16. The effect of making adjustments under Division 13 is
that amounts that otherwise would not be derived under section 25 can be
included in assessable income in accordance with the arm's length
principle. Division 13 enables such amounts to be determined as having
an Australian source or a foreign source, as appropriate. It also
enables a determination of the extent to which expenses properly relate
to the derivation of Australian income and the extent to which they
relate to the derivation of foreign income (paragraphs 174 - 176
and 412 - 419)
.
17. The application of Division 13 will result in the
adjustment for taxation purposes of the actual consideration to an arm's
length consideration. The actual terms, conditions and prices agreed
upon between the parties is not affected for any other purpose (paragraphs 174 - 178)
.
The interaction between Division 13 and Australia's Double
Taxation Agreements
18. In considering the application of Division 13, the
terms of any relevant double taxation agreement must be considered. The
Commissioner may apply the provisions of Division 13 and/or the treaty
provisions. In the event of any inconsistency, the treaty provisions
will prevail unless the treaty itself gives precedence to the domestic
law (paragraphs 184 - 186).
The interaction between subsection 51(1) and Division
13
19. It may not be necessary to consider the application
of Division 13 for the purpose of denying or reducing a deduction under
subsection 51(1) of the ITAA, in respect of an acquisition of property
under an international agreement, where the deduction, or the relevant
part of it, is not allowable under subsection 51(1) because it:
- (a)
- was not incurred for the purpose of producing the assessable
income of the taxpayer - but for some other purpose;
- (b)
- is properly regarded as being incurred in producing the income of
another party; or
- (c)
- was incurred in relation to the gaining or production of exempt
income
(paragraphs 187 - 199).
20. Where the operation of section 51 is not clear cut,
consideration would need to be given to whether a determination should
be made under section 136AD:
- (a)
- as an alternative basis upon which to support an adjustment under
subsection 51(1); or
- (b)
- to remedy the effect of profit shifting from Australia resulting
from non-arm's length transfer pricing,
where the preconditions for application of section 136AD have
been met (paragraphs 188 - 203)
.
21. Even where expenditure is not deductible under
subsection 51(1) because it is incurred in deriving exempt income,
Division 13 may still have to be applied to increase the amount of any
exempt income where it would reduce a carry forward loss and where the
preconditions for its application have been satisfied (paragraphs
197
- 199)
.
22. Where expenditure is otherwise deductible under
subsection 51(1), Division 13 can apply to allow an adjustment to be
made to the amount of that expenditure where the conditions for the
application of the Division have been satisfied (paragraphs 200 -
203)
.
Outline of the basic concepts
23. Section 136AD deems the consideration, in respect of
the supply or acquisition of property, to be equal to the arm's length
consideration, for "all purposes of the application of [the ITAA]" in
relation to a taxpayer, if all the following conditions have been
satisfied:
- (a)
- the "taxpayer" has either "supplied or acquired property" under
an "international agreement";
- (b)
- the Commissioner is satisfied that, in respect of "the
agreement", any "two or more of the parties were not dealing with each
other at arm's length" in relation to the supply or acquisition of
property;
- (c)
- the "consideration" in respect of the supply or acquisition of
property was not the "arm's length consideration", or no consideration
was received or receivable; and
- (d)
- the Commissioner determines that the relevant subsection should
apply to the taxpayer in relation to the supply or acquisition of
property.
(paragraphs 204 - 206)
24. Section 136AD of Division 13 may be applied to any
form of cross-border dealing, where the dealing and the relevant
consideration are not at arm's length. This is achieved through the use
of the following terms, expressions and concepts, all of which have been
given extended meanings for the purposes of the Division:
- (a)
- "supply" and "acquire" (paragraphs 214 - 216)
;
- (b)
- "supply of property" and "acquisition of "property" (paragraphs 217 - 222)
;
- (c)
- "property" (paragraphs 223 - 238)
;
- (d)
- "services" (paragraphs 229 - 237)
;
- (e)
- "agreement" (paragraphs 239 - 266)
; and
- (f)
- "international agreement" (paragraphs 267 -
272).
The meaning of "taxpayer" for the purposes of Division
13
25. The scope of Division 13 is subject to the doctrine
of territorial limitation. A "taxpayer" has to be read as a person or
persons:
- (a)
- whose income or profits or gains of a capital nature are relevant
in the context of ascertaining Australian taxation liabilities (e.g.
income tax or withholding tax) or losses; or
- (b)
- who is, or is deemed by law to be, an Australian resident
(including a company) or someone who has sufficient economic connection
with Australia such that the person has derived Australian sourced
income; or
- (c)
- who would have derived income that would have been liable to
Australian tax or relevant to the calculation of carry-forward losses
had the dealings by the person being at arm's length
(paragraphs 211 - 213).
Supply or acquisition of property
26. The word "acquire" in the context of Division 13,
includes an agreement to acquire and covers things not yet in existence
as capable of being acquired (paragraphs 214 - 216)
.
27. The expressions "supply of property" and "acquisition
of property" include:
- (a)
- sales, purchases, transfers and assignments of
property;
- (b)
- leasing, hiring, hire purchase of property;
- (c)
- the supplying or obtaining of services generally;
- (d)
- a gift of property from one company to another or the provision
of services free of charge;
- (e)
- the provision of property to, or the obtaining of property from,
a joint venture;
- (f)
- an exchange of property (including an exchange of property for
services) as part of a barter or countertrade arrangement;
- (g)
- the conferring of any economic or commercial advantage or benefit
by way of credit, loan or guarantee facilities;
- (h)
- any transfer of technology or knowledge of any economic or
commercial advantage between companies;
- (i)
- the granting of exclusive marketing rights in a particular
geographical area in respect of a product or service;
- (j)
- dealings in respect of property which is not yet in existence;
and
- (k)
- an arrangement for a loan in which the terms of the loan are
clearly established, including agreement for the payment of interest,
and in respect of which the parties to the arrangement either fail to
pay or fail to demand payment of the agreed interest
(paragraphs 214 - 219)
28. The supply or acquisition of property "in connection
with an agreement" extends the range of matters to which Division 13
applies and includes back to back deals, side deals or collateral
arrangements, and the indirect supply or acquisition of property through
associates, interposed entities or third parties (paragraph
220)
.
29. In the context of Division 13, there must be a
relevant connection between the supply or acquisition of property and an
"international agreement" must exist. "A taxpayer" has to be either a
supplier or acquirer of property, but "the taxpayer" need not be the
only party to supply or acquire property in connection with the
"agreement". Nor is there any requirement for "the taxpayer" to be a
party to the "agreement" in a formal sense (paragraphs 221 -
222)
.
The meaning of the term "property"
30. In the context of Division 13, the term "property",
when used in conjunction with the terms "supply" and "acquire", means
that the expressions "supply of property" and "acquisition of property"
can refer to both the supply or acquisition of a discrete item of
property and the supply or acquisition of a number of items of property (paragraphs 223 - 228)
.
The term "property" includes "services"
31. The word "benefit" contained in the definition of
"services" encompasses anything that would bestow an economic or
commercial advantage which an independent entity might reasonably be
expected to pay for, or to obtain consideration for supplying. That is,
something that would assist a company's profitability or net worth by
enhancing, assisting or improving the company's income production,
profit making, the quality of its products, or which could result in a
reduction of expenses or otherwise facilitate the operations of the
company. A benefit (in the relevant sense) has to be reasonably capable
of being identified and valued and may be regarded as something of
economic or commercial value which an independent entity might
reasonably expect to pay for, or to obtain consideration for
supplying (paragraphs 229 - 237).
32. The breadth of the terms used in the definition of
"services", means that Division 13 could potentially apply to
arrangements between companies relating to the use of, or the right to
use, any copyright, patent, design or model, plan, secret formula or
process, trade-mark, or the supply or acquisition of scientific,
technical, industrial or commercial knowledge or information. The supply
of commercial knowledge would include the use of marketing skills on
behalf of another entity and information would include the provision of
market or fashion trend information to another entity (paragraphs
229 - 237)
.
33. "Services" includes the provision of insurance cover,
the guarantee of a loan and a commitment to lend money (paragraph
237)
.
34. In the context of Division 13, the term "property"
includes:
- (a)
- trading stock;
- (b)
- work in progress and other business inputs;
- (c)
- futures contracts, hedging agreements and forward sale and
purchase agreements;
- (d)
- cash and foreign exchange;
- (e)
- options, including the property in respect of which the option is
given;
- (f)
- the provision of finance (whether by loan, the provision of
credit or an advance or the purchase of commercial paper), including the
terms of any such provision;
- (g)
- debts, including the factoring and forgiveness of
debts;
- (h)
- financial products, including newly developed and developing
financial products;
- (i)
- leases and licences, including the terms upon which a lease or
licence is made;
- (j)
- hire-purchase agreements, including the terms of any such
agreement;
- (k)
- the transport of any property or personnel;
- (l)
- service, management and administration fees;
- (m)
- the provision of services such as administration, management,
marketing, sales or distribution services by head offices or companies
within a group of companies to other companies within the
group;
- (n)
- intangible assets including their development and use and their
royalty income flows;
- (o)
- gifts of money or plant and equipment;
- (p)
- the manufacturing or processing of goods or materials belonging
to someone else
(paragraphs 223 - 238).
What is an "agreement" for the purposes of Division
13?
35. The term "agreement" is broad enough to include
situations where parties other than those directly involved with the
supply or acquisition of property are somehow involved or can influence
the outcome of the dealings between the parties directly involved (paragraph 239 - 241)
.
36. The word agreement contained within the expression
"agreement" is closest in nature to that of a contract between parties
but is not limited to its strict legal sense in Division 13. It can
include agreements:
- (a)
- that are unilateral, in the sense that one party can provide a
benefit to another without obtaining any consideration;
- (b)
- where one party is acting under dictation; or
- (c)
- which are legally unenforceable
(paragraphs 242 - 244).
37. An arrangement (and therefore an "agreement") would
exist if the facts showed a course of dealing between the parties, even
though no formal agreement had been entered into and no legally
enforceable relationship was intended (paragraphs 245 - 247)
.
38. The word transaction is not limited to a single act
or step but includes a series of acts or steps (paragraphs 248 -
249).
39. The term understanding includes situations where the
relevant parties have a common view regarding the maintenance of a
particular state of affairs or the adoption of a course of conduct -
whether or not the state of affairs or course of conduct has been
unilaterally created or involves some element of mutual obligation (paragraphs 250 - 252)
.
40. The word scheme is used in the neutral sense of a
plan or system in the context of which property is supplied or acquired.
It is not used in the sense of a tax avoidance scheme and does not
require the demonstration of a purpose or object of avoiding Australian
tax, though that may well be the effect of a particular scheme (paragraphs 253 - 255)
.
41. Few, if any, non-arm's length dealings between
companies would be unable to be brought within the operation of Division
13 where independent parties could reasonably have been expected to have
sought greater remuneration or paid a lower cost in those circumstances,
there was evidence of the underpayment of Australian income tax or
withholding tax as a result of those dealings and the other
preconditions for the application of Division 13 have been
satisfied (paragraph 256)
.
42. An "agreement" may in some cases constitute only a
single step, one contract, or one arrangement. In other cases, an
"agreement" may comprise a number of steps, two or more contracts, two
or more arrangements or some combination of these which together form a
broader "agreement" (paragraph 257)
.
43. Where only a part of the "agreement" involves the
supply or acquisition of property, this part will not be viewed in
isolation but in the context of the broader arrangement, understanding
or scheme (paragraphs 258 - 259)
.
44. The provisions of Division 13 can be applied to a
particular transaction forming one part of a broader arrangement,
understanding or scheme or to a scheme within a larger scheme. However,
due consideration would have to be given to the existence of any broader
agreement, taking account of the legislative purpose behind Division 13 (paragraph 260)
.
45. Evidence of a course of conduct or a pattern of
trading between companies may be relied upon as evidence of the
formation of an "agreement" or its existence and its basic terms even
though there may be no evidence to show when, where by whom or in what
particular words such "agreement" was made (paragraphs 261 -
262)
.
46. Where evidence of a course of conduct or a pattern of
trading between companies exists, and that pattern of trading is not
consistent with the arm's length principle and results in the
underpayment of Australian income tax or withholding tax, it could be
expected that Division 13 will be applied where all its preconditions
for application have been satisfied (paragraph 263)
.
47. More than one specific transaction may be covered by
an "agreement" and regard would have to be given to other factors which
would indicate what independent parties dealing at arm's length with
each other might reasonably be expected to have done in comparable
circumstances (paragraphs 264 - 265)
.
48. Where a company is involved in two or more separate
and distinct "agreements", and each "agreement" is entire in itself and
unrelated to any other "agreement", Division 13 would have to be
considered in the context of each or any of these separate and distinct
"agreements" (paragraph 266)
.
Provision of property under an "international
agreement"
49. The existence of an "international agreement" is
essential to the operation of section 136AD. An "international
agreement" can in very broad terms be described as dealings between
separate legal entities involving the supply or acquisition of property
across international borders. The table at paragraph 272 lists all the
basic combinations covered by the concept of an "international
agreement". However, regard must also be had to the possible existence
of "back to back" deals, side deals or other collateral arrangements,
which may involve interposed entities and may have the effect that, in
the context of broader "agreements", onshore dealings may be covered by
the concept, as well as dealings between offshore parties (paragraphs 267 - 272)
.
Not dealing with each other at arm's length
50. In the context of Division 13, the expression "any
connection between" is not dependent upon the existence of control or
share ownership. Without limiting the scope of the expression, it would
include:
- (a)
- a direct or indirect shareholding in one company by another
company;
- (b)
- the common ownership of companies even though there may be no
direct or indirect shareholding between the subsidiaries;
- (c)
- the ability of one company to obtain an interest in another
company through:
- (i)
- an existing option agreement;
- (ii)
- the fact that convertible notes are held;
- (iii)
- the ownership of convertible preference shares;
- (d)
- the existence of common directors;
- (e)
- the existence of common executives; and
- (f)
- involvement in a cartel
(paragraphs 273 - 277) .
51. Without in any way limiting the width of the
expression "any other relevant circumstances," in the context of
Division 13 the expression would include, for example, the existence of:
- (a)
- a market sharing agreement or agreement not to enter a particular
market;
- (b)
- any back to back or collateral arrangements or side deals;
and
- (c)
- an income sharing agreement that does not properly reflect the
contributions of the parties
(paragraphs 278 - 283) .
52. Paragraph (b) of subsections 136AD(1) - (3) focuses
on the type of dealing between the parties rather than merely on the
relationship between them. Hence, the presence or absence of such
matters as those listed in paragraph 50 above will not necessarily be
determinative of whether or not any of the parties to an "agreement"
were dealing at arm's length with each other (paragraphs 277 and
284 - 286)
.
53. It will be relevant to consider whether the outcome
of dealings between the relevant parties is a matter of real bargaining,
in terms of the consideration that passed between them as a consequence
of their dealings, and the overall manner and effect of what the parties
did, for the purposes of determining whether or not they were dealing at
arm's length with each other (paragraphs 284 - 289)
.
54. The use of the concept of "arm's-length
consideration" in Division 13 is modelled on the arm's length principle.
This principle is in turn modelled on notions of comparison and
predication about what independent parties dealing at arm's length
either did or might reasonably be expected to have done in the
taxpayer's circumstances. This necessarily involves consideration be
given to the outcome of the dealing. It is not confined to an
examination of process, though process is also relevant (paragraph
289)
.
55. Real bargaining between related parties could be
expected to be achieved where the conditions in which the bargaining is
undertaken are similar to those that would exist between unrelated
parties dealing at arm's length. The view has been expressed by the OECD
that conditions for arm's length dealings are sometimes fulfilled by
members of company groups where "the members have a considerable amount
of autonomy so that they can and often indeed do bargain with each other
in a manner similar to that of independent entities". We would go
further and add that where such conditions do exist, failure by the
members to exercise that autonomy and operate as separate profit
centres, would be unlikely to lead to a result that is consistent with
the arm's length principle (paragraph 290)
.
56. Relevant factors in determining whether the relevant
parties were dealing at arm's length with each other would include those
matters referred to in paragraphs 291 and 292 (paragraphs 291 -
292).
57. The fact that the parties to an "agreement" are under
common control raises an issue of whether the parties were not dealing
at arm's length with each other. However, other factors such as pricing
and the terms and conditions of the "agreement" may be enough to
overcome this concern, if they show that the "agreement" was concluded
on the basis of arm's length dealing, i.e. on rates available on the
open market to the world at large and the normal terms of trade
available to those parties in the relevant market were adopted. The
Commissioner needs to be satisfied that all aspects of the relevant
agreement can be explained by reference to ordinary commercial dealings
and real bargaining, and that there is nothing that can be explained
only by reference to a special relationship between the parties that
indicates acquiescence or a facade (paragraphs 284 - 297)
.
58. A strong market position may enable one entity to
negotiate from a position of strength, such that the parties with whom
it deals cannot negotiate their desired outcomes. Where this results
from the particular dynamics of the market it does not justify a
conclusion that there was an absence of real bargaining (paragraph
298)
.
59. In order to show that real bargaining occurred in
respect of dealings between related parties, it would be expected that
the parties would have brought into existence during the negotiation
phase the type of documentation independent parties dealing at arm's
length would have used in comparable circumstances (paragraph
299)
.
60. The documentation and information held by taxpayers
needs to be sufficient to enable an effective assessment of compliance
with the arm's length principle (paragraph 299)
.
61. The mere fact that any two or more of the parties to
an agreement are associated or are "connected" will not necessarily be
determinative in concluding that they were not dealing at arm's length
with each other (paragraphs 300 - 302)
.
The meaning of consideration received or receivable, or
given or agreed to be given
62. The word "consideration", in the context of Division
13, should be construed as a reference to anything of value that
actually passes between the parties, or that was agreed to pass as
payment for the supply or acquisition of property (paragraphs 303 -
306)
.
63. In view of the context in which the word
"consideration" appears in Division 13, claims that:
- (a)
- a parent company receives immediate and adequate compensation in
the form of an increase in the value of the shares it holds in a
subsidiary;
- (b)
- a parent company is likely to receive an increased flow of
dividends from a non-resident subsidiary, the likely increase being
adequate compensation; or
- (c)
- a non-resident subsidiary is in the practice of paying dividends
approximately equal to its after tax profits, and consequently, there
has therefore been no profit shifting,
will not be accepted as forming any part of the "consideration
received or receivable" by a parent company for "property" supplied to
the subsidiary (paragraphs 306 - 309)
.
Arm's length consideration
64. The arm's length consideration should be consistent
with the consideration that would arise as a result of real bargaining
between independent parties (paragraphs 310 - 313)
.
65. The incurring of expenditure is not a measure of, or
a substitute for, the arm's length consideration. The quantum of the
expenditure incurred is but one factor (and in some cases a very
important factor) to take into account in ascertaining the arm's length
consideration (paragraph 314)
.
66. Implicit in the concept of the "arm's length
principle" and of the expression "arm's length consideration" used in
Division 13 is the notion that independent parties who were dealing at
arm's length would each compare the options realistically available to
them and seek to maximise the overall value of their respective entities
from the economic resources available to or obtainable by them. In this
regard, all the matters referred to in paragraph 315 would be
relevant. (paragraphs 315 - 316)
.
67. The matters in paragraph 315 are also relevant in
terms of paragraphs 136AA(3)(c) and (d) in determining the consideration
that might reasonably be expected to have been set by independent
parties dealing at arm's length with each other, regardless of the
methodology that is sought to be applied (paragraphs 315 -
316)
.
68. The appropriate arm's length consideration should
reflect commercial and market realities, would have regard to the nature
of competition and the nature of business (ie. what it means to compete
and what it means to carry on business) whereby it would generally be
expected that entities would seek to:
- (a)
- maximise the consideration received in respect of the supply of
property;
- (b)
- minimise the consideration to be given in respect of the
acquisition of property; and
- (c)
- be adequately rewarded for the activities carried out so as to be
commercially viable
(paragraphs 317 - 318) .
69. The generalisation in paragraph 68 needs to be
tempered with a recognition that, for legitimate commercial reasons,
companies may sometimes reduce prices to gain market share or move
surplus stocks or secure reliable long term distribution outlets. In
such cases regard should also be had to paragraphs 139 - 141
below, (paragraphs 317 - 318)
.
70. The ATO accepts that it could not reasonably be
expected that a company would achieve the same level of profit margin in
countries where there is government intervention through pricing
controls or other price regulation mechanisms that are impacting on
company profits as the company would achieve in an unregulated market.
This assumes that there is reliable evidence that the market price would
be higher if such controls or regulatory mechanisms were not in place (paragraph 319)
.
71. The views that members of company groups need only:
- (a)
- cover their variable costs and make some contribution to fixed
costs; or
- (b)
- return a profit, however marginal, from their
activities,
are not accepted. The "arm's length principle" and the expression
"arm's length consideration" are not predicated on the basis of whether
variable costs may or may not have been covered or whether any
particular level of profits has been attained but rather are based on an
objective determination of the consideration that might reasonably be
expected to have arisen had the parties to the dealings been independent
parties dealing at arm's length (paragraph
320).
72. If the way an "agreement" was entered into or was
priced can only be explained by reference to some special relationship
not able to be explained by reference to normal commercial dealings, the
"agreement" will not be consistent with the "arm's length principle" if
the outcome is not an arm's length price (paragraph 321)
.
73. Determining the relevant arm's length consideration
involves a practical weighing of the functions performed or to be
performed, the assets and skills used or available for use, the degree
and nature of risks involved and/or to be rewarded, the business
strategies being pursued and the market and economic context in which
the relevant parties are operating (paragraph 322).
74. The determination of the arm's length consideration
involves an element of judgment and is not a precise science.
Accordingly, taxpayers and ATO auditors need to approach cases with a
degree of flexibility and commonsense, having regard to business and
market realities. There will often be a range of comparable prices and
taxpayers and ATO auditors need to establish the most appropriate point
in the range having regard to the facts and circumstances of the
particular case (paragraph 323)
.
75. The view that because certain arrangements are common
between companies in multinational groups, they should be regarded as
arm's length arrangements, is not accepted. Nor is it accepted that a
particular dealing is on an arm's length basis simply because it is an
arrangement that can only be entered into between related parties. The
fact that arm's length parties would not have entered into similar
arrangements will often confirm the non-arm's length nature of the
dealings between the parties, though highly vertically integrated
industries, transfers and licences of valuable intangibles and dealings
in unique or highly differentiated products require further analysis (paragraph 324)
.
76. Where related parties revise or renegotiate existing
contracts or arrangements, the likely absence of a divergence of
interest between the parties means that close examination will need to
be given to the changed circumstances leading to the revision or
renegotiation in order to be satisfied that the approach taken and
outcome achieved by the related parties is consistent with what arm's
length parties might reasonably be expected to have done in comparable
circumstances (paragraph 325)
.
77. A finding reached for the purposes of paragraph (b)
of subsections 136AD(1) - (3), that any two or more of the parties to an
"agreement" were not dealing at arm's length with each other, will not
necessarily be determinative in concluding that the consideration
received or receivable or given or agreed to be given for the purposes
of paragraph (c) of subsections 136AD(1) - (3) was not an arm's length
consideration (paragraph 326)
.
78. Where it can be concluded that, even though there was
an absence of real bargaining, an arm's length consideration was
received or receivable or given or agreed to be given, as the case may
be, then paragraph (c) of subsections 136AD(1) - (3) will not be
satisfied and section 136AD will have no application. This conclusion
does not apply to transactions like re-invoicing where no economic value
is added and for which independent parties would be prepared to pay (paragraph 327)
.
The Commissioner may deem an amount to be the arm's length
consideration
79. Where for any reason (including an insufficiency of
information available to the Commissioner), it is not possible or not
practicable for the arm's length consideration in respect of the supply
or acquisition of property to be ascertained, subsection 136AD(4) allows
the Commissioner to determine an "amount" - which is then deemed, for
the purposes of section 136AD, to be the arm's length consideration in
respect of the supply or acquisition of property. Where the subsection
is applied, the Commissioner would still need to make the relevant
determination under paragraph (d) of subsections 136AD(1), (2) or (3)
for Division 13 to operate (paragraphs 328 - 334)
.
80. Subsection 136AD(4) may be applied in cases such as
those involving vertically integrated industries where an arm's length
consideration does not exist in respect of the goods, services
(including intangibles) or work in progress transferred. It may also be
applied in cases involving unique or highly differentiated products or
services, although consideration would need to be given to whether
comparable products or services exist; and to the degree of difference
in respect of near comparable products or services to see whether
adjustments could be made to produce a valid comparison (paragraphs
335 - 336)
.
81. Subsection 136AD(4) may be used to deem an "amount"
to be the arm's length consideration where, after careful consideration
of whether comparables are reasonably available, it is concluded that it
would not be administratively practicable to determine the arm's length
consideration (paragraph 337)
.
82. Subsection 136AD(4) is silent as to the manner in
which the relevant "amount" is to be determined. The determination of
the relevant "amount" needs to be approached in a manner which, in all
the circumstances of the case, would lead to a fair result that is as
consistent as practicable with the arm's length principle as
internationally accepted (paragraphs 338 - 340)
.
83. The amount determined by the Commissioner under
subsection 136AD(4) needs to be supported by sufficient relevant
information to demonstrate that an informed and reasonable decision has
been reached in the circumstances of the case (paragraphs 339 -
340)
.
84. Given the purpose, policy and wording of Division 13,
the view is not accepted that section 136AD should not be applied in the
case of dealings between members of company groups where it would not be
possible to arrive at an arm's length consideration because similar
dealings would not occur between unrelated parties (paragraph
341)
.
85. In situations involving dealings between related
parties which may not occur between unrelated parties, the role of the
Division is to consider the underlying economic and commercial reality
of the situation. Regard would be had to the economic functions
performed or to be performed, the assets and skills used or available
for use and the degree and nature of risks involved and/or to be
rewarded in respect of the various parties to the dealing. Some of the
other factors listed in paragraph 315 may also be useful in this regard.
In this way, a reasonable reflex can be obtained of the economic value
of the contribution made by the activities carried on in Australia which
can then provide a basis for comparison with the actual pricing of the
inputs and outputs by the relevant company in its dealings with other
entities (paragraph 342)
.
What methodologies can be used to ascertain an arm's length
consideration?
86. Division 13 does not prescribe any particular
methodology for the purpose of ascertaining an arm's length
consideration. Nor does it prescribe a preference for the order in which
particular arm's length methodologies should be used. The Commissioner
would generally seek to use methods that have been given international
endorsement and to adopt the method that is the most appropriate or best
suited to the circumstances of each particular case (paragraphs 343
- 367)
.
87. In determining the most appropriate method, companies
and ATO auditors should bear in mind that:
- (a)
- the Commissioner is under no obligation to accept the particular
method chosen by companies unless, on an objective analysis, it produces
the most accurate calculation of the arm's length consideration in the
particular case. Companies should be mindful of this and can reduce the
risk of disputation by being able to demonstrate that their choice of
method is the most appropriate for their circumstances (in this regard,
reference should be made to paragraphs 376 - 377 on
documentation);
- (b)
- choosing the most appropriate method would take into account
relevant market and business factors, the functions performed or to be
performed, the assets and skills used or available for use and the
degree and nature of risks involved and/or to be rewarded in respect of
the various parties to the dealing;
- (c)
- a result that is fair, in the sense referred to in Mobil Oil
Australia Pty Ltd v. FC of T
(1963) 113 CLR 475, does not mean the result that produces the most
favourable taxation outcome for the company or the company group of
which it may be a member - or necessarily the result that produces the
highest amount of Australian tax;
- (d)
- a result that is fair must consider the policy and objects
underlying Division 13 and recognise that Australia should not be denied
its fair share of tax based on the economic value it has contributed,
measured by reference to the arm's length principle; and
- (e)
- the most appropriate method will be the one that produces the
highest practicable degree of comparability, recognising though that
there will be unique situations and cases involving valuable intangibles
where it is not practicable to apply methods based on a high degree of
direct comparability
(paragraph 344) .
88. The ATO accepts the comparable price method (CUP),
the resale price method and the cost plus method as acceptable
methodologies for the purposes of determining the arm's length
consideration (or an amount for the purposes of subsection 136AD(4))
under Division 13. The method to be adopted in the circumstances of the
particular case (the most appropriate method) should be the one that
produces the highest degree of comparability (paragraphs 346 -
348).
89. In relation to the CUP method, the word "comparable"
means the "same as, similar to or analogous". Even though identical
dealings do not exist, there may be comparables. Care needs to be taken
to ensure that the comparable chosen is as close as practicable to the
dealings under review (paragraph 353)
.
90. While the CUP method involves close product
similarity, its application also requires a consideration of all other
factors relevant to comparability. For example, a business strategy
based on price competition would be relevant. Similarly, the marketing
of an identical or closely similar product under a brand name could have
a material effect on comparability (paragraph 354)
.
91. It is recognised that in practice it is often
extremely difficult to ascertain an arm's length consideration under the
CUP method. This is particularly true where the property involved is
unique or highly differentiated, intangible property is involved,
services are provided or received, markets are isolated or where, as in
the case of transfers of work in progress in highly vertically
integrated businesses, there is little or no comparability with dealings
of unrelated parties (paragraph 355)
.
92. The ATO considers that the CUP method can still have
application even where there are differences between the dealing being
reviewed and the dealings of the parties considered to be comparable,
provided those differences are capable of quantification on some
reasonable basis and adjustments can be made to produce a valid
comparison. Thus, an adjusted comparable uncontrolled price ("an
adjusted CUP") could be acceptable as the arm's length consideration
against which actual prices can be benchmarked. However, given that an
element of judgment is involved in making adjustments, where the
differences are significant other methods may need to be considered
because such major adjustments may not result in a true comparable (paragraphs 353 - 357)
.
93. In seeking to find an adjusted CUP, regard should be
had to factors which, although not directly measurable (such as the
presence or absence of a tariff, credit terms or delivery terms) are
sufficiently quantifiable to make the choice of the CUP method a more
accurate measure of an arm's length consideration than the result
produced by some other method. Such factors might include:
- (a)
- whether intangibles are included (e.g. patents, copyrights,
trademarks);
- (b)
- geographic market place;
- (c)
- level of market penetration;
- (d)
- the provision of guarantees or after sales service;
- (e)
- differences in functionality or the quality of
functionality;
- (f)
- the degree of physical similarity of product;
- (g)
- volumes of sales or purchases (if volume has an effect on price)
and the relevant terms of trade;
- (h)
- whether services are provided with the goods sold;
- (i)
- the duration of the relevant agreement and whether continuity of
supply is important;
- (j)
- whether the timing of the agreement affects the price;
and
- (k)
- whether any government regulation impacts on transfers or the
price that can be charged.
(paragraph 358) .
94. Unlike the CUP method, the resale price method does
not require the same close physical similarity with the property sold,
or that services provided be as closely comparable with those provided
by the comparable arm's length seller. A lack of close physical
similarity is not necessarily indicative of dissimilar mark-up
percentages. A comparison is made between the mark-up charged by
comparable arm's length resellers and the mark-up charged by the
relevant company. Where comparable arm's length resellers cannot be
identified, an appropriate profit mark-up may be determinable by
reference to the functions performed or to be performed, the assets and
skills used or available for use and the degree and nature of risks
involved and/or to be rewarded in respect of the company reselling the
relevant property or services (paragraphs 359 - 360)
.
95. The resale price method is best suited to cases where
there is a high degree of similarity of process between what the
taxpayer does and the activities of independent parties engaged in
comparable uncontrolled dealings. The resale price method is generally a
more reliable measure where there is little useable evidence of
comparable uncontrolled sales, where the property or services sold are
not used in a manufacturing process of the reseller, or the reseller
does not add substantially to the value of the product, e.g. where the
reseller, being merely a distributor, sells the product or service to an
independent third party (paragraph 361)
.
96. Where the non-arm's length reseller adds substantial
value to the property (e.g. where the products are further processed
through manufacture or are incorporated as components of a more
complicated product so that the identity of the original products is
lost or transformed or the taxpayer establishes, builds up or maintains
a valuable trademark in the relevant market largely through its own
expense and endeavour), a portion of the resale price is attributable to
this effort. This addition would need to be assessed and accounted for,
making it more difficult to establish an arm's length consideration and
consequently, more difficult to apply this method (paragraph
362)
.
97. In applying the cost plus method the profit mark-up
is ideally determined by reference to the profit mark-up earned by the
same supplier in a comparable dealing with an independent party. If
there are no comparable sales by the non-arm's length supplier to arm's
length parties, the profit mark-up is generally determined by reference
to the profit mark-up earned by a comparable arm's length party in a
comparable dealing with an independent party (paragraph 363)
.
98. The cost plus method is generally a more reliable
measure where components or unfinished goods are subject to additional
manufacturing, assembly, addition of trade marks, etc prior to
distribution, provided the process does not involve high value
intangibles (sometimes unique) (paragraphs 364 - 365)
.
99. There may be situations, including but not confined
to those dealing with intangibles, where CUP, resale price and cost plus
methods are inadequate in approximating a satisfactory arm's length
outcome. This leads to the need to have regard to other methods such as
profit methods, and to develop methods that have regard to commercial
and economic reality, the merits of each case, and the standard of the
arm's length principle. That is not to say that companies and the ATO
ought to depart from the first three methods referred to above merely
because it is easier or administratively convenient. A profit method, as
with any other method should be used where it is the most appropriate
method because it produces the highest practicable degree of
comparability in the circumstances of the particular case (paragraphs 366)
.
100. Where the CUP, resale price or cost plus methods
are inappropriate on their own in a given case, having regard to
commercial and economic realities and the nature of the company's
business, products and markets, for the purposes of determining the
arm's length consideration (or an amount for the purposes of subsection
136AD(4)) under Division 13, we will accept the use of:
- (a)
- a mixture of the above three methods; or
- (b)
- some other method (e.g. a profit split or profit comparison
method) or a mixture of methods:
that is likely to lead to a result that is as consistent as
practicable with the arm's length principle as internationally accepted (paragraph 367)
.
Documentation
101. Division 13 imposes obligations on taxpayers to use best endeavours to lodge correct tax returns and to pay the right amount of tax based on the economic value added in the respective jurisdictions (calculated in accordance with the arm's length principle). Other provisions impose general obligations on taxpayers to lodge accurate returns. Taxpayers are advised to create and keep contemporaneous records in order to demonstrate that their international dealings comply with the arm's length principle. However, records created during the setting of transfer prices and used in preparing tax returns are required by section 262A to be retained. It is not accepted that taxpayers need not address the question of whether their pricing policies comply with the arm's length principle until they are subject to audit by the ATO (paragraphs 368 - 371) .
102. The ATO will seek to rely as much as possible on
documentation that should be created in the ordinary course of business.
However, in order to satisfy the arm's length principle taxpayers who
deal with related parties need to do an analysis in accordance with the
principles set out in this Ruling. In this regard we will limit
requirements to the minimum necessary to ensure compliance with the
arm's length principle (paragraphs 372 - 373)
.
103. For the purposes of ascertaining the most
appropriate method for determining the arm's length consideration in
respect of the supply or acquisition of property under an international
agreement and also for determining whether resort may need to be made to
subsection 136AD(4), we will ask companies:
- (a)
- what methodology they are using;
- (b)
- the reasons why they consider their choice of methodology to be
the most appropriate to the relevant international agreement(s) and to
their particular circumstances; and
- (c)
- how and why they chose the particular price as a result of
applying their chosen methodology
(paragraph 374) .
104. In testing a taxpayer's methodology and in those
cases where no particular methodology has been chosen by companies to
set their international transfer prices in relation to the supply or
acquisition of property under an international agreement, we will be
asking their opinion as to:
- (a)
- which products, goods or services, etc, if any, they consider to
be most comparable to the products, goods or services being
investigated;
- (b)
- who their major competitors are;
- (c)
- which of their competitors they consider to be most comparable to
them; and
- (d)
- what they consider to be the most appropriate methodology to use
in their particular circumstances.
This information will be considered in determining whether resort
may need to be made to subsection 136AD(4) (paragraph 375)
.
105. In undertaking an analysis of whether the
consideration for the supply or acquisition of property under
international agreements represented an arm's length consideration, we
will ask companies to provide relevant documentation created when the
dealing was being contemplated and at the time the arrangement was
entered into. Where there is inadequate contemporaneous documentation of
non-arm's length international dealings, it is clearly more difficult
for companies to convince us that the dealings took place on an arm's
length basis. However, companies will be given the opportunity to
explain their business circumstances and pricing policies (paragraph 376)
.
106. We will ask companies under audit to provide
relevant documents, explanatory material and other information which the
company has or to which the company could reasonably be expected to have
access. The nature of the documentation likely to be sought would
include relevant pricing policies, product profitabilities, relevant
market information (such as sales forecasts and market characteristics),
the profit contributions of each party, and an analysis of the
functions, assets, skills and the degree and nature of the risks
involved for the various parties (paragraph 377)
.
107. Where international agreements are being
contemplated by companies in the same multinational group, the risk of
the Commissioner seeking to make an adjustment under of Division 13 can
be considerably reduced where the companies involved:
- (a)
- establish the economic justification prior to the arrangement
being entered into;
- (b)
- satisfy themselves that the consideration is an arm's length
consideration;
- (c)
- have the necessary contemporaneous documentation to support the
matters referred to in (a) and (b) above and the assessment of market
conditions at the time the pricing decisions were made;
- (d)
- provide reasons why the chosen methodology is appropriate to
their circumstances. However, companies would not be required to
undertake an intricate analysis of other methodologies but should have a
sound basis for using the selected methodology;
- (e)
- establish a systematic arm's length process for setting
international transfer prices and consistently follow the process they
have established; . and
- (f)
- conclude an advance pricing agreement with the ATO, in
appropriate cases
(paragraphs 378 - 381 and 385 - 386) .
108. Where contemporaneous documentation does not exist,
companies should review their pricing policies against the principles
set out in this Ruling and satisfy themselves that they accord with the
arm's length principle and that dealings with related parties have been
carried out on that basis. Documentary evidence that such reviews have
been done should reduce the risk of disputation to the extent that the
review properly addresses the requirements of the arm's length
principle. However, for the future, companies would be well advised to
maintain contemporaneous documentation (paragraph 382)
.
109. Where a company finds on review that its pricing
policies do not comply with the arm's length principle, the company
should request an amended assessment under subsection 170(1).
Assessments amended in this way will not be treated as involving the
exercise of the Commissioner's discretion under Division 13 and
therefore will not activate section 225 penalties. Normal procedures
regarding voluntary disclosures would apply (paragraph 383)
.
110. Division 13 is seen as imposing an obligation on
taxpayers to conform to the arm's length principle for tax purposes in
respect of international dealings. Accordingly, it is expected that
companies will take reasonable care to ensure that when preparing their
tax returns they properly review the data available to them and address
the question of whether the amounts of income and deductions included in
their tax returns have been calculated according to the arm's length
principle. Where companies have not used arm's length consideration in
the ordinary course of their day to day dealings with non-arm's length
parties, an adjustment should be made for tax purposes at the time of
preparation of their tax returns (paragraph 384 - 385)
.
Access to relevant information
111. Where a company has been tardy or unco-operative in
providing all the relevant information from Australian or overseas
sources, formal requests should be made under section 264A and/or the
relevant double taxation agreement for information held offshore to
enable the audit to be completed within a reasonable time frame (paragraph 387 - 388)
.
112. The fact that section 263 or section 264 have
already been used or might be used in the future does not prevent the
use of section 264A notices, or the exchange of information provisions
under double taxation agreements, though ATO auditors should take care
to avoid unnecessary duplication. However, on occasions auditors may
need to verify information if there is reason to believe that the
information provided may be inaccurate, misleading or incomplete (paragraph 388).
113. We will seek such information as will establish how
transfer prices were set in respect of dealings between related parties
at an early stage of an audit. Where such information is either not held
or able to be obtained by a company operating in Australia but could
reasonably be expected to be held by the company's foreign parent or
some other offshore related entity, ATO auditors should consider whether
an offshore information notice under section 264A and/or a request to a
foreign tax administration under a double tax agreement should issue
with a view to obtaining such information (paragraph 389)
.
The Commissioner has a discretion whether or not to apply
section 136AD
114. In exercising the discretion in paragraph (d) of
subsections 136AD(1), (2) and (3) the Commissioner must take into
account all relevant facts and circumstances as they existed at the time
the international agreement was made in forming a view as to whether the
amount of consideration in an international agreement needs to be
adjusted. It would also be relevant to consider subsequent events to the
extent that they are relevant to testing purpose or assist in
determining the true nature of any agreement by comparing the conduct of
the parties and the stated terms of the agreement. The Commissioner must
not consider irrelevant circumstances (paragraphs 390 - 391)
.
115. In particular the Commissioner needs to be
satisfied that the various preconditions in subsections 136AD(1), (2),
or (3) are met as the case may be. Consideration also needs to be given
to whether the exercise of the discretion, or a failure to exercise it,
would be consistent with the policy underlying Division 13 (paragraph 392).
116. It would also be relevant to consider whether there
is any evidence of the taxpayer's purpose since this would also be a
relevant factor. However, this would need to be weighed with other
factors, including the effect on the Australian revenue of the use of
non-arm's length consideration, against the wording and legislative
purpose of section 136AD (paragraph 393)
.
117. Having regard to the legislative intent, where
paragraphs (a), (b) and (c) of subsections 136AD(1) - (3) have been
satisfied, then, in the absence of sound reasons to the contrary, it
could be expected that the discretion in paragraph (d) of the relevant
subsection would be exercised where the Australian revenue has been
disadvantaged (paragraph 394)
.
118. Where the discretion under paragraph (d) of
subsections 136AD(1), (2) or (3) is exercised, a formal determination
should be made to that effect (paragraph 395)
.
Does a tax avoidance purpose need to exist before Division
13 can apply?
119. It is the view of the ATO that the Commissioner
does not have to identify a tax avoidance purpose in order to invoke the
discretion in paragraph (d) of subsections 136AD(1), (2) and (3). Cases
where there is a tax avoidance purpose are clearly intended to be
countered by Division 13 where the use of non-arm's length consideration
results in an underpayment of Australian tax. But it does not follow
that the absence of a tax avoidance purpose renders the Commissioner's
discretion inoperative (paragraphs 401 - 407)
.
120. Where a tax avoidance purpose exists in relation to
a matter being considered in the context of Division 13, then Part IVA
may also have application, where the particular requirements of Part IVA
are satisfied (paragraph 408)
.
121. Penalties are imposed under section 225 of the
ITAA, where Division 13 has been applied, notwithstanding the absence of
a tax avoidance purpose. The existence of a tax avoidance purpose is,
however, a factor to consider in the imposition of such penalties (paragraph 409)
.
Higher tax rates in foreign countries in themselves do not
suggest an absence of profit shifting
122. The view that profits are not shifted overseas
where foreign nominal or effective company tax rates are comparable to
the prevailing company tax rate in Australia, and hence that Division 13
should not be applied in such cases, is not accepted because it ignores
the need to protect Australia's legitimate taxing rights (paragraphs 410 - 411)
.
The source of income
123. In determining the source or sources of income or
the extent to which expenditure was incurred in deriving income for the
purposes of section 136AE, regard would be had, amongst other things,
to:
- (a)
- the nature and extent of any relevant business
activities;
- (b)
- the place or places at which the business is carried
on;
- (c)
- the functions performed in each country, the assets and skills
employed in each country and the risks and responsibilities borne by the
various entities;
- (d)
- the economic value added to the relevant property in each
location;
- (e)
- the application of common law rules relating to
source;
- (f)
- the degree of connection between each amount of expenditure and
the income derived in each jurisdiction;
- (g)
- other circumstances relevant to a particular company and
"agreement"; and
- (h)
- the operation of any source rules in any applicable double tax
agreement.
(paragraphs 412 - 419) .
124. The inclusion of the words "as to the extent to
which" in relation to the Commissioner's determination of the source of
income have the effect that the Commissioner can make that determination
in relation to a part of the arm's length consideration that has been
deemed to have been received or receivable (paragraphs 414 -
416)
.
125. Regard must also be had to the operation of any
source rules contained within Australia's double tax agreements. In that
regard, the determination of source may differ depending on the type of
income involved (paragraph 417)
.
Transfers of property including trading stock and other
goods and services
126. Subsection 136AD(1) could generally be expected to
apply where a person carrying on business in Australia sells property
overseas at a reduced price in a non-arm's length dealing, unless there
was cogent evidence that the consideration received or receivable was,
in reality, the arm's length consideration (paragraph 420)
.
127. Where the consideration is, prima facie, less than
the arm's length consideration, companies would be expected to:
- (a)
- have ascertained what an arm's length consideration might
reasonably be expected to be in respect of the relevant supply of
property; and
- (b)
- be able to supply the necessary contemporaneous documentation or
- in the case of past dealings where contemporaneous documentation was
not kept - a reasoned case based on all the facts and circumstances that
then applied to support the transfer prices that have been adopted. For
the future, companies should maintain sufficient contemporaneous
documentation to enable tax returns to be prepared having regard to the
arm's length principle
(paragraph 421) .
128. Where a foreign parent company directs its
Australian associated company what the price will be for the acquisition
of property, to be exported from Australia, it cannot be said that the
parties are dealing at arm's length with each other as there is no real
bargaining between the parties in respect of the acquisition of
property. Subsection 136AD(1) could therefore normally be expected to
apply to such cases where the other requirements of the subsection are
satisfied (paragraph 423)
.
129. It is not accepted that independent parties dealing
at arm's length would supply goods free of charge except in very narrow
circumstances. We would require very convincing proof
that such circumstances have arisen before accepting a nil or reduced
payment between associated enterprises as being equivalent to the arm's
length consideration (paragraphs 424 - 425)
.
130. Subsection 136AD(3) could generally be expected to
apply where profits have been shifted out of Australia by a person
carrying on business in Australia purchasing property from overseas at
an inflated price in a non-arm's length dealing (paragraph
426)
.
131. In cases where the consideration given or agreed to
be given for purchases is, prima facie, more than the arm's length
consideration, companies would be expected to meet the criteria stated
in paragraph 127 above to support contentions that the transfer prices
adopted represent the arm's length consideration (paragraph
427)
.
132. Where a foreign parent company advises its
Australian associated company what the price will be for property to be
imported into Australia, or has directed the return that the Australian
associated company is to make, it could not be said that the parties
were dealing at arm's length with each other as there has been no real
bargaining. Subsection 136AD(3) could therefore normally be expected to
apply to such cases where the other requirements of the subsection are
satisfied (paragraph 428)
.
Where non-resident companies have incurred expenditure
on behalf of or provided services to their Australian associates and
have charged amounts which exceed the value of the economic benefits
obtained by the Australian associate, subsection 136AD(3) could normally
be expected to apply to reduce the consideration to an arm's length
consideration (which in some cases may be the cost and in some other
cases may be a nil amount - as would be the case with shareholder
costs). Regard should also be had to the possible disallowance of
expenditure not complying with the requirements of subsection 51(1) (paragraph 429)
.
134. Where doubt exists about the financial capacity of
an associated entity to pay an arm's length consideration, it would
generally not be acceptable for companies to simply reduce the purchase
price or to indefinitely defer demands for payment without some form of
compensation or security being provided to the supplier of the goods.
The nature of any compensation or security to be provided would need to
be consistent with what independent parties dealing at arm's length with
each other would agree to if faced with similar circumstances (paragraphs 430 - 431)
.
135. Where a range of "property" (not including
intangible property or services) is supplied or acquired under a broadly
based (or "umbrella") agreement covering one or more product lines, on
occasions referred to as a "basket of goods", and there are genuine
commercial reasons for selling some products at less than the market
price - or even supply them free - in order to make a higher overall
profit on its sales of products to the same buyer, the ATO would
generally not make an adjustment under Division 13 provided independent
parties dealing at arm's length might reasonably have been expected to
have entered into a comparable "agreement". In cases of transfers of
goods between associated entities, it would be relevant to consider,
inter alia :
- (a)
- the price eventually realised upon resale to an independent
party;
- (b)
- the overall profit made on a "basket of goods" with the total
profit that could be made on the basis of individual product sales;
and
- (c)
- whether the business strategy resulted in any deferral or
avoidance of tax
(paragraphs 432 - 438) .
Effects on the value of opening and closing trading stock
where an adjustment is made under subsection 136AD(3)
136. Where a determination made under subsection
136AD(3) has the effect of reducing the actual consideration in respect
of the acquisition of trading stock, to an arm's length consideration
given or agreed to be given, there may also be a need to revise the
value of closing stock on hand at the end of the financial year
(depending on the method of accounting for trading stock), as any
determination made under section 136AD applies for all purposes of the
ITAA. Such purposes would include any effect on closing trading stock
values at the end of the relevant year of income, as well as the opening
stock values in the succeeding year of income. There may also be a
continued flow-on effect for later years (paragraphs 439 -
440)
.
Existence of a business purpose insufficient in itself to
avoid Division 13
137. The existence of a business purpose is not in
itself sufficient to preclude the making of a determination under
section 136AD where the conditions for its application are met (paragraphs 441 - 444)
;
"Start up", "market penetration and "obsolete stock
prices"
138. Where Australian producer/wholesaling companies
reduce or discount the price at which property is supplied to foreign
marketing/distribution associates and the price reduction or discount is
for the purpose of increasing market share, establishing a new market in
the foreign country, introducing its products into an existing market in
the foreign country or to clear surplus or obsolete stock, then, whether
Division 13 will apply in such cases will depend on the facts and
circumstances of each case and in particular on:
- (a)
- the discounted prices being charged for only a limited period, in
accordance with a genuine business strategy and with the specific
objective of improving the profits of the Australian producer in the
longer term;
- (b)
- the research and analysis undertaken at the time to support the
business strategy;
- (c)
- the market conditions prevailing at the time;
- (d)
- the market impact of any price discount strategies and the
financial and taxation consequences for the parties involved;
and
- (e)
- regard being given to what independent parties dealing at arm's
length might reasonably have been expected to have done in comparable
circumstances
(paragraphs 445 - 451) .
139. Where goods are sold to an independent distributor
at discounted prices to increase the distributor's profit and thereby
entice the distributor to become tied to the supplier's products, or at
least provide a reliable competitive outlet for the goods, Division 13
would not normally be applied in such a case unless there is evidence of
some back to back or collateral arrangement or side deal (paragraph
452)
.
140. Where goods are sold to a related party
distributor, and the related party has a high level of independence,
operates as a truly separate profit centre with authority (which it
exercises) to deal with third party suppliers, and adopts arrangements
similar to those used by independent distributors in that market,
Division 13 would not normally be applied unless the particular case
exhibits other abnormal features that are inconsistent with independent
dealing (paragraphs 445 - 453)
.
141. On occasions, foreign producer companies selling
goods through an associated marketing/distribution entity in Australia
may wish to establish a new market in Australia, increase market share,
introduce its products into an established Australian market, or to
clear surplus or obsolete stock and therefore direct that lower prices
be charged to unrelated Australian buyers, without at the same time
decreasing the prices charged to their Australian distributor. The
pricing of such arrangements would generally only be acceptable for tax
purposes where:
- (a)
- the discounted prices were charged for only a limited period, in
accordance with a genuine business strategy and with the specific
objective of improving the profits of both the foreign producer and
Australian marketing entity in the longer term;
- (b)
- they reflected the respective contributions of the producing and
marketing/distribution entities in terms of: the nature of functions
performed; the assets and skills used; and the degree and nature of any
business or financial risks involved; and
- (c)
- regard had been given to what independent parties dealing at
arm's length might reasonably have been expected to have done in
comparable circumstances
(paragraphs 445 - 449 and 454 - 457) .
The treatment of joint venture arrangements
142. The provision of property to a joint venture falls
within paragraph (b) of the definition of "supply" in subsection
136AA(1) (paragraphs 458 - 461)
.
143. Where property is supplied to or acquired from a
joint venture, it will be the value of that property which will be
relevant for the purposes of Division 13 (paragraph 462)
.
144. Subsections 136AD(1), (2) or (3) may be applied to
either or both of the supply or acquisition of property having regard to
the value of the contribution to the joint venture, the product sharing
agreement and the division of output between the joint venturers (paragraph 463)
.
145. Where property is supplied to a joint venture under
an "international agreement", subsection 136AD(1) could normally be
expected to apply to any of the joint venturers who were not dealing at
arm's length with each other and where the consideration in respect of
the supply of property was less than an arm's length consideration.
Similarly, subsection 136AD(2) may be expected to apply where no
consideration was received in respect of the supply of property (paragraph 464)
.
146. The output or product of a joint venture obtained
by each joint venturer would fall within paragraph (b) of the definition
of "acquire" in subsection 136AA(1). Where property is obtained from a
joint venture under an international agreement, subsection 136AD(3)
could normally be expected to apply to any of the joint venturers who
were not dealing at arm's length with each other and where the
consideration in respect of the acquisition of property was more than an
arm's length consideration (paragraph 465)
.
147. The fact that the joint venturers may have agreed
upon the value to be ascribed to the property provided by each of the
joint venturers or to the share of the product of the joint venture
obtained by each of the joint venturers does not automatically mean that
such agreed values represent the arm's length consideration in respect
of the supply or acquisition of the relevant property (paragraph
466)
.
148. In ascertaining the arm's length consideration in
respect of property provided to or obtained from a joint venture, regard
should be had to the matters referred to in paragraph 467 (paragraph 467)
.
The treatment of barter and countertrade
arrangements
149. In respect of arrangements where a company issues
shares in itself in exchange for property, the general principles
espoused in this Ruling would apply (paragraphs 468 - 470)
.
150. Section 136AD could be expected to apply to barter
and countertrade arrangements involving the supply or acquisition of
property under international agreements where the parties to the barter
or countertrade arrangement were not dealing at arm's length with each
other and the value of the consideration is not arm's length in respect
of the relevant supply or acquisition (paragraphs 468 - 472)
.
151. In barter arrangements under international
agreements, there is both a supply and acquisition of property (by
virtue of the word "exchange" in paragraph (a) of the definitions of
"supply" and "acquisition" in subsection 136AA(1)). Both sides of any
barter or countertrade arrangement should be benchmarked against arm's
length prices to ensure that the consideration received or given
respectively is equivalent to the value of what is being supplied or
acquired (paragraph 473)
.
152. For the purposes of ascertaining the arm's length
consideration that might reasonably be expected to have been agreed in
respect of the supply and acquisition of property under a barter
arrangement, we will accept as indicative of an arm's length
consideration:
- (a)
- the cash price and terms which the company would normally have
obtained from an independent party dealing with the company at arm's
length for the supply of the property; and
- (b)
- the cash price and terms which the company would normally have
expected to have agreed to with an independent party dealing with the
company at arm's length for the acquisition of the
property
(paragraph 474) .
153. The fact that the parties to a barter arrangement
may have agreed upon the value to be ascribed to the property
contributed by each of them, does not automatically mean that such
agreed values represent the arm's length consideration in respect of the
supply or acquisition of the relevant property. It will be the arm's
length consideration which will be relevant for a range of purposes
including depreciation, trading stock valuation and capital gains
calculations (paragraph 475)
.
Explanations
History behind the introduction of Division 13 and adoption
within it of the "arm's length principle"
154. The legislative purpose behind Division 13 is to
ensure Australia can counter "non-arm's length transfer pricing" or
"international profit shifting" arrangements in order to protect the
Australian revenue. Expressed another way, Division 13 provides a
mechanism by which Australia can ensure that it receives its fair share
of tax based on the economic value added by activities carried on in
Australia or involving the use of Australian assets, infrastructure and
skills, and measured by reference to the internationally accepted arm's
length principle. It covers cases where there has been an undercharging
in respect of property or services supplied or an overcharging for
property or services acquired, regardless of whether any resulting
shortfall in Australian tax is due to deliberate tax avoidance or merely
due to the adoption of an incorrect pricing method for taxation purposes
(whether through misunderstanding, carelessness, recklessness or
miscalculation or the inappropriate use of a methodology).
155. The current Division 13 (sections 136AA - 136AG)
was introduced into the ITAA by the Income Tax Assessment Amendment
Act 1982
to overcome deficiencies in the application of the former Division 13
(section 136), exposed by the decision of the Full High Court in FC
of T v. Commonwealth Aluminium Corporation Ltd,
(1980) 143 CLR 646 and other potential deficiencies (as described in the
Explanatory Memorandum to the Income Tax Assessment Amendment Act
1982
("Explanatory Memorandum") at pages 3-4).
156. Unlike the former section 136, the operation of
Division 13 does not require that the dealings be between companies
under common "control" or "share ownership" (Explanatory Memorandum at
page 3). Division 13 applies equally to Australian and foreign owned
entities. It adopts the internationally accepted "arm's length
principle" for taxation purposes as the basis for determining whether
Australia has been denied its fair share of tax.
157. The "arm's length principle" is stated in Article
9(1) of the 1977 Organisation for Economic Co-operation and Development
("OECD") Model Double Taxation Convention on Income and on Capital and
more recently in Article 9(1) of the 1992 OECD Model Tax Convention on
Income and Capital. It provides:
"[When] conditions are made or imposed between ... [associated]
enterprises in their commercial or financial relations which differ from
those which would be made between independent enterprises, then any
profits which would, but for those conditions, have accrued to one of
the enterprises, but, by reason of those conditions, have not so
accrued, may be included in the profits of that enterprise and taxed
accordingly."
158. The arm's length principle is predicated on the
basis of adjusting profits by reference to the conditions which would
have existed between independent parties under comparable circumstances.
Application of the arm's length principle requires that members of
multinational enterprises ("MNEs") be treated as operating as separate
entities rather than as inseparable parts of a single unified business
("the separate entity approach"). This accords with their legal status
as separate entities. Because the separate entity approach treats the
members of MNEs as if they were independent entities, attention is
focused on the nature of the dealings between those members.
159. In practical terms - and in the absence of "back to
back" deals, side deals or other collateral arrangements - the
application of the "arm's length principle" should result in prices
being charged or paid for the supply or acquisition of goods and
services, or assets of a capital nature, that would have been charged or
paid between unrelated entities for comparable products under comparable
circumstances. In setting the price to be charged, independent entities
would have regard to the functions they had to perform, the assets and
skills they had to use and the degree and nature of any business or
financial risks involved in the process of deriving their income.
Similarly, in deciding how much to pay for goods, services or other
property, an independent entity would also consider these issues.
160. MNEs often integrate their activities so as to
obtain a competitive advantage or cost reduction. Notwithstanding this
legitimate objective and the fact that such arrangements may present
unique situations, dealings between the various parts of MNEs and with
associates and others must also have regard to the legitimate interests
of the nations in which they operate who:
"need to determine the proper level of taxable profits of the
affiliated enterprises operating within their respective
jurisdictions".
[paragraph 3 of the 1979 Report of the OECD Committee on Fiscal
Affairs, titled "Transfer Pricing and Multinational Enterprises" ("the
1979 OECD Report")].
161. In other cases, valuable intangibles are used by
one or more parties operating together in an international
context.
162. An analysis of functions, assets and risks will
assist the allocation of income and expenses in all the above cases and
is consistent with what independent enterprises would do in order to set
prices.
163. Notwithstanding the fact that global manufacturing
and trading often presents unique situations that do not occur between
independent enterprises, it is generally accepted by tax authorities
around the world that the arm's length principle has application to
these cases and is the best approach to the determination of fair shares
of revenue between countries in respect of dealings and financial
relations between associated entities.
164. For the purposes of Division 13, the arm's length
principle is reflected in subsections 136AD(1), (2) and (3) through the
requirements for "not dealing at arm's length with each other" and
"arm's length consideration" in relation to "international agreements".
The "arm's length principle" also underlies the allocation of profits
and expenses for tax purposes in each of Australia's comprehensive
double taxation agreements.
165. In a speech to the Australian Mining Industry
Council on 25 March 1983 ("the 1983 Speech"), the then Second
Commissioner of Taxation, Mr Boucher said:
"(Division 13) state(s) the basic principle to be applied - the
arm's length principle - in a way that (section 136) never did. ...
(T)he new law in large measure represents a statutory expression of a
principle that had been found by interpretation to exist in section 136.
That is put in a few words by the Taxation Board of Review in the
celebrated 1963 oil industry case when it said -
".... the independent arm's length test prescribed .... (in the
U.K. tax treaty) .... is not materially different from the fair market
value test, which in our opinion, is the primary but not the exclusive
yardstick to be applied in making determinations under section
136."."
[Note: The reference to the "1963 oil industry case" is a
reference to Case N69, [1962] 13 TBRD (NS) 270; 11 CTBR (NS) Case
53].
166. In other words, the arm's length principle tries to
reflect the characteristics of supply and demand and competition in an
open market and uses the behaviour of independent entities as a guide.
It poses the question: what would a reasonable business person do in the
circumstances of the taxpayer in order to protect and advance their own
economic interest?
167. It follows from the very nature of the arm's length
principle that comparability is central to its operation. Tax
authorities try, by various methodologies, to compare what the related
entities have done to what independent entities have done or would have
done in comparable circumstances. This can be done directly by the use
of comparable uncontrolled prices or less directly by the use of "cost
plus" or "resale price" methodologies which focus on profit margins.
Where these methodologies are inapplicable or not practicable, other
indirect methods such as profit splits and profit comparisons, which
also involve comparisons with rates of return for comparable activities,
should be considered. All of these methodologies are considered by the
ATO as compatible with the arm's length principle. This is not to
suggest that taxpayers and ATO auditors need to exhaustively explore
each methodology in some sort of hierarchy before a selection is made.
These methodologies are discussed further below and will be the subject
of a separate detailed Ruling.
168. The methodology that on the basis of the facts and
circumstances of the case will produce the highest degree of
comparability (between what the related entities have done and what
independent entities have done or might reasonably be expected to do in
comparable circumstances) is the one that should be used. It should be
noted in this regard that in some cases indirect methodologies may have
to be used if there are no reasonably reliable direct comparables. The
matters listed in paragraph 344 also need to be borne in mind.
The role and structure of Division 13 as it applies to
separate legal entities.
169. Where non-arm's length dealings between separate
legal entities occur across international borders, questions often arise
as to the proper allocation of income, profits and expenses between the
respective tax jurisdictions. Putting to one side the operation of
Australia's double tax agreements (see paragraphs 184 - 186 below),
Division 13 has the role of ensuring that Australia is not deprived of
its fair share of tax as a consequence of international profit shifting.
As stated by Mr Boucher in his 1983 Speech:
"this particular area of the legislation is designed so that it
may, as necessary, have application to all possible forms of profit
shifting."
170. Division 13 is structured to achieve its
legislative purpose by focussing on basic mechanisms through which
underpayment of Australian tax may occur, whether deliberate or not. It
covers:
- (a)
- the underpricing of goods, services or other property supplied by
companies;
- (b)
- the overpricing of goods, services and other property acquired by
companies; and
- (c)
- the inappropriate allocation of global, headquarters or other
expenses against Australian income.
171. Division 13 codifies this approach by using the
concept of the supply or acquisition of property under an "international
agreement", coupled with a statutory power in the Commissioner to adjust
cases of underpricing and overpricing back to the arm's length
consideration in order to protect the Australian revenue.
172. Special statutory rules in respect of permanent
establishments (branch offices) are necessary to ensure that Australia
gets its fair share of tax because Australia's domestic legislation
adopts the "single entity approach". That is, dealings between branches
of the same enterprise or between a branch and its head office are not
recognised under Australian general law or taxation law since an entity
cannot deal with itself or make a profit out of itself, although
specific statutory provisions have been made for offshore banking. This
is a fundamental principle reflected in the concept of an "international
agreement" on which section 136AD is based and in the specific reference
in paragraph (b) of subsections 136AD(1), (2) and (3) to "two or more
parties".
173. This approach differs from the practice in most
other OECD countries where a branch office of a company is treated (at
least for taxation purposes) as a separate legal entity. Where
international dealings between different parts of the same entity are
concerned, the issues to be addressed for Australian taxation purposes
are those of properly allocating the appropriate part of the income,
profits and expenses between the Australian and foreign operations. In
these cases, section 136AE is the relevant provision to consider (see
paragraphs 412 - 419).
174. Division 13 does not operate as a stand-alone
assessing provision. It operates in conjunction with other provisions of
the ITAA to produce the effect that in relevant cases, income or
assessable income is increased, deductions or losses are reduced so that
the right amount of Australian income tax and withholding tax is
payable.
175. The adjusted consideration under the relevant
"international agreement" becomes the relevant component of assessable
income (including capital gains) or the amount of allowable deduction as
the case may be. For example, an increase in the consideration for goods
sold will have the effect that the gross sales income for the purposes
of section 25 is correspondingly increased. Adjustments under Division
13 which affect the amount of exempt income may in turn affect the
amount of any carry-forward losses.
176. The effect of making adjustments under Division 13
is that amounts that otherwise would not be derived under section 25 can
be included in assessable income in accordance with the arm's length
principle. Division 13 enables such amounts to be determined as having
an Australian source or a foreign source, as appropriate. It also
enables a determination of the extent to which expenses properly relate
to the derivation of Australian income and the extent to which they
relate to the derivation of foreign income (also see paragraphs 412 -
419).
177. Where a determination has been made under Division
13, provision is also made for compensating (consequential) adjustments
where the conditions of section 136AF are met. The application of
section 136AF will be discussed in detail in a later Ruling.
178. While application of Division 13 will result in the
adjustment of the actual consideration to an arm's length consideration,
it must be emphasised that any such adjustment only applies "for
taxation purposes". That is, the actual terms, conditions and prices
agreed upon between the parties in relation to the supply or acquisition
of the relevant "property" is not affected for any other purpose.
Division 13 has a broad scope
179. In order to achieve its policy objective, Division
13 has been drafted in broad terms. Subsection 136AB(1) gives it
priority over every provision of the ITAA other than Part IVA. In this
regard subsection 136AB(1) provides that nothing in the provisions of
the ITAA (other than provisions contained within Division 13 itself)
shall limit the operation of the Division. For example, the fact that
transfer prices may have the effect that profits are shifted out of
Australia notwithstanding the provisions of sections 25 and 51, Division
13 enables a reallocation of the amount properly attributable to
Australia by allowing the adjustment of the actual consideration for
sales and acquisitions as appropriate.
180. Where its provisions are applied, Division 13 can
result in adjustments being made to, inter alia :
- (a)
- assessable income and/or allowable deductions;
- (b)
- income subject to withholding taxes, including income from
dividends, interest and royalties liable to tax under section
128B;
- (c)
- exempt income;
- (d)
- the cost of acquisitions and value of disposals, for depreciation
purposes;
- (e)
- receipts or losses of a capital nature affecting any liability to
capital gains tax; and
- (f)
- other matters for which the ITAA makes special provision,
including:
- (i)
- capital costs for special provisions which allow for a full, or
partial, capital deduction (e.g. Divisions 10B and 10D of Part
III);
- (ii)
- costs for specific deduction provisions (e.g. research and
development);
- (iii)
- expenditure subject to recoupment provisions; and
- (iv)
- income subject to special provisions which can affect the
calculation of taxable income (e.g. Division 12 of Part
III).
181. Any adjustment made as a result of the application
of sections 136AD and/or 136AE (the operative provisions of Division 13)
applies to the relevant taxpayer "for all purposes of the
ITAA"
. This will result in not only the underlying consideration in respect
of the supply or acquisition of property being adjusted to an arm's
length consideration but will also have flow-on consequences for the
taxpayer where that consideration is also relevant to the operation of
other provisions of the ITAA. For example:
- (a)
- the value of opening and closing trading stock under section 28
(see paragraphs 439 - 440);
- (b)
- bad debts under subsection 51(1) or section 63; and
- (c)
- carried forward losses under sections 79D, 79E or
80.
182. The Commissioner will not, however, apply sections
51 and 63 in respect of bad debts in a way that undermines the
legislative purpose behind Division 13. It would be absurd and illogical
for the flow-on consequences to operate in such a manner. For example,
an increase under section 136AD in the sale price charged by an
Australian company will produce sales income (for taxation purposes)
higher than the actual sales income resulting from the prices actually
charged. Companies have to comply with the preconditions for write off.
In particular, the increase in the sales income for Australian tax
purposes will not be regarded as a debt unless it is recognised by the
other party as legally owing to the company with the Australian tax
liability. This may present problems for taxpayers because the other
party may have difficulty showing additional consideration being
received for its assumption of the additional liability; past
consideration is no consideration.
183. The ATO will agree to an appropriate adjustment
under section 136AF where it is fair and reasonable to do so, in
conjunction with sections 51 or 63 as appropriate. In such circumstances
any amount to be written off as a bad debt would have to be calculated
on the basis of the full amount of the relevant sales income after the
application of Division 13, and not just the increase occasioned by
Division 13, unless the amount actually agreed has already been paid in
full.
The interaction between Division 13 and Australia's Double
Taxation Agreements
184. In considering the application of Division 13, the
terms of any relevant double taxation agreement must be considered.
Australia's double taxation agreements, which appear as schedules to the Income Tax (International Agreements) Act 1953 ("the
IT(IA)A")
, contain their own provisions to deal with profit shifting arrangements
in certain circumstances. These provisions, like the domestic non-arm's
length transfer pricing provisions, are based on the arm's length
principle.
185. Section 4 of the IT(IA)A
provides that the ITAA is incorporated and shall be read as one with the IT(IA)A
. The provisions of the IT(IA)A
have precedence in the case of any inconsistency, notwithstanding
anything contained in the ITAA (other than section 160AO or Part IVA) or
in any Act imposing Australian tax.
186. There should be no fundamental inconsistency
between the results under Division 13 and the relevant provisions of the
double taxation agreements since both are based on the arm's length
principle, though due regard has to had to the precise wording of the
relevant provision(s) being applied. Accordingly, the Commissioner may
apply the provisions of Division 13 and/or the treaty provisions.
However, in the event of any inconsistency, the treaty provisions will
prevail unless the treaty itself gives precedence to the domestic law. A
detailed discussion of the interaction between certain provisions of
Australia's double taxation agreements and Division 13 will be dealt
with in later Rulings.
The interaction between subsection 51(1) and Division
13
187. Cases may arise, which involve the acquisition of
property under an international agreement, where subsection 51(1) can be
relied upon to deny a deduction in respect of that portion of
expenditure which, while incurred by the taxpayer, was either:
- (a)
- not incurred for the purpose of producing the assessable income
of the taxpayer but for some other purpose;
- (b)
- properly regarded as being incurred in producing the income of
another party; or
- (c)
- incurred in relation to the gaining or production of exempt
income.
188. Where the operation of section 51 is not clear cut,
consideration would need to be given to whether a determination could be
made under section 136AD, as an alternative basis upon which to support
an adjustment under subsection 51(1), or to remedy the effect of profit
shifting from Australia resulting from non-arm's length transfer pricing
where the preconditions for application of section 136AD have been
met.
Expenditure incurred not for the purpose of producing the
assessable income of a taxpayer but for some other
purpose
189. If the proper conclusion to be drawn from all the
facts and circumstances is that certain expenditure (or part of it) was
not incurred for the purpose of gaining or producing assessable income
of the Australian taxpayer, or is otherwise not allowable under
subsection 51(1), then the appropriate result is that the expenditure
(or relevant part) should be disallowed as a tax deduction under
subsection 51(1). Such a case would not normally give rise to an
application of Division 13.
190. There will be cases where Division 13 will apply
even though expenditure is not deductible under subsection 51(1); e.g.
where Division 13 is relied on to increase exempt income and thereby in
certain circumstances reduce carry forward losses. Division 13 may,
however, be invoked as an alternative basis for disallowing a deduction
under subsection 51(1) where there is some doubt about the operation of
subsection 51(1), in the particular circumstances, and/or if the facts
indicate profit shifting has occurred through the use of non-arm's
length transfer pricing.
191. It is well established that the words "to the
extent to which" in subsection 51(1), make it clear that the subsection
contemplates apportionment: Fletcher & Ors v. FC of T
(1991) 173 CLR 1 at 16; Ronpibon Tin NL and Tongkah Compound NL v.
FC of T,
(1949) 78 CLR 47 at 59; Ure v. FC of T
81 ATC 4100; 11 ATR 484. In Ronpibon Tin NL and Tongkah Compound
NL v. FC of T
(ibid), Latham CJ, Rich, Dixon, McTiernan and Webb JJ, in their joint
judgment stated that there were at least two kinds of outgoings which
require apportionment for the purposes of the subsection:
"One kind consists in undivided items of expenditure in respect
of things or services of which distinct and severable parts are devoted
to gaining or producing assessable income and distinct and severable
parts to some other cause. In such cases it may be possible to divide
the expenditure in accordance with the applications which have been made
of the things or services. The other kind of apportionable items
consists in those involving a single outlay or charge which serves both
objects indifferently."
192. As was also pointed out by their Honours, what is
an appropriate apportionment in such cases is essentially a question of
fact. The following passages from Fletcher & Ors v. FC of T
(1991) 173 CLR 1 at 18/19 are relevant in this regard:
"Even in a case where some assessable income is derived as a
result of the outgoing, the disproportion between the detriment of the
outgoing and the benefit of the income may give rise to a need to
resolve the problem of characterisation of the outgoing for the purposes
of the subsection by a weighing of the various aspects of the whole set
of circumstances, including direct and indirect objects and advantages
which the taxpayer sought in making the outgoing. Where that is so, it
is a "commonsense" or "practical" weighing of all the factors which must
provide the ultimate answer."
And later:
"If, however, that consideration reveals that the disproportion
between outgoing and relevant assessable income is essentially to be
explained by reference to the independent pursuit of some other
objective and that part only of the outgoing can be characterised by
reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable
income and the pursuit of that other objective will be necessary
." (emphasis added)
193. Subsection 51(1) could reasonably be expected to
apply to apportion a claim for a deduction where after a "practical
weighing of all the factors" the conclusion is reached that a company
had some other objective or purpose in addition to the pursuit of
assessable income. Such situations might include:
- (a)
- a cost sharing arrangement between an Australian company and a
non-resident company, in respect of which, the cost allocated to the
Australian associate for the provision of services allegedly provided to
it by the non-resident company, are disproportionately high compared to
the level of services actually provided or the benefits actually
obtained; and
- (b)
- the importation of goods by an Australian associate of a
non-resident company where the cost of acquisition of the goods cannot
be reconciled with normal commercial prices that could reasonably be
expected in the circumstances of the particular
case.
Expenditure incurred on behalf of another
194. Instances have come to light in the course of
audits in which Australian companies have incurred expenditure on behalf
of or provided services to their foreign associates without receiving
arm's length consideration. In these cases, the Australian companies
have claimed tax deductions for the expenditure. It is often the case
that the incurring of such expenditure has not been formally recognised
in documentation between the respective companies. In some cases, such
expenditure would not be deductible under subsection 51(1) since it may
be properly regarded as being incurred in producing the income of
another party (Hooker Rex Pty Ltd v. FC of T
(1988) 19 ATR 1241 at 1253 and 1262; 88 ATC 4392 at 4404 and 4411), or
perhaps, incurred in deriving exempt income (e.g. section 23AJ) (see
below).
195. Division 13 may however be invoked as an
alternative basis for disallowing a deduction under subsection 51(1)
where there is some doubt about the operation of subsection 51(1), in
the particular circumstances, and/or if the facts indicate profit
shifting has occurred through the use of non-arm's length transfer
pricing.
196. Where the expenditure is deductible under
subsection 51(1), subsections 136AD(1) or (2) could normally be expected
to apply where the preconditions for application of the relevant
provision have been met. The result would be that an arm's length
consideration (which in some cases may be at cost) would be deemed to be
received by the Australian company.
Expenditure incurred in relation to the gaining or
production of exempt income
197. Subsection 51(1) also provides that expenditure
incurred in deriving exempt income shall not be an allowable deduction.
In particular, no deductions would be allowed under subsection 51(1) in
connection with:
- (a)
- foreign branch profits derived by Australian companies where the
profits are exempt under section 23AH;
- (b)
- non-portfolio dividends from foreign countries where the
dividends are exempt under section 23AJ; and
- (c)
- income other than dividends that is exempt under the former
paragraph 23(q).
198. Division 13 may however be invoked as an
alternative basis for disallowing a deduction under subsection 51(1)
where there is some doubt about the operation of subsection 51(1), in
the particular circumstances, and/or if the facts indicate profit
shifting has occurred through the use of non-arm's length transfer
pricing.
199. It should be noted that even though expenditure may
not be deductible under subsection 51(1) if it is incurred in deriving
exempt income, Division 13 can still apply to increase the amount of
exempt income where the preconditions have been satisfied. For example
it can be applied in cases where the Australian taxpayer has deductible
carry forward losses which the law requires be reduced by any increase
in exempt income.
Expenditure otherwise deductible under subsection
51(1)
200. It is also a long established principle underlying
the operation of subsection 51(1) that:
"it is not for the Court or the Commissioner to say how much a
taxpayer ought to spend in obtaining his income, but only how much he
has spent": ( Ronpibon Tin NL and Tongkah Compound NL v. FC of T
(1949) 78 CLR 47 at 60).
This is not a prohibition on the Commissioner ever looking beyond
the amount spent; the prohibition applies only when it is demonstrated
that the expenditure was really incurred for the purpose of obtaining
assessable income.
201. However, it needs to be recognised that in
appropriate cases Division 13 can apply to disallow a deduction that
would be otherwise allowable under section 51 where the preconditions of
section 136AD have been met.
202. Section 31C of the ITAA has been introduced to
overcome arrangements relating to the acquisition of trading stock at
inflated prices following adverse decisions on subsection 51(1) in Cecil Bros Pty Ltd v. FC of T
(1964) 111 CLR 430; Isherwood & Dreyfuss Pty Ltd v. FC of T
78 ATC 4311; 8 ATR 735 (decision affirmed on appeal by Full Federal
Court 79 ATC 4031; 9 ATR 473). Much of the difficulty faced by the
Commissioner in these cases is arguably due to the very nature of
trading stock.
203. The subsequent enactment of Division 13 also makes
provision to overcome non-arm's length transfer pricing arrangements
involving expenditure which would otherwise be deductible under
subsection 51(1) - including arrangements to purchase trading stock at
inflated prices under an "international agreement". Division 13 contains
a specific provision (subsection 136AB(2)), which states that the
operation of section 31C is to be disregarded whenever the Division is
applied.
Flowchart of Division - for separate legal
entities
204. The basic structure of Division 13 and the
preconditions for its application to dealings between separate legal
entities are shown in the following flowchart (see next page).
Outline of the basic concepts
205. In broad terms, and as the above diagram indicates,
the legislation provides that the following conditions must all be
satisfied before an adjustment can be made under section 136AD:
- (a)
- a "taxpayer" (see paragraphs 211 - 213)
must have either "supplied or acquired property" (see paragraphs
214 - 222)
under an "international agreement" (see paragraphs 267 -
272)
;
- (b)
- the Commissioner must be satisfied that, in respect of "the
agreement" (see paragraphs 239 - 266)
, any "two or more of the parties were not dealing with each other at
arm's length" (see paragraphs 273 - 302)
in relation to the supply or acquisition of property;
- (c)
- the "consideration" (see paragraphs 303 - 309)
in respect of the supply or acquisition of property was not the "arm's
length consideration" (see paragraphs 310 - 327)
or no consideration was received or receivable; and
- (d)
- the Commissioner determines that the relevant subsection should
apply to the taxpayer in relation to the supply or acquisition of
property (see paragraphs 390 - 395)
.
206. Where all the above conditions are satisfied, the
legislation deems the consideration in respect of the supply or
acquisition of property to be equal to the arm's length consideration (see paragraphs 396 - 400)
for "all purposes of the application of the ITAA" in relation to the
taxpayer (see paragraphs 181 - 183)
.
207. Where it is not possible or practicable for the
Commissioner to ascertain the arm's length consideration, subsection
136AD(4) allows the Commissioner to determine an amount which is deemed
to be the arm's length consideration in respect of the supply or
acquisition of property (see paragraphs 328 - 342)
.
208. In addition, subsection 136AD(2) (i.e. in
situations where no consideration is received or receivable in respect
of the supply of property) also contains a mechanism to enable the time
of derivation of the deemed arm's length consideration to be determined (see paragraphs 398 - 400)
.
Where section 136AD has been applied and a question
arises as to the source of any adjustment, or the allocation of any
expenditure between Australian sourced income and other income, the
Commissioner may also determine these questions under subsections 136AE
(1) - (3) (see paragraphs 412 - 419)
.
210. The Commissioner is also authorised under section
136AF to make such compensating consequential adjustments as are fair
and reasonable. Consequential adjustments will be discussed in more
detail in a later Ruling.
The meaning of "taxpayer" for the purposes of Division
13
211. Subsections 136AD(1) - (3) focus on "a taxpayer".
The term "taxpayer" is defined for the purposes of Division 13 in
subsection 136AA(1). The effect of this definition is to extend the
meaning of the term "taxpayer" found in subsection 6(1) of the ITAA to
include a partnership and a taxpayer in the capacity of a trustee.
Paragraph (a) of subsections 136AD(1) - (3), makes no distinction
between resident and non-resident taxpayers.
212. The provisions of Division 13 apply with equal
force to Australian owned and foreign owned companies.
213. The scope of Division 13, while extensive, is still
subject to the doctrine of territorial limitation which requires that
there be a relevant connection with Australia. Therefore, the definition
of "taxpayer" has to be read as relating to a person or persons whose
income or profits or gains of a capital nature are relevant in the
context of ascertaining Australian taxation liabilities (e.g. income tax
or withholding tax) or losses. In other words, a "taxpayer" has to be
someone who is, or is deemed by law to be, an Australian resident
(including a company) or someone who has sufficient economic connection
with Australia such that the person has derived Australian sourced
income. It also includes a person (whether a resident or not) who would
have derived income that would have been liable to Australian tax or
relevant to the calculation of carry-forward losses had the dealings by
the person being at arm's length.
Supply or acquisition of property
214. The terms "supply" and "acquire" are both defined
in subsection 136AA(1) to encompass the ordinary meaning of the words
(which would include such things as sales, purchases, transfers and
assignments), as well as leasing, hiring, hire purchase and exchange of
property. Additionally, the term "supply" includes situations where
something is provided, granted or conferred and the term "acquire"
includes situations where something is obtained, gained or
received.
215. In Allina Pty Ltd v. FC of T
1991 ATC 4195; (1990) 21 ATR 638, the Full Federal Court considered the
meaning of the word acquire in the context of paragraph 160ZH(9)(a) of
the ITAA and said:
""To acquire", according to its ordinary and natural meaning,
connotes in our view to obtain, gain or get something. The first meaning
given in the Oxford English Dictionary, 2nd ed (1989), is: "1. To gain,
obtain or get as one's own, to gain the ownership of (by one's own
exertions or qualities)." The second meaning is: "2. To receive, or get
as one's own (without reference to the manner), to come into possession
of." The Macquarie Dictionary gives a similar definition. There must be
something in existence that can be obtained or gained; but the word is
apt to encompass the case where one person creates an asset which at the
same time comes into the possession of or is obtained by another
person."
216. The Full Federal Court was considering acquisitions
of assets. In the context of Division 13, the word "acquire" has to be
construed against the background that "property" is defined to include
"services". Clearly then, it is apt to cover things not yet in existence
as capable of being acquired. Transactions in commodity or financial
futures and in respect of future production or future research are
examples of this. This interpretation is reinforced by the fact that
"acquire" also includes an agreement to acquire.
217. Given the breadth of subject matter encompassed by
the term "property" (discussed in paragraphs 223 - 238 below), the
expression "supply of property" is therefore wide enough to cover the
case where a benefit is conferred by one company on another, such as in
respect of permitting access to or use of industrial or intellectual
property. Similarly, the expression "acquisition of property" is wide
enough to include the case where one of the companies within the group
provides a particular service (e.g. communications and reporting through
central computer facilities or management services) to some or all of
the companies within the group.
218. The breadth of the expressions "supply of property"
and "acquisition of property" are a clear indication of the legislative
intent to cover all forms of dealings between companies. The expressions
are wide enough to include, for example:
- (a)
- a gift of property from one company to another or the provision
of services free of charge;
- (b)
- the provision of property to or the obtaining of property from a
joint venture;
- (c)
- an exchange of property (including an exchange of property for
services) as part of a barter or countertrade arrangement;
- (d)
- the conferring of any economic or commercial advantage or benefit
by way of credit, loan or guarantee facilities;
- (e)
- any transfer of technology or knowledge of any economic or
commercial advantage between companies; and
- (f)
- the granting of exclusive marketing rights in a particular
geographical area in respect of a unique or highly differentiated or
patented product or service.
219. Paragraph 136AA(3)(a) provides that "a reference to
the supply or acquisition of property includes a reference to agreeing
to supply or acquire property". Accordingly, "property" would include
property which is not yet in existence (eg. next year's production). The
expressions "supply of property" or "acquisition of property" would be
wide enough therefore to include an arrangement for a loan in which the
terms of the loan are clearly established, including agreement for the
payment of interest, and in respect of which the parties to the
arrangement either fail to pay or fail to demand payment of the agreed
interest. The provision of the principal amount of the loan would
constitute the supply of property even where the terms of the loan do
not provide for the payment of interest. An agreement to pay interest
would constitute an agreement to supply property and would therefore
fall within the expanded meaning of the expression "supply of
property".
220. Paragraph 136AA(3)(e) states that "a reference to
the supply or acquisition of property under an agreement includes a
reference to the supply or acquisition of property in connection
with
an agreement." (emphasis added). The Explanatory Memorandum at page 63
states that paragraph 136AA(3)(e) "is a safeguarding measure to ensure
that a supply or acquisition of property that is technically not made
under an agreement, but nevertheless occurs in connection with the
agreement, is to be brought within the scope of the Division." The
provision is designed to extend the range of matters to which Division
13 applies and would include back to back deals (see the example at
paragraph 279), side deals or collateral arrangements (see example at
paragraph 282) and the supply or acquisition of property by an associate
to or from a third party (see example at paragraph 274).
221. The expression "in connection with" was considered
by Nourse J in Emery v. IRC
(1981) STC 150 at p171, where reference was made to the decision of
McFarlane J in Re Nanaimo Community Hotel Ltd
[1944] 4 DLR 638 at 639:
"One of the very generally accepted meanings of "connexion" is
"relation between things one of which is bound up with or involved in
another"; or again, "having to do with". The words include matters
occurring prior to as well as subsequent to or consequent upon so long
as they are related to the principal thing. The phrase "having to do
with" perhaps gives as good a suggestion of the meaning as could be
had."
222. It is clear there must be a relevant connection
between the supply or acquisition of property and an "international
agreement" and that "a taxpayer" has to be either a supplier or acquirer
of property, but "the taxpayer" need not be the only party to supply or
acquire property in connection with the "agreement". Nor is there any
requirement for "the taxpayer" to be a party to the "agreement" in a
formal sense. The expression "in connection with" includes the indirect
supply or acquisition of property through interposed entities within the
operation of Division 13.
The meaning of the term "property"
223. For the purposes of Division 13, the term
"property" is defined in subsection 136AA(1) in considerably broader
terms than the common law definition, including such things as:
- (a)
- a chose in action;
- (b)
- any estate, interest, right or power, whether at law or in
equity, in or over property;
- (c)
- any right to receive income; and
- (d)
- services.
The expressions "right to receive income" (see paragraph 228
below) and "services" (see paragraphs 229 - 237 below) are also defined
in subsection 136AA(1).
224. Decided cases which dealt with the term "property"
in the context of the ITAA provide some guidance as to how it might be
interpreted for the purposes of Division 13. In FC of T v. Miranda,
76 ATC 4180 at 4189; 6 ATR 367 at 377, Rath J in considering the
meaning to be given to the term "property" in paragraph 26(a) of the
ITAA, saw no reason to restrict its meaning. His Honour referred to Stroud's Judicial Dictionary
(3rd. ed., vol.3 p. 2340) where the term "property" is defined as the
generic term for all that a person has dominion over. His Honour
referred to Stroud's
quotation of Langdale MR in Jones v. Skinner
5 LJ Ch 90 where he said:
"'Property' is the most comprehensive of all terms which can be
used, inasmuch as it is indicative and descriptive of every possible
interest that a party can have."
225. In ordinary usage, the word "property" is used both
as a singular term (i.e. to describe a single discrete item of property)
and as a collective term (i.e. to describe a collection of items of
property). When used in conjunction with the terms "supply" and
"acquire", the expressions "supply of property" and "acquisition of
property" (discussed in paragraphs 214 - 222) can refer to both the
supply or acquisition of a discrete item of property and the supply or
acquisition of a number of items of property (e.g. a "basket of goods"
as referred to in paragraph 432).
"Property" includes choses in action
226. The ordinary meaning of property clearly includes
all forms of tangible property, and intangible property such as
copyrights, patents and trademarks. For the purposes of Division 13, the
meaning of the term "property" has been expanded to include choses in
action, i.e. rights enforceable in law or equity. A chose in action
means a thing recoverable by action as opposed to a thing which is
enjoyed by possession (refer to Halsbury's Laws of England
4th ed, vol 6, para 1). This is the classical distinction between
enforceable rights and property (in its ordinary sense). Examples of
choses in action would be debts, contractual rights or rights to sue for
breach of copyright, patent, negligence or trespass. It could be argued
that there are elements of overlap between choses in action and the
ordinary meaning of property.
"Property" includes rights or powers in or over
property
227. Paragraph (b) of the definition of "property"
covers a range of rights or powers in or over property. For example, a
lease would be covered, as would the equitable interest under a contract
of purchase. Again, there are overlaps with the ordinary meaning of
property. The definition also covers powers of appointment or waiver and
the power to licence or permit the use of or access to any
property.
"Property" includes any right to receive
income
228. Rights to receive income are expressly included in
the definition of property but regard would have to be had to the
provisions of section 102A of the ITAA and the principles developed in Norman v. FC of T
(1963) 109 CLR 9, Shepherd v. FC of T
(1965) 113 CLR 385 and Myer v. FC of T
(1987) 163 CLR 199 in relation to whether and, if so, how a taxpayer
can effectively transfer such a right for tax purposes.
The term "property" includes "services"
229. The inclusion of "services" represents a
significant extension of the ordinary meaning of the term "property".
The term "services" itself, is defined broadly in subsection 136AA(1),
to embrace not only the ordinary meaning, but also rights, benefits,
privileges or facilities generally.
"Services" includes benefits
230. "Services" includes "benefits". The word "benefit"
is intended to encompass anything that would bestow an economic or
commercial advantage; that is, something that, in the context of this
Ruling, would assist a company's profitability or net worth by
enhancing, assisting or improving the company's income production,
profit making, the quality of its products, or which could result in a
reduction of expenses or otherwise facilitate the operations of the
company.
231. The ordinary meaning given to the word benefit in
the Macquarie Dictionary
is "anything that is for the good of a person or thing; to gain
advantage" and in the Shorter Oxford English Dictionary
as "advantage, profit, good".
232. A simple example of a benefit would be the receipt
of money (regardless of whether in a lump sum or otherwise) by one
entity from another in circumstances in which there was no obligation
for the payment to be made, such as with a gift. Another example would
be where a company is granted terms of trade (as distinct from the value
of the underlying property) more favourable than those ordinarily
available in the relevant market, e.g.:
- (a)
- terms of payment for goods supplied being either without penalty
for late payment or no provision for payment of interest on overdue
amounts, or payment not due until 180 days after supply where the
industry norm for payment terms is COD; or
- (b)
- the liability for warranty claims being solely the responsibility
of the distributing entity where usually there would be recourse to the
manufacturing entity in respect of such
claims.
233. In the context of Division 13, a benefit may be
regarded as something of economic or commercial value which an
independent entity might reasonably expect to pay for, or to obtain
consideration for supplying. In this regard it needs to be borne in mind
that circumstances will vary and the issue is whether the dealings are
reasonable in terms of the arm's length principle. It follows that a
benefit has to be reasonably capable of being identified and
valued.
"Services" includes privileges
234. The Macquarie Dictionary
defines privilege as including "a right or immunity enjoyed by a person
or persons beyond the common advantages of others: a prerogative,
advantage, or opportunity enjoyed by anyone in a favoured position (as
distinct from a right)". There is thus a large degree of overlap between
a benefit and a privilege. An example of a privilege would be the
situation which arises where an associated company, which is a
non-resident for Australian tax purposes, has much of the work
associated with its operations performed by staff of its parent company
located in Australia. The provision of commercial or technological
information, equipment and other facilities of the parent company not
available to the wider community or competitors, or the provision of
services by senior or junior staff, would each constitute a privilege or
benefit provided to the non-resident associate.
"Services" includes the conferring of rights, benefits or
privileges for which consideration is payable in the form of a
royalty
235. By virtue of sub-paragraph (a)(iii) of the
definition in subsection 136AA(1), "services" includes the conferring of
rights, benefits or privileges for which consideration is payable in the
form of a royalty, tribute, levy or similar exaction. The term "royalty"
is defined in subsection 6(1) of the ITAA and has itself been given an
extended meaning. The breadth given to these terms means that Division
13 could potentially apply to arrangements between companies relating to
the use of, or the right to use, any copyright, patent, design or model,
plan, secret formula or process, trade-mark, or the supply or
acquisition of scientific, technical, industrial or commercial knowledge
or information. The above reference to the supply of commercial
knowledge would include, for example, the possession and use of
marketing skills on behalf of another entity and the reference to
information would include, for example, the provision of market trend
information to another entity.
236. In a particular case, regard may need to be had to
the definition of royalty in any relevant double taxation
agreement.
237. The definition of "services" also includes
agreements of insurance and agreements for or in relation to the lending
of moneys (paragraphs (c) and (d) of the definition). It would therefore
include the provision of insurance cover, the guarantee of a loan and a
commitment to lend money. TR 92/11 addresses the application of Division
13 to loan arrangements and credit balances.
Other things covered by the term "property"
238. The term "property" also includes:
- (a)
- trading stock;
- (b)
- work in progress and other business inputs;
- (c)
- futures contracts, hedging agreements and forward sale and
purchase agreements;
- (d)
- cash and foreign exchange;
- (e)
- options, including the property in respect of which the option is
given;
- (f)
- the provision of finance (whether by loan, the provision of
credit or an advance or the purchase of commercial paper), including the
terms of any such provision;
- (g)
- debts, including the factoring and forgiveness of
debts;
- (h)
- financial products, including newly developed and developing
financial products;
- (i)
- leases and licences, including the terms upon which a lease or
licence is made;
- (j)
- hire-purchase agreements, including the terms of any such
agreement;
- (k)
- the transport of any property or personnel;
- (l)
- service, management and administration fees;
- (m)
- the provision of services such as administration, management,
marketing, sales or distribution services by head offices or companies
within a group of companies to other companies within the
group;
- (n)
- intangible assets including their development and use and their
royalty income flows;
- (o)
- gifts of money or plant and equipment; and
- (p)
- the manufacturing, processing or refining of goods or materials
belonging to someone else.
What is an "agreement" for the purposes of Division
13?
239. The term "agreement" is central to the meaning of
the expression "international agreement" (discussed in paragraphs 267 -
272) which is used in section 136AD. "Agreement" is defined broadly to
mean "any agreement, arrangement, transaction, understanding or scheme,
whether formal or informal, whether express or implied and whether or
not enforceable, or intended to be enforceable, by legal
proceedings".
240. The broad drafting of Division 13 reflects the
legislative intention of being able to address those situations where
parties, other than those directly involved with the supply or
acquisition of property, are somehow involved or can influence the
outcome of the dealings between the parties directly involved in the
supply or acquisition of the relevant property (see also the example at
paragraphs 279 - 281).
241. Although not having been the subject of judicial
consideration in the context of Division 13, courts have considered the
term "agreement" and similar terms in other provisions of the ITAA.
Expressions and terms found within the definition of "agreement" have
also been judicially considered.
The meaning of agreement
242. The word agreement is closest in nature to that of
a contract between parties and was considered in Re Symon, Public
Trustee v. Symon
[1944] SASR 102 at 110 where Mayo J said that:
"'Agreement' signifies primarily a contract, that is, a legally
binding arrangement between two or more persons, by which rights are
acquired by one or more acts or forbearances on the part of the other or
others."
243. However, "agreement" is not limited to its strict
legal sense in Division 13. It can be unilateral, in the sense that one
party can provide a benefit to another without obtaining any
consideration (subsection 136AD(2)). Again, one party could be acting
under dictation, e.g. a subsidiary following the directions of the
parent company, such that there may not be any notion of agreement as
understood by contract law.
244. Moreover, an agreement as defined in Division 13
can be legally unenforceable.
The meaning of arrangement
245. The word arrangement has been described as
something less than a binding contract or agreement, something in the
nature of an understanding between two or more persons ( Newton v.
FC of T,
(1958) 98 CLR 1 at 7; FC of T v. Lutovi Investments Pty Ltd,
(1978) 140 CLR 434 at 466). An arrangement may be informal as well as
unenforceable and the parties to it may be free to withdraw from it or
to act inconsistently with it, notwithstanding their adoption of it
( FC of T v. Lutovi Investments Pty Ltd
(ibid)). In other words, in the context of Division 13, an arrangement
(and therefore an "agreement") would exist if the facts showed a course
of dealing between the parties, even though no formal agreement had been
entered into and no legally enforceable relationship was
intended.
246. In Top Performance Motors Pty Ltd v. Ira Berk
(Queensland) Pty Ltd
(1975) 5 ALR 465 at 469; (1975) 24 FLR 286 at 291, the Full Court of
the Australian Industrial Court in considering the meaning of the word
"arrangement" appearing in section 45 of the Trade Practices Act
1974
, referred to the decision of the Privy Council in Newton v. FC of
T
(supra) and to the judgment of Diplock LJ in British Slag Ltd v.
Registrar of Restrictive Trading Agreements
[1963] 2 All ER 807 at 819 and said that:
"an arrangement of the kind contemplated in s.45 is conditional
upon a meeting of the minds of the parties to the arrangement in which
one of them is understood, by the other or others, and intends to be so
understood, as undertaking, in the role of a reasonable and
conscientious man, to regard himself as being in some degree under a
duty, moral or legal, to conduct himself in some particular way, at any
rate so long as the other party or parties conducted themselves in the
way contemplated by the arrangement." (per Smithers
J)
247. In respect of arrangements which are not
enforceable at law, Cross J in British Slag Ltd v. Registrar of
Restrictive Trading Agreements
[1962] 3 All ER 247 at 255 (referred to by Diplock LJ in the Court of
Appeal on appeal) said that:
"all that is required to constitute an arrangement not
enforceable in law is that the parties to it shall have communicated
with one another in some way and that as a result of the communication
each has intentionally aroused in the other an expectation that he will
act in a certain way."
The meaning of transaction
248. The word transaction has been described as "a
comprehensive word which includes any dealings with property": Barron (Inspector of Taxes) v. Littman
[1953] AC 96 at 113; (1952) 2 All ER 548 at 555 and "In its ordinary
sense it is understood to mean the doing or performing of some matter of
business between two or more persons": R v. Canavan and Busby
[1970] 3 OR 353 at 356 by the Ontario Court of Appeal.
249. The word transaction, in its ordinary sense, is not
limited to a single act or step but includes a series of acts or steps: Birks v C of T
(1953) 10 ATD 266 at 270 per Kitto J, Robertson v. IRC
[1959] NZLR 492 at 499. Both of the foregoing cases were relied on by
the Full High Court in Palmer v C of T
(WA) (1976 -1977) 136 CLR 406 in interpreting the word
transaction.
The meaning of understanding
250. The word understanding is of very wide import and
was considered in Top Performance Motors Pty Ltd v. Ira Berk
(Queensland) Pty Ltd
(supra) in the context of section 45 of the Trade Practices Act 1974.
In that case, Smithers J stated that:
"It seems to me also that an understanding must involve the
meeting of two minds. Where the minds of the parties are at one that a
proposed transaction between them proceeds on the basis of the
maintenance of a particular state of affairs or the adoption of a course
of conduct, it would seem that there would be an understanding within
the meaning of the Act."
251. This passage was cited by Fisher J in TPC v.
Nicholas Enterprises
(1979) 26 ALR 609 at 629. Fisher J, however, then went on to hold that
it was a necessary ingredient of an understanding that there be an
element of mutual commitment between the other parties to the
understanding. When the case went on appeal to the Full Federal Court, Morphett Arms Hotel Pty Ltd v TPC
(1979-80) 30 ALR 88 at 91-92, Bowen CJ who delivered the judgment of the
court, qualified his general agreement with the reasons of Fisher J when
he said, in obiter, that:
"As at present advised, it seems to me that one could have an
understanding between two or more persons restricted to the conduct
which one of them will pursue without any element of mutual obligation,
in so far as the other party or parties to the understanding are
concerned."
This is an example of a situation where the Commissioner could
conclude that there may be a unilateral agreement.
252. For the purposes of Division 13, the term
"understanding" will be read as including situations where the relevant
parties have a common view regarding the maintenance of a particular
state of affairs or the adoption of a course of conduct - whether or not
the state of affairs or course of conduct has been unilaterally created
or involves some element of mutual obligation.
The meaning of scheme
253. In Investment and Merchant Finance Corporation
Ltd v. FC of T,
(1970) 120 CLR 177 at 188-89, Windeyer J said, in respect of the
interpretation of the word scheme which appeared in the former paragraph
26(a), that:
"A scheme presupposes some programme of action, a series of steps
all directed to an end result. Similarly an undertaking is an enterprise
directed to an end result. Each word connotes activities that are
co-ordinated by plan and purpose - that whatever is done under the
scheme or pursuant to the undertaking is done as a means to an end. There may, in one sense, be several transactions, but they are
related because all directed to the attainment of the one end,
profit
." (emphasis added)
254. In XCO Pty Ltd v. FC of T,
(1971) 124 CLR 343 at 349, Gibbs J, when also discussing the word
"scheme" in the context of the former paragraph 26(a) said:
"A taxpayer can, within sec.26(a), carry out a scheme,
notwithstanding that what he does is done for the purposes of a larger
scheme to which others are parties."
255. The above statements are considered relevant to the
application of the word "scheme" contained within the definition of the
term "agreement" in subsection 136AA(1). The word "scheme" is used in
the neutral sense of a plan or system in the context of which property
is supplied or acquired. It is not used in the sense of a tax avoidance
scheme and does not require the demonstration of a purpose or
object
of avoiding Australian tax, though that may well be the effect
of a particular scheme (see also paragraphs 401 - 408).
256. When the meanings of the individual words in the
definition of "agreement" are considered it can be appreciated that few,
if any, non-arms length dealings between companies would be unable to be
brought within the operation of Division 13 if an independent party
could reasonably have been expected to have sought greater remuneration
or paid a lower cost in those circumstances and if there was evidence of
the underpayment of Australian tax as a result of those dealings. The
other preconditions for the application of Division 13 would also need
to be satisfied.
Determining the scope of an "agreement"
257. An "agreement" may in some cases constitute only a
single step, one contract, or one arrangement, for example, the supply
of a single shipment of particular goods. In other cases, an "agreement"
may comprise a number of steps, two or more contracts, two or more
arrangements or some combination of these which together form a broader
"agreement"; for example, a contract between related parties for the
supply of property being entered into on the understanding that a
contract for the acquisition of the same property will subsequently be
entered into between the first purchaser and another related party. It
is a long-established principle of legal construction that all related
transactions need to be considered together in order to properly
determine the true nature of an arrangement (e.g. FC of T v. Myer
Emporium Ltd
(1987) 163 CLR 199 at 216).
258. Where only a part of the "agreement" involves the
supply or acquisition of property, this part will not be viewed in
isolation but in the context of the broader arrangement, understanding
or scheme. It is only when all connected steps are viewed in their
proper context that the true nature, extent and effects of an
"agreement" can be determined.
259. For example, an agreement between related parties
for the sale of particular property may be entered into on the basis
that the property will be on-sold to another related party. Each
agreement might adopt a different pricing method that, taken in
isolation, would appear to be an arm's length consideration. However,
taken together as an intended preordained, integrated series of steps,
it may be clear that the party on-selling was bound to lose money
because of the way the separate agreements were priced. It is considered
that Division 13 would have application to either or both of the
agreements (In this regard, see FC of T v. Ball,
82 ATC 4701; 13 ATR 746, decision affirmed by High Court in Estate
of Ball v. FC of T,
84 ATC 4920; 15 ATR 1296).
260. That is not to say that the provisions of Division
13 cannot be applied to a particular transaction forming one part of a
broader arrangement, understanding or scheme or to a scheme within a
larger scheme as was the case in XCO Pty Ltd v. FC of T
(supra). However, due consideration would have to be given to the
existence of any broader agreement, but also taking account of the
legislative purpose behind Division 13.
Evidence of a course of conduct
261. Evidence of a course of conduct or a pattern of
trading between companies may be relied upon as evidence of the
formation of an "agreement" or its existence and its basic terms even
though there may be no evidence to show when, where by whom or in what
particular words such "agreement" was made, ( Brogden v.
Metropolitan Railway Co.
(1877) 2 App. Cas. 666 at 680, 686; Lahey v. Canavan
[1970] Qd. R. 224 at 230; Goodwin v. Temple
[1957] St. R. Q. 376 at 384-387). The same approach is also applicable
to variations to existing "agreements" ( Bowman v. Durham Holdings
Pty Ltd
(1973) 131 CLR 8 at 17-20; Winks v. W.H. Heck & Sons Pty Ltd
[1986] 1 Qd. R. 226 at 238).
262. A course of conduct or a pattern of trading between
companies may also constitute an admission receivable into evidence
against a company if such conduct or trading discloses an intention to
affirm or acknowledge the existence of an "agreement": ( Lustre
Hosiery Ltd v. York
(1935) 54 CLR 134 at 143-144; Grey v. Australian Motorists &
General Insurance Co.
[1976] 1 NSWLR 669 at 684-685).
Where having regard to paragraphs 261-162 evidence of a
course of conduct or a pattern of trading between companies exists, and
that pattern of trading is not consistent with the arm's length
principle and results in the underpayment of Australian income tax or
withholding tax, it could be expected that Division 13 will be applied
where all its preconditions for application have been satisfied.
Division 13 is "agreement" based and is not limited to
considering specific transactions
264. It has been suggested that in applying Division 13
regard can only be had to a specific transaction when deciding whether
the parties were dealing at arm's length in relation to a supply or
acquisition of property and whether the consideration given (if any) was
an arm's length consideration.
265. "Transaction" is a sub-set of "agreement" and (as
discussed in paragraphs 248 - 249 above) a range of lower level
transactions can fall within a broader transaction. Whilst section 136AD
clearly allows for the application of the Division in relation to each
supply or acquisition of property under an international agreement, more
than one specific transaction may be covered by an "agreement" and
regard would have to be given to other factors which would indicate what
independent parties dealing at arm's length with each other might
reasonably be expected to have done in comparable circumstances.
On occasions, companies may be involved in more than one
separate and distinct "agreement"
266. There may also be occasions where a company may be
involved in two or more separate and distinct "agreements", each
"agreement" being entire in itself and unrelated to any other
"agreement". Each of these separate and distinct "agreements" may
involve one or more steps, one or more contracts, one or more
arrangements or some combination of these. These individual and
unrelated "agreements" could be between the same parties or between
different parties. Whether more than one separate and distinct
"agreement" exists, will depend ultimately on the facts in each
particular case. Where this is so, the application of Division 13 would
have to be considered in the context of each or any of these separate
and distinct "agreements".
Provision of property under an "international
agreement"
267. The existence of an "international agreement" is
essential to the operation of section 136AD. An "international
agreement" can in very broad terms be described as dealings between
separate legal entities involving the supply or acquisition of property
across international borders. Taxation Ruling TR 92/11 discusses the
supply and acquisition of property under an "international agreement" in
relation to loans and credit balances.
268. A basic design feature of Division 13 is that where
dealings are limited to those between a branch office (permanent
establishment) and its head office (regardless of whether the entity is
a resident or a non-resident), there is no "international agreement"
since any dealings are within the same entity. This outcome reflects the
fact that Australia's domestic law (which adopts the single entity
approach) does not recognise intra-entity transactions. Such
transactions have therefore been excluded from the scope of section
136AD through the use of the concept of an "international agreement" and
the requirement that there be at least two parties who are not dealing
with each other at arm's length.
269. Division 13 contains special provisions in
subsections 136AE(4) - (6) covering dealings between different parts of
the same entity. These provisions, which give the Commissioner power to
allocate the income, profits and expenses between Australian and
overseas operations, will be the subject of a later Ruling.
270. Another basic design feature for section 136AD to
apply is that there must be a cross border dealing. The section does not
apply where all the relevant dealings are wholly within Australia.
However, regard must also be had to the possible existence of "back to
back" deals, side deals or other collateral arrangements, like the
examples in paragraphs 274, 279 and 282 below which have the effect of
shifting profits out of Australia.
271. The expressions "a business carried on" in
paragraph 136AC(a) and "carrying on a business" in paragraph 136AC(b)
have their ordinary meanings for the purpose of Division 13. The body of
law which has developed in respect of the similar expression in
subsection 51(1) would provide assistance in their
interpretation.
272. The following table lists all the basic
combinations covered by the concept of an "international agreement".
However, regard must also be had to the possible existence of "back to
back" deals, side deals or other collateral arrangements, which may
involve interposed entities and may have the effect that, in the context
of broader "agreements", onshore dealings may be covered by the concept,
as well as dealings between offshore parties. (for table see next page)
WHAT QUALIFIES AS AN INTERNATIONAL
AGREEMENT?
supply or acquisition by |
Resident company operating onshore |
NR company operating onshore through a PE |
NR company operating onshore but not through a PE |
Resident company operating offshore |
NR company operating offshore |
supply to or acquisition
from
|
|
|
|
|
|
Resident company operating
onshore
|
No 1 [totally domestic]
|
No 1 [exception to
136AC(a)]
|
Yes 136AC(a)
|
Yes 136AC(b)
|
Yes 136AC(a)
|
NR company operating
onshore through a PE
|
No 1 [exception to [exception
to 136AC(a)]
|
No 1 [exception to [exception
to 136AC(a)]
|
Yes 136AC(a)
|
Yes 136AC(b)
|
Yes 136AC(a)
|
NR company operating
onshore but not through a PE
|
Yes 136AC(a)
|
Yes 136AC(a)
|
Yes 136AC(a)
|
Yes 136AC(a) and (b)
|
Yes 136AC(a)
|
Resident company operating
offshore through a PE
|
Yes 136AC(b)
|
Yes 136AC(b)
|
Yes 136AC(a) and (b)
|
Yes 136AC(b)
|
Yes 136AC(a) and (b)
|
NR company operating
offshore
|
Yes 136AC(a)
|
Yes 136AC(a)
|
Yes 136AC(a)
|
Yes 136AC(a) and (b)
|
Yes
136AC(a)
|
NOTES TO TABLE:
"NR" stands for non-resident as defined in subsection 6(1) of the
ITAA
"PE" stands for permanent establishment as defined in subsection
136AA(1) of the ITAA
1 Subject to the exceptions referred to in paragraph 272 in
relation to back to back deals, side deals or other collateral
arrangements.
2 However such company is unlikely to be a "taxpayer" for the
purposes of Division 13 (see paragraphs 211 - 213), unless the accruals
legislation applies and regard must also be had to the exceptions
referred to in note 1 above.
Not dealing with each other at arm's length
273. One of the principal requirements in subsections
136AD(1), (2) and (3) before Division 13 can be applied, is that the
Commissioner must be satisfied that the parties to the agreement or any
two or more of those parties were not dealing at arm's length with each
other (paragraph (b) of subsections 136AD(1) - (3)). In addressing this
issue, regard is to be had to "any connection between any 2 or more of
the parties to the agreement or to any other relevant circumstances".
The expressions "any connection between" or "any other relevant
circumstances" are expressions of the widest import.
The meaning of "any connection between"
274. The expression "any connection between" is not
dependent upon the existence of control or share ownership although
cases in which non-arm's length transfer pricing does occur are normally
found where one of the parties controls the other, or they are under
common control. Instances where dealings between unrelated parties are
on non-arm's length terms can also arise. This aspect of unrelated
parties not dealing at arm's length was discussed by Mr Boucher in his
1983 Speech. In this address, the following example was given of a
situation in which section 136AD would have application:
"Another illustration of the point that non-arm's length dealings
can operate outside the area of dealings between affiliates is provided
by a case we have experienced in practice. A company in Australia bought
a raw material from an independent supplier overseas. It paid an
inflated price but was prepared to do so because it sold the finished
product, at a correspondingly inflated price, to an Australian affiliate
of the overseas supplier. The purchase by the interposed company would
be open to attack under Division 13."
275. This comment needs qualification. Aus Co. 1 would
be subject to a possible adjustment under Division 13 if, for example,
there was tax deferral or tax rate arbitrage on a year to year basis.
For example, the raw materials could be paid for in Year 1 and the
income derived in Year 2 when tax rates had decreased.
276. The example also gives rise to the need to consider
the overall arrangement and consideration would have to be given to
whether Division 13 should be applied to Aus Co. 2. Where similar
situations are encountered in practice, paragraph (b) of the relevant
subsection (subsection 136AD(1), (2) or (3)) would be satisfied and
section 136AD could be expected to apply.
277. In the context of Division 13, the expression "any
connection between", is not dependent upon the existence of control or
share ownership. Without limiting the scope of the expression, it would
include, for example:
- (a)
- a direct or indirect shareholding in one company by another
company;
- (b)
- the common ownership of companies even though there may be no
direct or indirect shareholding between the subsidiaries;
- (c)
- the ability of one company to obtain an interest in another
company through:
- (i)
- an existing option agreement;
- (ii)
- the fact that convertible notes are held;
- (iii)
- the ownership of convertible preference shares;
- (d)
- the existence of common directors;
- (e)
- the existence of common executives; and
- (f)
- involvement in a cartel.
The meaning of "any other relevant
circumstances"
278. The expression "any other relevant circumstances"
is similarly a very wide expression. The question of what are relevant
circumstances will depend on the facts in each particular case. The
Explanatory Memorandum gives the following example at page 66:
"there can be cases where formally unrelated parties to an
agreement do not deal with one another on an arm's length basis, viewed
simply in relation to a particular supply or acquisition of property.
This could be the case where the particular transaction which reduces a
taxpayer's Australian income is offset by benefits under another
seemingly unrelated agreement, which may accrue abroad, and perhaps to
an associate of the taxpayer."
279. The example contained within the Explanatory
Memorandum and referred to in the previous paragraph can be illustrated
in the following diagram:
Two unassociated company groups comprising AusCo.1 and ForCo.1 in
one group and AusCo.2 and ForCo.2 in the other group have agreed that
AusCo.1 will receive 80% of the arm's length consideration from AusCo.2
in respect of the supply of property in Australia, while AusCo.1's
offshore associate, ForCo.1, will receive the balance of 20% of the
arm's length consideration from ForCo.2.
280. This example provides a good illustration of the
width of Division 13 by showing that it can embrace what at first glance
appears to be a totally domestic arrangement. In this example, a
non-resident has supplied property (the payment by ForCo.2 to ForCo.1
either with or without other property being transferred between them)
which gives the "agreement" (being the agreement between the two
unassociated company groups) its international flavour and renders the
"agreement" an "international agreement". This results in paragraph (a)
of subsection 136AD(1) being satisfied. On the facts as presented,
paragraphs (b) and (c) of subsection 136AD(1) are also satisfied and in
such circumstances, it could be expected that the Commissioner would
exercise the discretion in paragraph (d) of subsection 136AD(1) as the
Australian revenue has suffered as a consequence of the non-arm's length
dealing.
281. This example also serves to illustrate the point
made in paragraph 240 above as to why the legislation has adopted the
notion of an "agreement" and was not restricted to only those dealings
which involve the direct supply or acquisition of property to or from a
non-resident. In this example, Division 13 requires that the
consideration received by AusCo.1 be adjusted upwards to the arm's
length consideration for the property it supplied to AusCo.2. This can
be done by considering both sides of the back to back arrangement
together. Consideration should also be given to whether prosecution
action is warranted.
282. In the 1983 Speech, Mr Boucher also gave an example
of a situation to which the Division would apply as a result of "any
other relevant circumstances" even though there might not be "any
connection" between two or more of the parties. He said:
In this example, ForCo.1 and AusCo.1 are associated. No
association exists between AusCo.1 and ForCo.2.
"(Consider) a deal between a company in Australia that is a
member of one group with a company overseas that is a member of another,
quite unrelated group. The particular transaction could be one that
results in the company in Australia receiving less for its exports than
the relevant price on the open market. Why, it might be asked, should
the company here do that. The answer could be that there are other,
completely off-shore, deals between members of the two company groups
that, in one way or another, redress for each group as a whole the
income imbalance resulting from the reduced export price to the company
in Australia. There might, for example, be such an off-shore agreement
not to compete in a particular market.
Whatever might be said about the arm's length nature of the set
of deals between each of the two groups considered as a whole, the
export transaction itself is not one carried out at arm's length and
Division 13 is there to redress the revenue imbalance for Australia that
would otherwise exist."
283. Without in any way limiting the width of the
expression "any other relevant circumstances", in the context of
Division 13 the expression would include, for example, the existence of:
- (a)
- a market sharing agreement or agreement not to enter a particular
market;
- (b)
- any back to back or collateral arrangements or side deals;
and
- (c)
- an income sharing agreement that does not properly reflect the
contributions of the parties.
The meaning of "not dealing at arm's length with each
other"
284. The expression "not dealing at arm's length with
each other", is not defined, though it is used in a number of provisions
throughout the ITAA. In Barnsdall v. FC of T,
88 ATC 4565; (1988) 19 ATR 1352, Davies J, in considering the
expression "not dealing with each other at arm's length" in the context
of subsection 26AAA(4), held that:
"(the) term should not be read as if the words "dealing with"
were not present. The Commissioner is required to be satisfied not
merely of a connection between a taxpayer and the person to whom the
taxpayer transferred, but also of the fact that they were not dealing
with each other at arm's length. A finding as to a connection between
the parties is simply a step in the course of reasoning and will not be
determinative unless it leads to the ultimate conclusion."
This interpretation was also agreed with by Hill J in The
Trustee for the Estate of the late AW Furse No 5 Will Trust v. FC of T,
91 ATC 4007; 21 ATR 1123.
285. Given the similarity in wording between the
expressions "not dealing with each other at arm's length" in subsection
26AAA(4) and "not dealing at arm's length with each other" in paragraph
(b) of subsections 136AD(1) - (3), and the fact that in both contexts
the Commissioner has to have regard to any connection between the
taxpayers or any other relevant circumstances, the above statement of
Davies J is considered equally applicable to the interpretation of the
expression "not dealing at arm's length with each other" in Division
13.
286. The legislative formula in paragraph (b) of
subsections 136AD(1) - (3) focuses on the type of dealing between the
parties rather than merely on the relationship between them. Hence, the
presence or absence of such matters as those listed in paragraph 277
above will not necessarily be determinative of whether or not any of the
parties to an "agreement" were dealing at arm's length with each
other.
287. In The Trustee for the Estate of the late AW
Furse No 5 Will Trust v. FC of T
(supra), Hill J, in relation to the expression "not dealing with each
other at arm's length" in subsection 102AG(3) of the ITAA, said that:
"What is required in determining whether parties dealt with each
other in respect of a particular dealing at arm's length is an
assessment whether in respect of that dealing they dealt with each other
as arm's length parties would normally do, so that the outcome of their
dealing is a matter of real bargaining." (emphasis
added)
288. It will therefore be relevant to also consider
whether the outcome of dealings between the relevant parties is a matter
of real bargaining, in terms of the consideration that passed between
them as a consequence of their dealings and the overall manner and
effect of what the parties did, for the purpose of being satisfied as to
whether or not any two or more of the parties to the "agreement" were
dealing at arm's length with each other. There is thus some degree of
overlap between the tests in paragraphs (b) and (c) of subsections
136AD(1) - (3).
289. The use of the concept of "arm's length
consideration" in Division 13 is modelled on the arm's length principle.
This principle is in turn modelled on notions of comparison and
predication about what independent parties dealing at arm's length
either did or might reasonably be expected to have done in the
taxpayer's circumstances. It is therefore relevant to consider whether
any comparative analysis was done and to what extent the taxpayer relied
on it. Again, this necessarily involves consideration be given to the
outcome of the dealing. It is not confined to an examination of process,
though process is also relevant.
290. Real bargaining between related parties could be
expected to be achieved where the conditions in which the bargaining is
undertaken are similar to those that would exist between unrelated
parties dealing at arm's length. The view is expressed in paragraph 2 of
the 1979 OECD Report that conditions for arm's length dealings are
sometimes fulfilled by members of company groups where "the members have
a considerable amount of autonomy so that they can and often indeed do
bargain with each other in a manner similar to that of independent
entities". We would go further and add that where such conditions do
exist, failure by the members to exercise that autonomy and operate as
separate profit centres, would be unlikely to lead to a result that is
consistent with the arm's length principle.
291. Listed below are some factors (by no means
exhaustive) which, if shown to exist, would lend support to arguments
that conditions for real bargaining between related parties were similar
to those existing between unrelated parties dealing with each other at
arm's length (although, none of them in isolation would be conclusive of
those arguments in their own right):
- (a)
- members of company groups being allowed to acquire property (and
services) from unrelated parties where the consideration would be
lower;
- (b)
- members of company groups being allowed to supply property to
unrelated parties where the consideration would be higher;
- (c)
- each entity having its own profit and cost responsibility and
user pays principles applying in relation to goods and services provided
between the entities; and
- (d)
- manager remuneration is either significantly or wholly related to
the economic performance of the individual entity - and there is no
scope for rewarding performance detrimental to the individual entity
(but which is of overall advantage to the
group).
292. The weight to be given to the above factors will
depend on the particular case and individual factors taken in isolation
would not be conclusive. Moreover, it needs to be acknowledged that the
absence of some or all of the factors in (a) to (d) does not necessarily
lead to the conclusion that the parties were not dealing at arm's
length. The weight to be given to these factors would also depend on the
nature and the extent of the documentation that the company has to
support its contentions. In this regard, reference should be made to the
comments at paragraphs 299 and 368 - 385.
293. On the other hand, real bargaining between related
parties would not usually be expected to be achieved where:
- (a)
- the same directors, officers, or representatives handled the
negotiations on behalf of all the related parties; or
- (b)
- where one party may have directed the negotiations or determined
the outcome of the dealings for the related
parties.
294. In the Canadian case of Minister of National
Revenue v. Merritt & Another
69 DTC 5159, referred to with approval by Davies J in Barnsdall v
FC of T
(ibid), Cattanach J said at pp 5165-5166:
"where the 'mind' by which the bargaining is directed on behalf
of one party to a contract is the same 'mind' that directs the
bargaining on behalf of the other party, it cannot be said that the
parties are dealing at arm's length. In other words where the evidence
reveals that the same
person was 'dictating' the 'terms of the bargain' on behalf of both
parties, it cannot be said that the parties were dealing at arm's
length."
295. Davies J stated that this case and other Canadian
cases to which he referred in his judgment, looked primarily to the
relationship between the parties and to matters of influence and
control. He did not disagree with the analysis of Cattanach J. but
accepted that there may be transactions between related parties in which
the parties deal with each other at arm's length.
296. The fact that the parties to an "agreement" are
under common control raises an issue of whether the parties were not
dealing at arms length with each other. However, as suggested in the
cases referred to above, other factors such as pricing and the terms and
conditions of the "agreement" may be enough to overcome this concern, if
they show that the "agreement" was concluded on the basis of arm's
length dealing, i.e. on rates available on the open market to the world
at large and the normal terms of trade available to those parties in the
relevant market were adopted.
297. In other words, the Commissioner needs to be
satisfied that all aspects of the relevant agreement can be explained by
reference to ordinary commercial dealings and real bargaining, and that
there is nothing that can be explained only by reference to a special
relationship between the parties that indicates acquiescence or a
facade.
298. It needs to be recognised that a strong market
position may enable one entity to negotiate from a position of strength,
such that the parties with whom it deals cannot negotiate their desired
outcomes. Where this results from the particular dynamics of the market
it does not, on its own, justify a conclusion that there was an absence
of real bargaining.
299. In order to show that real bargaining occurred in
respect of dealings between related parties, it would be expected that
the parties would have brought into existence during the
negotiation phase,
the type of documentation independent parties dealing at arm's length
would have used in comparable circumstances and would have addressed
compliance with the arm's length principle. The documentation and
information held by taxpayers needs to be sufficient to enable an
effective assessment of compliance with the arm's length principle. This
view is reflected in paragraph 25 of the 1979 OECD Report. This
information, together with documents in respect of any subsequent
variations of contracts or arrangements, would be the best evidence for
a taxpayer to be able to establish that the relevant dealing was on
arm's length terms. Regard would also have to be had to the matters in
paragraphs 326 and 327. The nature of the documentation we would expect
to be held and we will be seeking from companies will be addressed in
more detail in a later Ruling.
300. The mere fact that any two or more of the parties
to an agreement are associated or are "connected" in the sense referred
to in paragraph 274 above, will not necessarily be determinative in
concluding that they were not dealing at arm's length with each other
( The Trustee for the Estate of the late AW Furse No 5 Will Trust v.
FC of T
(supra)). If, after reviewing all the relevant facts (and bearing in
mind that the outcome of the dealing must be consistent with real
bargaining), it is clear that the parties to the relevant "agreement"
were dealing with each other on an arm's length basis in respect of the
supply or acquisition of property, then paragraph (b) of subsections
136AD(1) - (3) will not be satisfied and section 136AD will have no
application to the relevant supply or acquisition of property (see the
Explanatory Memorandum at page 63).
301. It has been suggested that the ATO, by insisting on
the need for arm's length dealing and the adoption of arm's length
consideration, is telling taxpayers how to run their businesses. This is
not the case. Division 13 is concerned solely with the taxation
consequences of cross-border dealings. It states a number of factors to
which the Commissioner must have regard before the discretion in
Division 13 can be exercised. In particular, an objective assessment is
required of whether the parties were dealing at arm's length and whether
they used the arm's length consideration. It then empowers the
Commissioner, having properly considered all relevant factors, to make
an adjustment where appropriate so that for taxation purposes the
correct arm's length amounts of income and deductions are used.
302. Accordingly, it is a matter of applying Division
13, consistently with international practice and convention, in
accordance with the arm's length principle as reflected in its
wording.
The meaning of consideration received or receivable, or
given or agreed to be given
303. Other than paragraph 136AA(3)(b) providing that a
reference to consideration includes property supplied or acquired as
consideration, and a reference to the amount of any such consideration
as being a reference to the value of the property, the term
"consideration" is not defined in either Division 13 or in section 6 of
the ITAA. Accordingly, the word "consideration" has its ordinary meaning
in the context in which it appears. The Macquarie Dictionary
defines "consideration" as:
" 5.
Law. in a contract, or other legal transaction, the promise by which
some right or benefit accrues to one party, in return for which the
party who receives the benefit promises or conveys something to the
other."
304. A general principle of contract law is that "whilst
consideration need not be adequate it must be of value" (Halsbury's
Laws of England
). In Thomas v. Thomas
(1842) 2 QB 851 at p859, Patteson J said:
"Consideration means something which is of value in the eye of
the law, moving from the plaintiff ... ".
And in Currie v. Misa
(1875) LR 10 Exch 153 at 162:
"A valuable consideration, in the sense of the law, may consist
either in some right, interest, profit, or benefit accruing to one
party, or some forbearance, detriment, loss or responsibility given,
suffered or undertaken by the other".
305. The foregoing discussion has focussed on a meaning
to be given to the word "consideration" in the law of contract. However,
the interpretation of a word appearing in a statute should not be
divorced from its context ( Cooper Brookes (Wollongong) Pty Ltd v.
FC of T
(1981) 147 CLR 297). In this regard, it should be noted that the
references to "consideration" appearing in paragraphs 136AD(1) - (3) are
in the context of the amount
of the consideration which "was received or receivable by the taxpayer"
and "the taxpayer gave or agreed to give " in respect of the supply or
acquisition (or that there was no consideration) and not simply to
"consideration".
306. This context indicates that the reference to
"consideration" should be construed as a reference to anything of value
that actually passes between the parties, or that was agreed to pass as
payment for the supply or acquisition of property. This is reinforced by
the fact that the term "agreement" encompasses informal arrangements,
understandings and schemes. Further weight is given to this
interpretation when regard is had to the way the word "consideration" is
used in paragraphs 136AA(3)(c) and (d) in the context of defining the
expression "arm's length consideration" for the purposes of the Division
and to the use of the expression "the amount of that consideration"
appearing in paragraphs 136AD(1)(c) and (3)(c).
307. Representations have been made that an adjustment
to income should not be made in respect of property supplied by a
resident parent company to a non-resident subsidiary because:
- (a)
- the parent company receives immediate and adequate compensation
in the form of an increase in the value of the shares it holds in the
subsidiary;
- (b)
- the parent company is likely to receive an increased flow of
dividends from the non-resident subsidiary, the likely increase being
adequate compensation; or
- (c)
- the non-resident subsidiary is in the practice of paying
dividends approximately equal to its after tax profits, and
consequently, there has therefore been no profit
shifting.
308. These propositions are not accepted because they do
not pay sufficient regard to the fact that the companies are separate
legal persons. Nor do they properly address the tax effect and, if
accepted, would make Division 13 inapplicable to non-arm's length
dealings between a resident parent company and a non-resident subsidiary
despite the clear intention of the legislation, expressed in its terms
and confirmed in the Explanatory Memorandum and the Second Reading
Speech. Such propositions are based on a meaning of the term
"consideration" which is inconsistent with the notion of the supply or
acquisition of property under an international agreement between two or
more separate legal entities and the requirement for arm's length
consideration to be used in such dealings.
309. Where, for example, an arm's length supplier of
property would have received regular payments for the property supplied
over a period of time, the Australian revenue would lose if assessable
income is to be recognised only if and when dividends are actually
distributed. In this regard, it does not matter whether the potential
dividends would be assessable or exempt.
Arm's length consideration
310. Paragraphs 136AD(1)(c) and (3)(c) when read with
the definitions of arm's length consideration in paragraphs 136AA(3)(c)
and (d) require a comparison to be made between
:
- (a)
- the consideration that was:
- (i)
- received or receivable in respect of the supply of property
(subsection 136AD(1)(c)); or
- (ii)
- given or agreed to be given in respect of the acquisition of
property (subsection 136AD(3)(c)); and
- (b)
- the arm's length consideration in respect of the supply or
acquisition.
Where the consideration was less than or more than might
reasonably be expected to have been received or given, as the case may
be, in an arm's length dealing, then paragraph (c) of the relevant
subsection would be satisfied.
In the case of subsection 136AD(2) no comparison with an
arm's length consideration needs to be made in order for paragraph (c)
of the subsection to be satisfied. The relevant test in paragraph
136AD(2)(c) is satisfied if no consideration (in the sense referred to
in paragraphs 305 - 306) was received or receivable in respect of the
supply of property.
312. The expression "arm's length consideration" is
defined in paragraphs (c) and (d) of subsection 136AA(3) as the
consideration that might reasonably be expected to have been:
- (a)
- received or receivable in respect of the supply; or
- (b)
- given or agreed to be given in respect of the
acquisition,
if the property had been supplied or acquired, as the case may
be, under an agreement between independent parties dealing at arm's
length with each other in relation to the supply or
acquisition.
Arm's length consideration reflects commercial and market
realities and the nature of business
313. An important aspect of an arm's length
consideration is that it should be consistent with the consideration
that would arise as a result of real bargaining between independent
parties.
314. It should also be borne in mind that the incurring
of expenditure is not a measure of, or a substitute for, the arm's
length consideration. The quantum of the expenditure incurred is but one
factor (and in some cases a very important factor) to take into account
in ascertaining the arm's length consideration.
315. Implicit in the concept of the "arm's length
principle" and of the expression "arm's length consideration" used in
Division 13 is the notion that independent parties when evaluating the
terms of a potential deal would compare the deal to the other options
realistically available to them and would enter into the deal only if
there was no alternative clearly of greater commercial advantage to the
individual entity. It could therefore be said that independent parties
who were dealing at arm's length would each seek to maximise the overall
value of their respective entities from the economic resources available
to or obtainable by them. Optimal use of economic resources would take
into account such matters (non exhaustive) as:
- (a)
- the functions performed or to be performed, the assets and skills
used or available for use and the degree and nature of the risks
involved and/or to be rewarded;
- (b)
- the short term and long term business strategies of the entity,
including such things as:
- (i)
- corporate and group goals;
- (ii)
- actual and desired market share; and
- (iii)
- management of business and market
risks;
- (c)
- the nature of the markets in which the entity was operating or
seeking to operate, including such things as:
- (i)
- the ease of entry and exit;
- (ii)
- the degree of competition (i.e. are there many competitors, is
the competition between them intense, does the market tend towards an
oligopoly, monopoly or monopsony) and the strength of the negotiating
position of the respective parties (see paragraph 298);
- (iii)
- the relative shares of the market enjoyed by the company and its
competitors;
- (iv)
- the existence of and potential for substitute
products;
- (v)
- the price sensitivity of relevant products and the
market;
- (vi)
- the availability and supply of raw materials and other
inputs;
- (vii)
- the availability and stability of distribution
outlets;
- (d)
- the rate of technological change; and
- (e)
- external constraints (e.g. environmental and business regulation,
general economic conditions, the business/investment regime and the
political climate).
All of these matters are relevant to an examination of
comparability.
316. However, all of the matters set out in paragraph
315 are relevant in terms of paragraphs 136AA(3)(c) and (d) in
determining the consideration that might reasonably be expected to have
been set by independent parties dealing at arm's length with each other.
These matters are considered relevant regardless of the methodology that
is sought to be applied.
317. The appropriate arm's length consideration would
then reflect commercial and market realities, and would have regard to
the nature of competition and the nature of business whereby it would
generally be expected that entities would seek to:
- (a)
- maximise the consideration received in respect of the supply of
property;
- (b)
- minimise the consideration to be given in respect of the
acquisition of property; and
- (c)
- be adequately rewarded for the activities carried out so as to be
commercially viable. (The contribution of loss makers to the overall
group profitability should be compensated.)
318. This generalisation needs to be tempered with a
recognition that, for legitimate commercial reasons, companies may
sometimes reduce prices to gain market share or move surplus stocks or
secure reliable long term distribution outlets. Regard should also be
had to paragraphs 445 - 457 below.
319. The ATO accepts that it could not reasonably be
expected that a company would achieve the same level of profit margin in
countries where there is government intervention through pricing
controls or other price regulation mechanisms that are impacting on
company profits as the company would achieve in an unregulated market.
This, of course, assumes that there is reliable evidence that the market
price would be higher if such controls or regulatory mechanisms were not
in place.
320. It has been suggested, amongst other things, that
adoption of the "arm's length principle" implies that members of company
groups need only:
- (a)
- cover their variable costs and make some contribution to fixed
costs; or
- (b)
- return a profit, however marginal, from their activities (i.e.
that it is sufficient to avoid the operation of Division 13 provided
some amount of profit is returned as assessable income after all costs
associated with the relevant activities have been
covered).
These views are not accepted. The "arm's length principle" and
the expression "arm's length consideration" are not predicated on the
basis of whether variable costs may or may not have been covered or
whether any particular level of profits has been attained but rather are
based on an objective determination of the consideration that might
reasonably be expected to have arisen had the parties to the dealings
been independent parties dealing at arm's length.
321. If the way the "agreement" was entered into or was
priced can only be explained by reference to some special relationship
not able to be explained by reference to normal commercial dealings,
then the "agreement" will not be consistent with the "arm's length
principle" if the outcome is not an arm's length price.
322. Determining the relevant arm's length consideration
involves a practical weighing of the functions performed or to be
performed, the assets and skills used or available for use, the degree
and nature of risks involved and/or to be rewarded, the business
strategies being pursued, and the market and economic context in which
the relevant parties are operating. In saying this, it is acknowledged
that there will often be a range of comparable prices and taxpayers and
ATO auditors need to establish the most appropriate point in the range
having regard to the facts and circumstances of the particular case.
Ranges will be the subject of a more detailed discussion in a later
Ruling.
323. It also needs to be recognised that the
determination of the arm's length consideration involves an element of
judgment and that the exercise is not a precise science. Accordingly,
taxpayers and ATO auditors need to approach cases with a degree of
flexibility and commonsense, having regard to business and market
realities.
324. The view that because certain arrangements are
common between companies in multinational groups, they should be
regarded as arm's length arrangements, is also not accepted. Nor should
it be concluded that a particular dealing is on an arm's length basis
simply because it is an arrangement that can only be entered into
between related parties. The fact that arm's length parties would not
have entered into similar arrangements will often confirm the non-arm's
length nature of the dealings between the parties, though highly
vertically integrated industries, transfers and licences of valuable
intangibles and dealings in unique or highly differentiated products
require further analysis. A detailed discussion on the methodologies
that we would consider acceptable when seeking to ascertain an
appropriate arm's length consideration in such circumstances will be
dealt with in a later Ruling.
325. Where related parties revise or renegotiate
existing contracts or arrangements, the likely absence of a divergence
of interest between the parties means that close examination will need
to be given to the changed circumstances leading to the revision or
renegotiation. This needs to be done in order to be satisfied that the
approach taken and outcome achieved by the related parties is consistent
with what arm's length parties might reasonably be expected to have done
in comparable circumstances.
326. A finding reached by the Commissioner for the
purposes of paragraph (b) of subsections 136AD(1) - (3) that any two or
more of the parties to an "agreement" were not dealing at arm's length
with each other will not necessarily be determinative in concluding that
the consideration received or receivable or given or agreed to be given
for the purposes of paragraph (c) of subsections 136AD(1) - (3) was not
an arm's length consideration.
327. The fact that any two or more of the parties to an
"agreement" were not dealing at arm's length with each other might often
infer that the consideration was not an arm's length consideration. This
does not, however, mean that any such inference is irrefutable. If,
after reviewing all the relevant facts, it can be concluded that, even
though there was an absence of real bargaining, an arm's length
consideration was received or receivable or given or agreed to be given,
as the case may be, then paragraph (c) of subsections 136AD(1) - (3)
will not be satisfied and section 136AD will have no application. This
conclusion does not apply to transactions like re-invoicing where no
economic value is added and for which independent parties would not be
prepared to pay.
The Commissioner may deem an amount to be the arm's length
consideration (subsection 136AD(4))
328. The policy underlying subsection 136AD(4) is to
address situations in which it would not be practicable or possible to
determine the arm's length consideration. In the 1983 Speech, Mr Boucher
stated that:
"There are situations, recognised in every one of Australia's
comprehensive tax treaties, where it may not be practicable to apply the
arm's length principle. Section 136 was apt for such cases, because the
Commissioner could generally fix as a taxable income such part of the
taxpayer's receipts as he determined. Sub-section 136AD(4) of the new
law covers the situations I refer to."
329. Subsection 136AD(4) achieves this policy aim by
allowing the Commissioner to determine "an amount" which is then
deemed, for the purposes of section 136AD, to be the arm's length
consideration
in respect of the supply or acquisition of property. This amount is
then used in the application of subsections 136AD(1) - (3).
330. This deemed amount is then relevant:
- (a)
- for ascertaining whether the consideration which passed in
respect of the supply or acquisition of property was less than or more
than the arm's length consideration (paragraph (c) of subsection
136AD(1) or subsection 136AD(3)); and
- (b)
- as representing the consideration which is deemed to have passed,
in respect of the supply or acquisition of property, where a
determination is made to apply any of subsections 136AD(1) -
(3).
331. The manner in which subsection 136AD(4) operates is
different to that in subsections 136AD(1) - (3). Subsection 136AD(4)
operates in conjunction with and through the other provisions of section
136AD. The application of subsection 136AD(4) on its own results in an
amount being deemed to be the arm's length consideration in respect of
the relevant supply or acquisition of property. Subsection 136AD(4), on
its own, does nothing with this deemed amount. It is only when this
deemed amount is used for the purposes of subsections 136AD(1) - (3)
that the consideration for the supply or acquisition of property which
passed between the relevant parties is adjusted to the arm's length
consideration. This interpretation is supported by the introductory
words of the subsection which state, "For the purposes of this section,
...".
332. In this regard, subsection 136AD(4) merely states:
"... where, for any reason (including an insufficiency of
information available to the Commissioner), it is not possible or not
practicable for the Commissioner to ascertain the arm's length
consideration in respect of the supply or acquisition of property ..."
the Commissioner can determine an amount.
It should be noted, however, that where subsection 136AD(4) is
applied, the Commissioner would still need to make the relevant
determination under paragraph (d) of subsections 136AD(1), (2) or (3)
for Division 13 to operate.
333. The circumstances in which it may not be possible
or practicable for the Commissioner to determine the arm's length
consideration in respect of the supply or acquisition of property will
depend on the facts of each case. The Explanatory Memorandum at page 68
gives the following examples of situations in which subsection 136AD(4)
would have application:
- (a)
- the industry is so controlled and structured that there are no
comparable arm's length dealings in relation to property of the same
kind;
- (b)
- there are no comparable dealings in the same quantities as that
supplied or acquired under the agreement; or
- (c)
- though comparable dealings exist, details of them are held back
from or otherwise are not available to the
Commissioner.
334. The examples in the Explanatory Memorandum are seen
as relevant to cases where CUP would ordinarily be the best method but
for some reason cannot be applied. Being examples, they are not seen as
exhaustive. Nor is the passage seen as precluding the use of other arm's
length methodologies such as cost plus, resale price and profit methods
where they are the most appropriate methods.
335. Resort to subsection 136AD(4) may well be necessary
in cases of vertically integrated industries where an arm's length
consideration does not exist in respect of the goods, services
(including intangibles) or work in progress transferred. It may also be
applied in cases involving unique or highly differentiated products or
services, although careful consideration would need to be given to
whether comparable products or services exist; and to the degree of
difference in respect of near comparable products or services to see
whether adjustments could be made to produce a valid comparison.
336. Alternatives and substitutes need to be considered
in order to properly determine the relevant market for the purposes of
the analysis of comparables.
337. Subsection 136AD(4) may be used to deem "an amount"
to be the arm's length consideration where, after careful consideration
of whether comparables are reasonably available, it is concluded that it
would not be administratively practicable to determine the arm's length
consideration.
338. Subsection 136AD(4) is silent as to the manner in
which the relevant "amount" is to be determined. However, the
determination of the relevant "amount" (which is then deemed to be the
arm's length consideration) needs to be approached in a manner which, in
all the circumstances of the case, would lead to a fair result that is
as consistent as practicable with the arm's length principle as
internationally accepted. As Kitto J said in Mobil Oil Australia
Pty Ltd v. FC of T
(1963) 113 CLR 475 at 504 (in the context of the review function of the
now replaced Taxation Boards of Review):
"What is fair in a given situation depends upon the
circumstances."
339. The amount determined by the Commissioner under
subsection 136AD(4) needs to be supported by sufficient relevant
information to demonstrate that an informed and reasonable decision has
been reached in the circumstances of the case. It is not a matter of the
Commissioner substituting his own commercial judgement for that made by
the company at the time the transaction was entered into.
340. The statements made in the preceding paragraphs on
the role of subsection 136AD(4) and how it will be administered are
consistent with the view expressed in paragraph 46 of the 1979 OECD
Report that:
"It has to be recognised that an arm's length price will in many
cases not be precisely ascertainable and that in such circumstances it
will be necessary to seek for a reasonable approximation to
it."
Division 13 can apply even where independent parties would
not enter such agreements
341. Representations have been made that, in the case of
some dealings between members of company groups, it would not be
possible to arrive at an arm's length consideration because, for
example, the industry is so vertically integrated. In these situations,
so it is argued, similar dealings would not occur between unrelated
parties and thus Division 13 should not apply. While it is acknowledged
that company groups are able to enter into a greater variety of dealings
and arrangements than can unrelated entities (a point which is
recognised in the 1979 OECD Report at paragraphs 24 and 38), the
argument that Division 13 should not be applied in these cases is not
accepted. If this view was to be accepted, Division 13 would be rendered
inapplicable to a large number of international dealings with the
consequence that significant opportunities for international profit
shifting would not be addressed. Division 13 was intended to cover all
international dealings which had the capacity to adversely affect the
Australian revenue and has been deliberately drafted in the broadest
possible terms so as to achieve this policy aim.
342. Where the application of Division 13 is
contemplated in situations involving types of dealings between related
parties which may not occur between unrelated parties, the role of the
Division is to consider the underlying economic and commercial reality
of the situation. Regard would be had to the economic functions
performed or to be performed, the assets and skills used or available
for use and the degree and nature of risks involved and/or to be
rewarded in respect of the various parties to the dealing. Some of the
factors listed in paragraph 315 may also be useful in this regard. In
this way, a reasonable reflex can be obtained of the economic value of
the contribution made by the activities carried on in Australia which
can then provide a basis for comparison with the actual pricing of the
inputs and outputs by the relevant company in its dealings with other
entities.
What methodologies can be used to ascertain an arm's length
consideration?
343. Division 13 does not prescribe any particular
methodology for the purpose of ascertaining an arm's length
consideration. Nor does it prescribe a preference for the order in which
particular arm's length methodologies should be used. Given that there
is no prescribed legislative preference, the Commissioner would
generally seek to use methods that have been given international
endorsement and to adopt the method that is the most appropriate or best
suited to the circumstances of each particular case.
344. In determining the most appropriate method,
companies and ATO auditors should bear in mind that:
- (a)
- the Commissioner is under no obligation to accept the particular
method chosen by companies unless, on an objective analysis, it produces
the most accurate calculation of the arm's length consideration in the
particular case. Companies should be mindful of this and can reduce the
risk of disputation by being able to demonstrate that their choice of
method is the most appropriate for their circumstances (in this regard,
reference should be made to paragraphs 378 - 385 on
documentation);
- (b)
- choosing the most appropriate method would take into account
relevant market and business factors, the functions performed or to be
performed, the assets and skills used or available for use and the
degree and nature of risks involved and/or to be rewarded in respect of
the various parties to the dealing;
- (c)
- a result that is fair, in the sense referred to in Mobil Oil
Australia Pty Ltd v. FC of T
(supra), does not mean the result that produces the most favourable
taxation outcome for the company or the company group of which it may be
a member - or necessarily the result that produces the highest amount of
Australian tax;
- (d)
- a result that is fair must consider the policy and objects
underlying Division 13 and recognise that Australia should not be denied
its fair share of tax based on the economic value it has contributed,
measured by reference to the arm's length principle; and
- (e)
- the most appropriate method will be the one that produces the
highest practicable degree of comparability, recognising though that
there will be unique situations and cases involving valuable intangibles
where it is not practicable to apply methods based on a high degree of
direct comparability.
345. The following comments provide a general outline of
methodologies which would be relevant for the purposes of Division 13. A
more detailed discussion will be included in a later Ruling on
Methodologies.
346. Various internationally accepted methods exist to
determine an appropriate arm's length consideration. Many of these
methods are referred to in the 1979 OECD Report. In the 1983 Speech, Mr
Boucher stated that the 1979 OECD Report:
"(while not) an interpretation of Division 13 as enacted by the
Australian Parliament (is) so authoritative on the international scene
as to represent something to which we in Australia do pay close
regard".
347. The principal methods referred to in the 1979 OECD
Report are:
- (a)
- the comparable uncontrolled price method ("the CUP
method");
- (b)
- the resale price method;
- (c)
- the cost plus method; and
- (d)
- any other method which is found to be
acceptable.
348. The ATO accepts the CUP method, the resale price
method and the cost plus method as acceptable methodologies for the
purposes of determining the arm's length consideration (or an amount for
the purposes of subsection 136AD(4)) under Division 13. Other
methodologies (such as those referred to in paragraph 367) are also
acceptable. The method to be adopted in the circumstances of the
particular case (the most appropriate method) should be the one that
produces the highest degree of comparability.
349. The 1979 OECD Report at paragraphs 13 - 14 and 70 -
74 provides some discussion on certain other generic methods which have
found varying degrees of favour within the international community.
These other methods include comparable profits and various "global"
methods of profit allocation (including predetermined formula methods
and various yield methods). While these methodologies (which include
profit splits and profit comparisons) are less direct ways of applying
the arm's length principle - by focussing on rate of return and the
process by which profits and expenses are allocated - they are also
accepted by the ATO as being consistent with the arm's length principle
and most appropriate for cases where a more direct comparability on
price or profit margin is not possible or practicable. In that sense
they are methods of last resort. This is not to say that there needs to
be an exhaustive search for direct comparables before these methods can
be applied.
350. If after reasonable analysis of the facts and
circumstances direct comparables or price or profit margin cannot be
identified, other methods need to be considered and the most appropriate
method selected. This will involve two stages of analysis since Division
13 requires the overall result achieved by such methodologies to be
adjusted to the level of the particular international agreement and the
arm's length consideration. For example, the application of a profit
split or profit comparison - in cases where one or other of these is the
most appropriate method - may produce an overall adjustment which needs
to be apportioned across all relevant international agreements to
produce the appropriate arm's length consideration.
351. It is necessary to bear in mind the cautionary tone
expressed in paragraph 5 of the 1979 OECD Report and referred to in Mr
Boucher's 1983 Speech, in which it was said:
"What is set out in the main body of the report must necessarily
be regarded, however, as only a general guide setting out principles
that may be relevant and appropriate to apply in most cases to the
different circumstances arising. The report does not and cannot lay down
rules that are appropriate to every aspect of every case: it is an
essential feature of the problem that it is always necessary to have
regard to the particular facts of each case."
In this regard, the further comments made in paragraph 46 of the
1979 OECD Report and referred to at paragraph 340 above should also be
kept in mind.
352. A detailed explanation of the more widely known
methods used for ascertaining an arm's length consideration and of
various circumstances in which these methods could be employed will be
dealt with in a later Ruling. The purpose of discussing some matters
relevant to particular methodologies in this Ruling is simply to provide
broad directional guidance as to how the Commissioner would generally
seek to ascertain an arm's length consideration for the purposes of
section 136AD.
The CUP method
353. Broadly, the CUP method endeavours to ascertain an
arm's length consideration by attempting to identify comparable
transfers of property between unrelated parties in comparable markets
and setting the relevant transfer price by reference to such comparable
dealings. In this regard, the word "comparable" means "the same as,
similar to or analogous". Even though identical dealings do not exist,
there may be comparables. Care needs to be taken to ensure that the
comparable chosen is as close as practicable to the dealings under
review.
354. While the CUP method involves close product
similarity, its application also requires a consideration of all other
factors relevant to comparability. For example, a business strategy
based on price competition would be relevant. Similarly, the marketing
of an identical or closely similar product under a brand name could have
a material effect on comparability.
355. It is recognised that in practice it is often
extremely difficult to ascertain an arm's length consideration under the
CUP method. This is particularly true where the property involved is
unique or highly differentiated, intangible property is involved,
services are provided or received, markets are isolated or where, as in
the case of transfers of work in progress in highly vertically
integrated businesses, there is little or no comparability with dealings
of unrelated parties.
356. The ATO considers that the CUP method can still
have application even where there are differences between the dealing
being reviewed and the dealings of the parties considered to be
comparable, provided those differences are capable of quantification on
some reasonable basis and adjustments can be made to produce a valid
comparison (see also paragraph 46 of the 1979 OECD Report). Thus, an
adjusted comparable uncontrolled price ("an adjusted CUP") could be
acceptable as the arm's length consideration against which actual prices
can be benchmarked. However, given that an element of judgment is
involved in making adjustments, where the differences are significant
other methods may need to be considered because such major adjustments
may not result in a true comparable.
357. This position is consistent with the view expressed
in paragraph 51 of the 1979 OECD Report which states that:
"a useful comparison may still be possible so long as appropriate
adjustments can be reasonably made to the uncontrolled price to take
account of the differences. Similarly it may be possible to derive some
help from sales of substitute goods though much will depend on the
circumstances."
358. In seeking to find an adjusted CUP, regard should
be had to factors which, although not directly measurable (such as the
presence or absence of a tariff, credit terms or delivery terms) are
sufficiently quantifiable to make the choice of the CUP method a more
accurate measure of an arm's length consideration than the result
produced by some other method. Such factors might include:
- (a)
- whether intangibles are included (e.g. patents, copyrights,
trademarks);
- (b)
- geographic market place;
- (c)
- level of market penetration;
- (d)
- the provision of guarantees or after sales service;
- (e)
- differences in functionality or the quality of
functionality;
- (f)
- the degree of physical similarity of product;
- (g)
- volumes of sales or purchases (if volume has an effect on price)
and the relevant terms of trade;
- (h)
- whether services are provided with the goods sold;
- (i)
- the duration of the relevant agreement and whether continuity of
supply is important;
- (j)
- whether the timing of the agreement affects the price;
and
- (k)
- whether any government regulation impacts on transfers or the
price that can be charged.
The resale price method
359. The resale price method is based on the price at
which a property or services acquired by a taxpayer is resold to an
arm's length buyer. The selling price is then reduced by an appropriate
mark-up to cover the taxpayer's costs and a profit margin. The balance
remaining can be regarded as the arm's length consideration for the
original acquisition. The matters at issue then become the determination
of an appropriate mark-up and the identification of a comparable arm's
length reseller.
360. Unlike the CUP method, the resale price method does
not require the same close physical similarity with the property sold,
or that services provided be as closely comparable with those provided
by the comparable arm's length seller. A lack of close physical
similarity is not necessarily indicative of dissimilar mark-up
percentages. A comparison is made between the mark-up charged by
comparable arm's length resellers and the mark-up charged by the
relevant company. Where comparable arm's length resellers cannot be
identified, an appropriate profit mark-up may be determinable by
reference to the functions performed or to be performed, the assets and
skills used or available for use and the degree and nature of risks
involved and/or to be rewarded in respect of the company reselling the
relevant property or services.
361. The resale price method is best suited to cases
where there is a high degree of similarity of process between what the
taxpayer does and the activities of independent parties engaged in
comparable uncontrolled dealings. The resale price method is generally a
more reliable measure where there is little usable evidence of
comparable uncontrolled sales, where the property or services sold are
not used in a manufacturing process of the reseller, or the reseller
does not add substantially to the value of the product, e.g. where the
reseller, being merely a distributor, sells the product or service to an
independent third party.
362. Where the non-arm's length reseller adds
substantial value to the property (e.g. where the products are further
processed through manufacture or are incorporated as components of a
more complicated product so that the identity of the original products
is lost or transformed or the taxpayer establishes, builds up or
maintains a valuable trademark in the relevant market largely through
its own expense and endeavour), a portion of the resale price is
attributable to this effort. This addition would need to be assessed and
accounted for, making it more difficult to establish an arm's length
consideration and consequently, more difficult to apply this
method.
The cost plus method
The cost plus method requires the estimation of an arm's
length consideration by adding an appropriate profit mark-up to the
supplier's cost. The profit mark-up is ideally determined by reference
to the profit mark-up earned by the same supplier in a comparable
dealing with an independent party. Some difficulty arises in aplying
this method to account for the differences in functions, price and cost
when the non-arm's lenth supplier does not sell comparable property to
independent parties in arm's length dealings. Where transactions are
very interrelated it may be that they cannot be evaluated on a separate
basis. These difficulties will be discussed in detail in a later Ruling.
If there are no comparable sales by the non-arm's length supplier to
arm's length parties, the profit mark-up is generally determined by
reference to the profit mark-up earned by a comparable arm's length
party in a comparable dealing with an independent party.
364. The cost plus method is generally a more reliable
measure where components or unfinished goods are subject to additional
manufacturing, assembly, addition of trade marks, etc prior to
distribution, provided the process does not involve high value
intangibles (sometimes unique or highly differentiated).
365. In considering whether the cost plus method is the
most appropriate method to use in a particular case, regard should be
had to the problems identified in the 1979 OECD Report associated with
the use of this method (at paragraphs 64 - 69) and to the statement at
paragraph 63 of the same report which says that:
"Whilst it is true that an enterprise has to cover its costs over
a period of time to remain in business, its costs do not usually help
much in forming an opinion of the appropriate profit in specific
cases."
Other methods which may be appropriate
366. There may be situations, including but not confined
to those dealing with intangibles, where CUP, resale price and cost plus
methods are inadequate in approximating a satisfactory arm's length
outcome. This leads to the need to have regard to other methods such as
profit methods, and to develop methods that have regard to commercial
and economic reality, the merits of each case, and the standard of the
arm's length principle. That is not to say that companies and the ATO
ought to depart from the first three methods referred to above merely
because it is easier or administratively convenient. A profit method, as
with any other method should be used where it is the most appropriate
method because it produces the highest practicable degree of
comparability in the circumstances of the particular case.
367. Where the CUP, resale price or cost plus methods
are inappropriate on their own in a given case, having regard to
commercial and economic realities and the nature of the company's
business, products and markets, for the purposes of determining the
arm's length consideration (or an amount for the purposes of subsection
136AD(4)) under Division 13, we will accept the use of:
- (a)
- a mixture of the above three methods; or
- (b)
- some other method (e.g. a profit split or profit comparison
method) or a mixture of methods:
that is likely to lead to a result that is as consistent as
practicable with the arm's length principle as internationally
accepted.
Documentation
368. The purpose of this part of the Ruling is to cover
the broad issues in relation to the types and extent of documentation
taxpayers need to keep in relation to their transfer prices. A more
detailed discussion will be the subject of a later Ruling. The starting
point in considering documentation is that section 262A requires
taxpayers: "[to] keep records that record all transactions and other
acts engaged in by the person that are relevant for any purpose of [the
Income Tax Assessment Act]". In particular the section requires
taxpayers to keep:
- (a)
- any documents that are relevant for the purpose of ascertaining
the person's income and expenditure; and
- (b)
- documents containing particulars of any election, estimate,
determination or calculation made by the person under that Act and, in
the case of an estimate, determination or calculation, particulars
showing the basis on which and the method by which the estimate,
determination or calculation was made.
369. The section goes on to say that the records must be
kept in the English language or so as to enable the records to be
readily accessible and convertible into writing in the English language,
and that they must be kept in such a way as to enable the person's
liability to tax under the Act to be readily ascertained. The basic
requirement is that those records be maintained for 5 years or until the
completion of the transactions or acts to which those records relate,
whichever is the later.
370. In addition there are practical reasons why, in
terms of Division 13, taxpayers would be well advised to keep
contemporaneous documentation. Division 13 imposes obligations on
taxpayers to use best endeavours to lodge correct tax returns and to pay
the right amount of tax based on the economic value added in the
respective jurisdictions (calculated in accordance with the arm's length
principle). It does not seem possible for taxpayers to comply with these
expectations if, at the time of lodging tax returns, they do not address
the question of whether their dealings comply with the arm's length
principle. Other provisions impose general obligations on taxpayers to
lodge accurate returns.
371 In order to effectively do this, it seems to us that taxpayers need to keep sufficient contemporaneous records to enable this evaluation to be done. While section 262A only requires those records created during the setting of transfer prices and used in the preparing of tax returns to be retained, taxpayers are nevertheless advised to keep contemporaneous documentation in order to demonstrate that their international dealings comply with the arm's length principle. It is not accepted that taxpayers need not address the question of whether their pricing policies comply with the arm's length principle until they are subject to audit by the ATO. It also needs to be remembered that sections 14ZZK and 14ZZO of the Taxation Administration Act provide that the ultimate onus of proof in the event of disputation rests with the taxpayer.
372. If taxpayers have not maintained appropriate
records the process of checking compliance with the arm's length
principle becomes far more difficult and ATO auditors are forced to rely
on less evidence on which to apply a methodology, thus requiring a
greater degree of judgment.
373. In terms of administrative approach, the ATO will
seek to rely as much as possible on documentation that should be created
in the ordinary course of business. However, in order to satisfy the
arm's length principle taxpayers who deal with related parties need to
do an analysis in accordance with the principles set out in this Ruling.
In this regard we will limit requirements to the minimum necessary to
ensure compliance with the arm's length principle.
374. In seeking to ascertain the most appropriate method
for determining the arm's length consideration in respect of the supply
or acquisition of property under an international agreement and also for
determining whether resort may need to be made to subsection 136AD(4),
we will ask companies:
- (a)
- what methodology they are using;
- (b)
- the reasons why they consider their choice of methodology to be
the most appropriate to the relevant international agreement(s) and to
their particular circumstances; and
- (c)
- how and why they chose the particular price as a result of
applying their chosen methodology.
375. In testing a taxpayer's methodology and in those
cases where no particular methodology has been chosen by companies to
set their international transfer prices in relation to the supply or
acquisition of property under an international agreement, we will be
asking their opinion as to:
- (a)
- which products, goods or services, etc, if any, they consider to
be most comparable to the products, goods or services being
investigated;
- (b)
- who their major competitors are;
- (c)
- which of their competitors they consider to be most comparable to
them; and
- (d)
- what they consider to be the most appropriate methodology to use
in their particular circumstances.
This information will be considered in determining whether resort
may need to be made to subsection 136AD(4).
The use of contemporaneous documentation
376. In undertaking an analysis of whether the
consideration for the supply or acquisition of property under
international agreements represented an arm's length consideration, we
will be asking companies, inter alia , to provide us with relevant
documentation created when the dealing was being contemplated and at the
time the arrangement was entered into. Where there is inadequate
contemporaneous documentation of non-arm's length international
dealings, it is clearly more difficult for companies to convince us that
the dealings took place on an arm's length basis. This view has also
been expressed in the 1979 OECD Report at paragraph 25 where it is
stated that:
"If the transactions are not adequately evidenced by contemporary
documents it is clearly more difficult for the (multinational company
group) to convince the tax authorities that they took place in the form
and manner claimed or that the transactions compare properly with
particular transactions between unrelated parties."
However, companies will be given ample opportunity to explain
their business circumstances and pricing policies.
377. It would not be unreasonable to expect companies
under audit to provide relevant documents, explanatory material and
other information which the company has or to which the company could
reasonably be expected to have access. The nature of the documentation
likely to be sought would include relevant pricing policies, product
profitabilities, relevant market information (such as sales forecasts
and market characteristics), the profit contributions of each party, and
an analysis of the functions, assets, skills and the degree and nature
of the risks involved for the various parties. (Regard should also be
had to the discussion on "Access to relevant information" in paragraphs
387 - 389.)
Ways companies can reduce the possibility of
disputation
378. Where international agreements are being
contemplated by companies in the same multinational group, the risk of
the Commissioner seeking to make an adjustment under of Division 13 can
be considerably reduced where the companies involved:
- (a)
- establish the economic justification prior to the arrangement
being entered into;
- (b)
- satisfy themselves that the consideration is an arm's length
consideration; and
- (c)
- have the necessary contemporaneous documentation to support the
matters referred to in (a) and (b) above and the assessment of market
conditions at the time the pricing decisions were
made.
379. The position outlined above is consistent with the
views expressed in the 1979 OECD Report, where it is stated that:
"In such instances tax authorities would have to determine what
is the underlying reality behind an arrangement in considering what the
appropriate arm's length price would be." (paragraph
24)
380. Companies can also reduce the risk of disputation
over their choice of methodology for the particular international
agreement(s) if they are able to provide reasons why the chosen
methodology is appropriate to their circumstances. However, companies
would not be required to undertake an intricate analysis of other
methodologies but should have a sound basis for using the selected
methodology.
381. Companies can similarly reduce the likelihood of
disputation where they establish a systematic arm's length process for
setting international transfer prices and consistently follow the
process they have established. Where companies have only occasional
related-party dealings, they may have many transactions with unrelated
parties against which they can benchmark their prices.
382. In the event that contemporaneous documentation
does not exist, companies should review their pricing policies against
the principles set out in this Ruling and satisfy themselves that they
accord with the arm's length principle and that dealings with related
parties have been carried out on that basis. Documentary evidence that
such reviews have been done should reduce the risk of disputation to the
extent that the review properly addresses the requirements of the arm's
length principle. However, for the future, companies would be well
advised to maintain contemporaneous documentation.
383. Where a company finds on review that its pricing
policies do not comply with the arm's length principle, the company
should request an amended assessment under subsection 170(1).
Assessments amended in this way will not be treated as involving the
exercise of the Commissioner's discretion under Division 13 and
therefore will not activate section 225 penalties. Normal procedures
regarding voluntary disclosures would apply.
384. Division 13 is seen as imposing an obligation on
taxpayers to conform to the arm's length principle for tax purposes in
respect of international dealings. Accordingly, it is expected that
companies will take reasonable care to ensure that when preparing their
tax returns they properly review the data available to them and address
the question of whether the amounts of income and deductions included in
their tax returns have been calculated according to the arm's length
principle. Where companies have not used arm's length consideration in
the ordinary course of their day to day dealings with non-arm's length
parties, an adjustment should be made for tax purposes at the time of
preparation of their tax returns.
385. While the above suggestions, if adopted in good
faith, are likely to lead to reduced disputation with the Commissioner,
it must still be emphasised that in the event of disputation, the onus
of proof ultimately rests with taxpayers by virtue of sections 14ZZK and
14ZZO of the Taxation Administration Act 1953
. A more detailed discussion on the nature and extent of relevant
documentation will be the subject of a later Ruling.
Advance Pricing Agreements
386. Companies may also wish to consider the merits of
entering into an Advance Pricing Agreement ("APA") on a unilateral basis
with the ATO, or on a bilateral basis with the ATO and the tax authority
of a foreign country with which Australia has concluded a double tax
agreement. An APA provides greater certainty for both the taxpayer and
the revenue authorities concerned, minimises the likelihood of a
dispute, and more effectively reduces the potential for double taxation
by allowing the parties to address and resolve international transfer
pricing issues on a prospective basis which reflects arm's length
principles. A later Ruling will provide more detailed procedures.
Access to relevant information
387. In seeking to establish the relevant facts
associated with arrangements to which section 136AD may have
application, including joint venture arrangements and barter and
countertrade arrangements, relevant information will be sought from the
parties involved both informally and formally (where necessary) under
sections 263, 264 and 264A.
388. In respect of offshore information notices under
section 264A, and the exchange of information provisions of double
taxation agreements, ATO auditors need to exercise judgment as to
whether informal approaches will enable all the relevant information to
be obtained in a reasonable timeframe. Where this is not the case, for
example where the taxpayer has been tardy or unco-operative in providing
all the relevant information from Australian or overseas sources, formal
requests should be made under section 264A and/or the relevant double
taxation agreement for information held offshore to enable the audit to
be completed within a reasonable timeframe. The fact that section 263 or
section 264 have already been used or might be used in the future does
not prevent the use of section 264A notices, or the exchange of
information provisions under double taxation agreements, though ATO
auditors should take care to avoid unnecessary duplication. However, on
occasions auditors may need to verify information if there is reason to
believe that the information provided may be inaccurate, misleading or
incomplete.
389. The basis upon which prices are established between
related parties in respect of transfers of property is central to the
issue of whether or not the consideration represents an arm's length
consideration. Taxpayers can therefore expect that such information will
be sought by us at an early stage of an audit. Where such information is
either not held or able to be obtained by a company operating in
Australia but could reasonably be expected to be held by the company's
foreign parent or some other offshore related entity, ATO auditors
should consider whether an offshore information notice under section
264A and/or a request under a double taxation agreement should be issued
with a view to obtaining such information. Additional guidelines in
respect of the use of the access provisions in the context of Division
13 will be provided in a later Ruling.
The Commissioner has a discretion whether or not to apply
section 136AD
390. The exercise of the discretion to make adjustments
under Division 13 is neither automatic nor mandatory. Long established
case law such as Sharpe v. Wakefield & Others
(1891) AC 73, demonstrates that an exercise of a discretion of this
type must be:
"according to the rules of reason and justice, not to private
opinion; according to law, and not humour. It is to be not arbitrary,
vague and fanciful, but legal and regular."
391. The Commissioner must take into account all
relevant facts and circumstances as they existed at the time the
international agreement was made in forming a view as to whether the
amount of consideration in an international agreement needs to be
adjusted. It would also be relevant to consider subsequent events to the
extent that they are relevant to testing purpose or assist in
determining the true nature of any agreement by comparing the conduct of
the parties and the stated terms of the agreement. Irrelevant
circumstances should be excluded from consideration.
392. In particular the Commissioner needs to be
satisfied that the various preconditions in subsections 136AD(1), (2),
or (3) are met as the case may be. Consideration also needs to be given
to whether the exercise of the discretion, or a failure to exercise it,
would be consistent with the policy underlying Division 13 ( Cooper
Brookes (Wollongong) Pty Ltd v. FC of T
(1981) 147 CLR 297; section 15AA of the Acts Interpretation Act
1901
). The Explanatory Memorandum, at page 66, states that the intention
behind the granting of the discretion is to:
"enable the Commissioner to have regard to whether the use of
non-arm's length prices has resulted in a shifting of taxable income
from Australia."
393. It would also be relevant to consider whether there
is any evidence of the taxpayer's purpose since this would also be a
relevant factor. However, this would need to be weighed with other
factors, including the effect on the Australian revenue of the use of
non-arm's length consideration, against the wording and legislative
purpose of section 136AD.
394. Having regard to the legislative intent, where
paragraphs (a), (b) and (c) of subsections 136AD(1) - (3) have been
satisfied, then, in the absence of sound reasons to the contrary, it
could be expected that the discretion in paragraph (d) of the relevant
subsection would be exercised where the Australian revenue has been
disadvantaged.
395. Where the discretion under paragraph (d) of
subsections 136AD(1), (2) or (3) is exercised, a formal determination
should be made to that effect (see also paragraph 416(a) below regarding
the need to cover the determination of the source of the amount by which
the actual consideration is deemed to have been increased). The nature
and process of making determinations will be discussed in more detail in
a later Ruling.
The arm's length consideration determined under section
136AD replaces the actual consideration
396. Where all of paragraphs (a), (b), (c) and (d) of
subsection 136AD(1) or (3) have been satisfied, then the actual
consideration is deemed to be adjusted to the arm's length consideration
for all purposes of the application of the ITAA (i.e for tax purposes).
Similarly, where all the paragraphs of subsection 136AD(2) have been
met, then consideration equal to the arm's length consideration in
respect of the supply is deemed to have been received for all purposes
of the application of the ITAA (i.e for tax purposes). Subsection
136AD(2) also provides a mechanism for determining the time at which the
arm's length consideration is deemed to have been received and
receivable by the taxpayer (discussed at paragraph 398 below).
397. The above result, whereby the actual consideration
(or the absence of consideration) is adjusted to the arm's length
consideration, is consistent with the internationally recognised "arm's
length principle".
The time of receipt of the arm's length consideration for
the purposes of subsection 136AD(2)
398. Where subsection 136AD(2) is applied to deem an
arm's length consideration in respect of the supply of property, in
circumstances where no consideration had been received or receivable, it
is also necessary to ascertain the point in time when the deemed
consideration is received or receivable so that normal rules regarding
the timing of derivation of income can be applied. The legislation
provides that the time the arm's length consideration will be deemed to
have been received or receivable shall be:
- (a)
- at the time when the property was supplied; or
- (b)
- as the case requires, any of the property was first supplied;
or
- (c)
- at such later time or times as the Commissioner considers
appropriate.
399. The use of the expression "any of the property" in
conjunction with the expression "was first supplied" referred to in
paragraph 398(b) above, indicates that there will be occasions when it
would be appropriate, in accordance with normal terms of trade, to
regard payment for property to be supplied to have been made in full, or
at least receivable, when the first shipment is supplied. This is
notwithstanding the fact that some of the property to be supplied under
the "agreement" will not be supplied until a later point or points in
time or that the property (such as with the provision of some services)
is being supplied on a continuous basis, for example over the whole of a
year of income.
400. The reference to "such later time or times" in
subsection 136AD(2), referred to in paragraph 398(c) above, would cover
cases where, for example, the terms of trade normally provided for
payment within a certain period after the property is supplied or
payment by instalments over a number of years.
Does a tax avoidance purpose need to exist before Division
13 can apply?
401. It has frequently been suggested that a tax
avoidance purpose needs to be identified before a determination can be
made under Division 13. Proponents of this view have referred to the
following passage from the Second Reading Speech on the Income Tax
Assessment Amendment Bill 1982
("the Second Reading Speech") being the Bill which introduced Division
13. This passage declares that the objective of the Division is to
address all international arrangements that result in a loss to the
Australian revenue even where the arrangement was not entered into
primarily for tax avoidance purposes:
"the proposed measures are not limited in scope to arrangements
that have a dominant tax avoidance purpose. In that regard, it is
important to recognise that an arrangement to shift profits out of
Australia may be entered into for a complex mixture of tax and other
reasons. However, as I mentioned in my earlier statement to the House on
this matter, the fact that tax saving is not a key purpose of a
particular arrangement or transaction is no reason why we, as a nation,
should not be in a position to counteract any loss to the Australian
revenue inherent in it."
(emphasis added)
402. That statement is reinforced by the terms of
Division 13 and other parts of the Second Reading Speech, and it is
important to note in this regard that nowhere in section 136AD is there
to be found a requirement for the existence of a tax avoidance purpose,
nor any implied requirement that a tax avoidance purpose is to be
identified. In this regard the drafting of Division 13 can be contrasted
with that of Part IVA.
403. The suggestion that the Commissioner is nonetheless
required to identify a tax avoidance purpose is not accepted. As stated
by the then Treasurer elsewhere in the Second Reading Speech, the
introduction of Division 13 completes:
"a package of general measures that are designed to render
ineffectual arrangements that have the purpose or effect
of avoiding Australian tax." (emphasis added)
404. It is accepted that in considering whether to
exercise the discretion in sections 136AD(1), (2) or (3) the
Commissioner should consider the taxpayer's purpose. However this would
not be determinative on its own, given the policy underlying Division 13
and its wording.
405. As stated in paragraphs 154 - 178, Division 13 is
concerned with ensuring that transfers of property under "international
agreements" (which have the potential to adversely affect the Australian
revenue) are subjected to Australian taxation on a basis that is
consistent with the arm's length principle.
406. The above view is consistent with the position
expressed in the 1979 OECD Report, where at paragraph 3 it says:
"It is important to bear in mind, moreover, that the need to
adjust the actual price to an arm's length price, in order to arrive at
a proper level of taxable profits, arises irrespective of any
contractual obligation undertaken by the parties to pay a particular
price or of any intention of the parties to minimise tax.
Hence, the consideration of transfer pricing problems should not be
confused with the consideration of problems of tax fraud or tax
avoidance, even though transfer pricing policies may be used for such
purposes." (emphasis added)
407. It is the view of the ATO that the Commissioner
does not have to identify a tax avoidance purpose in order to invoke the
discretion in paragraph (d) of subsections 136AD(1), (2) and (3). Cases
where there is a tax avoidance purpose are clearly intended to be
countered by Division 13 where the use of non-arm's length consideration
results in an underpayment of Australian tax. But it does not follow
that the absence of a tax avoidance purpose renders the Commissioner's
discretion inoperative. This view is reinforced by section 225 which
clearly envisages the application of Division 13 in non-tax-avoidance
cases, and it is consistent with the legislative intent.
408. Where a tax avoidance purpose does exist in
relation to a matter being considered in the context of Division 13,
then Part IVA may also have application, where the particular
requirements of Part IVA are satisfied. The interaction between Division
13 and Part IVA will be dealt with in a later Ruling.
409. Section 225 imposes a penalty where Division 13 has
been applied, notwithstanding the absence of a tax avoidance purpose.
The existence of a tax avoidance purpose results in a higher statutory
penalty. Additional guidelines to those in IT 2311 and TR 92/11 in
relation to penalties in Division 13 cases will be provided in a later
Ruling.
Higher tax rates in foreign countries in themselves do not
suggest an absence of profit shifting
410. Arguments have been put to us that we should accept
that profits would not be shifted overseas where foreign nominal or
effective company tax rates are comparable to the prevailing company tax
rate in Australia. It has been urged that Division 13 should not be
applied in these cases. This argument is not accepted because it ignores
the fact that the main objective of Division 13, as was stated in the
Second Reading Speech, is to ensure that Australia receives its fair
share of tax in accordance with the arm's length principle as
internationally accepted.
411. International profit shifting may seek to take
advantage of:
- (a)
- differences in effective tax rates as a result of concessions and
tax preferences;
- (b)
- timing differences with respect to the imposition and payment of
tax; and
- (c)
- other advantages that flow from paying tax in one jurisdiction
rather than another (e.g. foreign tax credits, franking credits,
etc).
In other words, while tax rates may be comparable there may be
advantages in paying tax in a country other than Australia and it is
therefore not accepted that profits would not be shifted overseas in
these cases.
The source of income
412. In general terms, section 25 of the ITAA operates
to establish a liability to Australian income tax in respect of income
derived:
- (a)
- by Australian residents - from all sources; and
- (b)
- by non-residents - from sources in Australia.
Having regard to the fact that Division 13 changes the tax effect
of actual dealings, a special rule is required to determine the source
of any additional income or profits arising as a result of the operation
of the Division. Similarly, because Division 13 can operate to reduce
expenditure, there is a need to have a special rule to enable the nexus
between income and expenditure to be determined.
413. Section 136AE provides for the determination of the
geographical source of income and the allocation of related expenses in
cases in which:
- (a)
- section 136AD has been
applied to deem an arm's length consideration as having been received
or receivable or given or agreed to be given in respect of the supply or
acquisition of property under an international agreement (subsections
136AE(1), (2) or (3)); or
- (b)
- section 136AD does not apply - where the circumstances involve
the allocation of income and or expenses within the one entity (e.g.
between a permanent establishment and its head office or between two
permanent establishments of the same entity) (subsections 136AE(4), (5)
or (6)).
414. Where section 136AE is applied, the relevant income
or expenditure is deemed for all the purposes of the ITAA to have been
derived or to have been incurred in deriving income:
- (a)
- from a particular source or from such sources; and
- (b)
- in such proportions,
as the Commissioner determines. Subsection 136AE(1) applies to
individuals and companies, subsection 136AE(2) to partnerships and
subsection 136AE(3) to trusts. Cases involving subsections 136AE(4) to
(6) (see paragraph 413(b) above) will be addressed in a later
Ruling.
415. Where section 136AD has been applied (see paragraph
413(a)), a question may arise whether, and if so, as to the extent to
which:
- (a)
- income consisting of the arm's length consideration deemed to
have been received or receivable for property supplied has a source in
Australia or in another country; or
- (b)
- the arm's length consideration deemed to have been given or
agreed to be given for property acquired was expenditure incurred in
deriving income from sources in or out of
Australia.
416. Such questions might arise, for example, in the
following circumstances:
- (a)
- An Australian company charges a foreign associate $250,000 for
goods or services provided to it by the Australian company. After
investigation, a determination is made under subsection 136AD(1) and
$450,000 is deemed as the arm's length consideration in respect of the
supply of the property. Other than for the operation of Division 13, the
$200,000 would not have been derived by the Australian company. If a
question arose as to the source of the additional $200,000 deemed
consideration, the Commissioner is able to determine the source of that
income under sub-paragraph 136AE(1)(b)(i).
- Views may differ as to whether there is a question of source as
to the additional $200,000 "deemed" consideration. On one view, the
question of source is determined by the source of the actual
consideration of $250,000. On the other view, it could be argued that
the source of the additional $200,000 is a separate question given that
this amount would not have been included in assessable income under
section 25, but for the application of Division 13. Given this
divergence of views, auditors should address their minds to the question
of source of the additional $200,000 and determine the appropriate
source of this amount in any determination made. The inclusion of the
words "as to the extent to which" in relation to the Commissioner's
determnation of the source of income have the effect that the
Commissioner can make that determination in relation to a part of the
arm's length consideration that has been deemed to have been received or
receivable;
- (b)
- An Australian company does not charge a foreign associate for the
goods or services provided to it or for the use of intangible property
belonging to the Australian company. After investigation, a
determination is made under subsection 136AD(2) and $500,000 is deemed
as the arm's length consideration in respect of the supply of the
property. As no amount of income has been derived by the Australian
company for the purposes of subsection 25(1) (apart from the operation
of Division 13), the question would arise as to the source of the deemed
income (sub-paragraph 136AE(1)(b)(i)). By the operation of subsection
136AE(1), the Commissioner is able to determine the source of that
income;
- (c)
- An Australian associate of a foreign company group is invoiced by
a foreign associate for an amount of $10,000,000 being for the
acquisition of motor vehicle parts. After investigation, a determination
is made under subsection 136AD(3) and an arm's length consideration of
$7,500,000 is deemed in respect of the acquisition of the property. The
amount of $7,500,000 will therefore represent the deduction allowable to
the Australian company under subsection 51(1). In this respect it is
difficult to see how a question would arise under section 136AE, since
the disallowance of part of the deduction for stock does not involve a
reallocation of expenses.
- However, a question might arise as to the nature of the balance
of the expenditure that the Australian associate company has been
charged for, being the amount of $2,500,000. As subsection 136AE(1)
makes a reference to "that consideration", which in the context of the
subsection is a reference to the deemed arm's length consideration, it
would appear that subsection 136AE(1) can have no application to the
amount of $2,500,000. How the overcharged disallowed amount of
$2,500,000 is to be treated falls within the realm of secondary
adjustments which are to be dealt with in a later
Ruling.
417. In each of the above examples, regard must be had
to the operation of any source rules contained within Australia's double
taxation agreements. In that regard, the determination of source may
differ depending on the type of income involved. If for example, an
Australian entity undercharges an overseas associate for trading stock
supplied directly from Australia, the amount undercharged would be
deemed to be income sourced in Australia. On the other hand, if an
Australian entity supplied technology to an associate resident in a
country with which Australia has a double tax agreement, the income
would be royalty income and treated as sourced in the overseas country
pursuant to the source rule contained in the relevant double tax
agreement. The determination of source would also have to have regard to
whether Division 13 is being applied directly to an Australian company
or is being applied under Australia's accruals tax rules.
418. In the application of subsections 136AE(1) to (3),
subsection 136AE(7) requires amongst other things that regard shall be
given to:
- (a)
- the nature and extent of any relevant business activities and the
place or places at which the business is carried on (paragraph
136AE(7)(a)); and
- (b)
- such other matters as the Commissioner considers relevant
(paragraph 136AE(7)(c)).
419. Accordingly, the issues that we would consider in
determining the source or sources of income or the extent to which
expenditure was incurred in deriving income would include:
- (a)
- the nature and extent of any relevant business
activities;
- (b)
- the place or places at which the business is carried
on;
- (c)
- the functions performed in each country, the assets and skills
employed in each country and the risks and responsibilities borne by the
various entities;
- (d)
- the economic value added to the relevant property in each
location;
- (e)
- the application of common law rules relating to source (though
the application of Division 13 often presupposes that these rules have
been effectively circumvented or that section 25 does not
apply);
- (f)
- the degree of connection between each amount of expenditure and
the income derived in each jurisdiction;
- (g)
- other circumstances relevant to a particular company and
"agreement"; and
- (h)
- the operation of any source rules in any applicable double
taxation agreement.
Transfers of property including trading stock and other
goods and services
420. Subsection 136AD(1) could generally be expected to
apply where a person carrying on business in Australia sells property
(e.g. trading stock) overseas at a reduced price in a non-arm's length
dealing, unless there was cogent evidence that the consideration
received or receivable was, in reality, the arm's length
consideration.
421. In cases where the consideration is, prima facie,
less than the arm's length consideration, companies would be expected
to:
- (a)
- have ascertained what an arm's length consideration might
reasonably be expected to be in respect of the relevant supply of
property; and
- (b)
- be able to supply the necessary contemporaneous documentation or
- in the case of past dealings where contemporaneous documentation was
not kept - a reasoned case based on all the facts and circumstances that
then applied to support the transfer prices that have been adopted. For
the future, companies should maintain sufficient contemporaneous
documentation to enable tax returns to be prepared having regard to the
arm's length principle.
422. A more detailed discussion on the nature and extent
of the documentation that we would expect to be held to support
contentions put to us that an arm's length consideration was received or
receivable will be dealt with in a later Ruling (see also paragraphs 368
- 377 above).
423. We have found cases where a foreign parent company
has sent a facsimile or telex message to its Australian associated
company stipulating what the price for the acquisition of property, to
be exported from Australia, will be. Again, it cannot be said that the
parties are dealing at arm's length with each other as there is no real
bargaining between the parties in respect of the acquisition of
property. Subsection 136AD(1) could therefore normally be expected to
apply to such cases where the other requirements of the subsection are
satisfied. Regard should also be had to the matters in paragraphs 326
and 327.
424. Paragraph 40 of the 1979 OECD Report states that
"The question has to be considered whether, in an arm's length
situation, goods might be supplied for no payment or an unusually low
payment, or might be supplied at a price producing less than the usual
profit or even a loss". It then goes on to make the following comments
in respect of the question raised:
- (a)
- It would not be unusual for an independent enterprise to do this
(i.e. to sell at a loss or at no cost) if the goods were samples or
advertising offers, but associated enterprises are not likely to be in a
parallel situation;
- (b)
- The question is more likely to arise in connection with goods
sold to an associate in financial difficulties when some or all of the
payment might be waived;
- (c)
- It would be very exceptional for this to occur in transactions
between independent enterprises, though the possibility cannot be wholly
discounted (for example a supplier might to some extent be prepared to
waive payment by an independent customer in temporary
difficulties
in order to preserve a potentially valuable outlet for his goods);
and
- (d)
- Tax authorities could properly require very convincing
proof
that this situation would arise before accepting a nil or reduced
payment between associated enterprises as equivalent to the arm's length
price. Payment might be deferred in such circumstances in the arm's
length situation but this would normally affect the price or be
compensated for under a credit arrangement of some sort. (emphasis
added)
425. Our view is in line with these remarks. It is not
accepted that independent parties dealing at arm's length would supply
goods free of charge except in the very narrow circumstances and under
the same sorts of conditions as referred to in paragraph 40 of the 1979
OECD Report.
426. Subsection 136AD(3) could generally be expected to
apply where the other preconditions of Division 13 have been satisfied
and profits have been shifted out of Australia by a person carrying on
business in Australia purchasing property (e.g. trading stock) from
overseas at an inflated price (refer to the Explanatory Memorandum at
page 68).
427. In cases where the consideration given or agreed to
be given for purchases is, prima facie, more than the arm's length
consideration, companies would be expected to meet the same criteria as
identified in paragraph 421 to support contentions that the transfer
prices adopted represent an arm's length consideration. A more detailed
discussion on the nature and extent of the documentation that we would
expect to be held to support contentions put to us that an arm's length
consideration was given or agreed to be given will be dealt with in a
later Ruling.
428. There have been some cases where foreign parent
companies have sent advice to their Australian associated company
stipulating what the price for the property, to be imported into
Australia, will be. In other cases, the foreign parent company has
directed the return that the Australian associated company is to make.
In such cases, it could not be said that the parties were dealing at
arm's length with each other as there has been no real bargaining
between the parties in respect of the acquisition of property by the
Australian associated company. Subsection 136AD(3) could therefore
normally be expected to apply to such cases where the other requirements
of the subsection are satisfied. Regard should also be had to the
matters in paragraphs 326 and 327.
429. Additionally, instances have also come to light in
the course of audits where non-resident companies which have incurred
expenditure on behalf of, or provided services to, their Australian
associates have charged amounts which exceed the value of the economic
benefits obtained by the Australian associate. In such cases, subsection
136AD(3) could normally be expected to apply to reduce the consideration
in respect of the charge levied on the Australian associate to an arm's
length consideration (which in some cases may be the cost, and in some
other cases may be a nil amount - as would be the case with shareholder
costs). Regard should also be had to the possible disallowance of
expenditure not complying with the requirements of subsection 51(1).
These matters will be discussed in a later Ruling.
Where doubt exists about the financial capacity of an
associate to pay for purchases
430. Where doubt exists about the financial capacity of
an associated entity to pay an arm's length consideration, alternative
arrangements such as those referred to in paragraph 40 of the 1979 OECD
Report would be considered acceptable where these would be consistent
with what independent parties dealing at arm's length would enter into
if confronted with similar circumstances. It would generally not be
acceptable for companies to simply reduce the purchase price or to
indefinitely defer demands for payment without some form of compensation
or security being provided to the supplier of the goods.
431. The nature of any compensation or security to be
provided would depend on the facts of each case and again would need to
be consistent with what independent parties dealing at arm's length with
each other would agree to if faced with similar circumstances. In this
respect, a distinction can be drawn between a company experiencing
temporary cash flow difficulties, for which few if any alternative
financial arrangements would be likely to be made and a company which
may be facing insolvency. In dealings between related parties, the
nature and extent of any financial support or guarantees that have been
provided in the past by associated entities in respect of dealings with
independent parties or other related parties or which might reasonably
be expected to be provided would also be relevant to consider. TR 92/11
provides more detail as to how deferral of demands for payment for
balances due between related parties (e.g. by suppliers of goods) could
attract the application of section 136AD.
Pricing of 'Baskets of goods'
432. A "basket of goods" could be described as the
supply or acquisition of a range of "property" (not including intangible
property or services) under a broadly based (or "umbrella") agreement
covering one or more product lines. In the usual situation, a more
streamlined pricing policy is applied which seeks to avoid treating each
good or product within the "basket" as a discrete item having a unique
price. Examples of such streamlined pricing policies could include
common profit margin mark-ups applied to product lines or across all
goods contained within the "basket".
433. An issue which sometimes arises is whether we would
require an individual price to be ascertained in respect of each
discrete item contained within a "basket of goods" or whether we would
accept a more streamlined pricing policy as representing the arm's
length consideration in respect of the supply or acquisition of
property. Our view is that neither paragraphs (b) or (c) of subsections
136AD(1), (2) and (3) (being the relevant paragraphs in this instance)
require, as a matter of practical application, the arm's length
consideration in respect of discrete goods contained within a "basket of
goods" to be determined, rather than accepting in appropriate cases, the
adoption of a more streamlined pricing policy. The question for the
purposes of section 136AD is: What would be the arm's length
consideration in respect of the supply or acquisition of an equivalent
"basket of goods" under a comparable "agreement" between independent
parties dealing at arm's length?
434. The further question has been put to us whether we
agree with the statement in paragraph 41 of the 1979 OECD Report in
respect of the pricing of discrete goods comprised within a "basket of
goods". It is stated in paragraph 41 that "It may be reasonable in some
circumstances to analyse the transfer prices for product lines or other
groupings rather than to ascertain an arm's length price for each
individual product or sale. An enterprise may find it necessary to sell
some products at less than the market price or even supply them free in
order to make a higher profit on its sales of products overall to the
same buyer."
435. We expect that companies already know and would be
able to demonstrate what it cost them to purchase or to produce each
discrete good or product line. The view expressed in paragraph 41 of the
1979 OECD Report is that it may be reasonable in some circumstances for
an enterprise to sell some
products at less than the market price or supply them free in order to
make a higher profit
on its sales of products overall to the same buyer
. In some cases, it may be thought desirable from a marketing point of
view to have a full range of certain products, even though some are not
expected to make money. Two aspects of the OECD statement must be
emphasised. First, it only applies to some products (and given the
examples used in paragraph 41 of the 1979 OECD Report, these products
would be ancillary to the major product lines). Secondly, it only
applies where the decision to sell some products at less than market
price or cost (or even free) is to make higher profits than would
otherwise have been obtained. Where the evidence shows that higher
overall profits in Australia were in fact realised as a consequence of
following the business strategy, it could be expected that the
arrangements would be acceptable to us provided independent parties
dealing at arm's length might reasonably have been expected to have
entered into a comparable agreement.
436. This is not to say Division 13 would not be applied
in a situation where a particular item in a "basket of goods" has been
priced below the arm's length amount and, having regard to the
particular product and its market, the pricing cannot be explained by
the business strategy. The conduct of the parties also needs to be
examined to determine if it is consistent with the professed business
strategy.
437. It is also stated in paragraph 41 of the 1979 OECD
Report that:
"an unusually low or high price would, however, have to be
examined closely and substantiated by cogent evidence, and the prices
realised on resale by the buyer could be relevant."
We would go further and say that in respect of transfers of
"baskets of goods" between associated entities, the price eventually
realised upon resale to an independent party would be a relevant factor
in examining the nature of the business strategy and in determining
whether it was capable of achieving its purpose, and whether it was in
fact implemented. It would be equally relevant to compare the overall
profit made on a "basket of goods" with the total profit that could be
made on the basis of individual product sales and whether the business
strategy resulted in any deferral or avoidance of Australian
tax.
438. There is a view expressed by some practitioners
that the concept of a "basket of goods" should be applied more broadly.
This issue will be addressed in a later Ruling on Methodologies.
Effects on the value of opening and closing trading stock
where an adjustment is made under subsection 136AD(3)
439. Where a determination is made under subsection
136AD(3), the deemed arm's length consideration applies for all purposes
of the application of the ITAA. In respect of property which is trading
stock, the deemed arm's length consideration will affect not only the
deduction allowable under subsection 51(1) in respect of the acquisition
of the trading stock, but may also affect the value of any relevant
trading stock still on hand at the end of a year of income. These
additional consequences may also affect the calculation of the taxable
income or loss of a company where a Division 13 determination has been
made. An example will illustrate one of the possible situations which
could arise.
440. Assume as in example (c) in paragraph 416(c) that a
Division 13 determination is made to reduce purchases of $10,000,000 to
$7,500,000. Assume also:
- (i)
- in its tax return, $4,000,000 worth of motor vehicle parts are
recorded by the Australian associate as still on hand at the end of the
year of income (cost price being used for the purposes of subsection
31(1));
- (ii)
- that (for the purpose of this example) the effect of the
determination can be apportioned on a straight line basis between the
stock on hand and the stock which has been sold. i.e. the value of any
of the overpriced stock still on hand will be 25% ($1,000,000) less than
the value of stock on hand recorded by the Australian associate
($7,500,000 / $10,000,000 x $4,000,000 = $3,000,000, a reduction of
$1,000,000);
- (iii)
- an amount of $12,000,000 was included by the Australian associate
in its assessable income under subsection 28(2) (being the excess of the
value of the trading stock on hand at the end of the year of income over
the value of the trading stock on hand at the beginning of the year of
income). This figure of $12,000,000 includes the $4,000,000 representing
the overpriced stock still on hand.
In this situation, the amount to be included in the assessable
income of the Australian associate under subsection 28(2) would be
reduced by $1,000,000 in accordance with step (ii) above to $11,000,000.
The revised amount of $11,000,000 would then form the value of the
opening stock on hand for the purposes of the succeeding year of income
under section 29. This may also have a continued flow-on effect for
later years.
Existence of a business purpose insufficient in itself to
avoid Division 13
441. An Australian entity may have a business purpose
for supplying property at no consideration or less than an arm's length
consideration or, alternatively, acquiring property for more than an
arm's length consideration from an offshore subsidiary. However, that in
itself is not adequate to take the dealings outside the ambit of
Division 13.
442. For example, an Australian parent company may
provide goods for sale at little or no charge to an offshore subsidiary
to enable it to accumulate profits for reinvestment. Where this is the
purpose of the provision of the goods, subsection 136AD(1) or (2) could
be expected to apply to attribute an arm's length consideration in
respect of the supply of the goods by the Australian parent even though
there was a business purpose to the dealings.
443. Similarly, a non-resident company in dealings with
an Australian subsidiary may have a business purpose for supplying
property at more than an arm's length consideration or acquiring
property for no consideration or less than an arm's length
consideration. Again, that in itself is not adequate to take the
arrangement outside the ambit of Division 13.
444. For example, a non-resident parent company may have
an urgent need for funds and impose terms for payment of goods in
advance of their supply, which would not be encountered were the parties
to the agreement independent parties dealing at arm's length with each
other (such terms might include the payment of a deposit in excess of
that which arm's length parties would have agreed to). Even where this
is the purpose for the advance payment (i.e. in essence a disguised
loan), subsection 136AD(1) or (2) could be expected to apply with the
result that an arm's length consideration will be deemed by way of the
interest that might reasonably have been expected to have been received
by the Australian subsidiary in respect of the advance payment.
"Start up", "market penetration" and "obsolete stock
prices"
445. As indicated in the 1983 Speech, Mr Boucher said
that:
"A company endeavouring to break into a market may, for a period,
undercut its competitors in that market. When the circumstances are
enquired into, that might be found to be an arm's length price. So too,
where a company has surplus stocks that it must unload for a price lower
than could apply in a balanced market."
446. Paragraph 43 of the 1979 OECD Report makes the
following relevant comments in respect of specially low prices charged
by producing entities to associated marketing entities:
- (a)
- that in general specially low prices may be expected to be
charged for a limited period only, with the specific objective of
improving the profits of the producer in the long term
; (emphasis added)
- (b)
- that producers may not be alone in this kind of activity and that
both producing and marketing entities may combine in such an operation,
splitting the risk and sharing the profitable outcome, if any, in some
way between them; and
- (c)
- that tax authorities could in principle accept such low prices
charged between associated enterprises as arm's length prices but
only if independent enterprises could be expected to have fixed the
prices in the same manner in comparable circumstances
. (emphasis added)
The matters raised in paragraphs 315 - 317 above would also need
to be considered.
447. While we are in broad agreement with these views,
it needs to be recognised that they consider the issue of specially low
prices arising out of "start up", "market penetration" or "obsolete
stock prices" mainly from the point of view of the producing or
manufacturing entity. The role of related party marketing or
distribution entities in any such business strategy is only lightly
discussed and the ultimate effect, if any, on prices charged to arm's
length consumers in the relevant market is not referred to at all. In
our view, such additional matters would also be relevant for the
purposes of assessing comparability with what independent parties
dealing at arm's length might reasonably have been expected to have done
in comparable circumstances. Such matters are referred to in more detail
below.
448. It has been suggested that the 1979 OECD Report may
be too narrow in the context of current global marketing techniques and
competition. We agree that a reasonable period of time needs to be
allowed to enable genuine business strategies to take effect. What is a
reasonable timeframe will depend on the facts and circumstances of the
case. However, regard could be had to the sorts of business strategies
generally being pursued in the particular market and the characteristics
of the market (including all of the features listed at paragraph
315(c)). We would want to be satisfied, though, that there was a
reasonable basis for the view that greater profits would be obtained in
the foreseeable future. Where prices are set such that losses are being
incurred beyond a reasonable period and no strong indication exists that
profitable operations will return or commence in the near future, a
transfer pricing adjustment may be appropriate, particularly where
comparable data over several years shows that the losses have been
incurred for a period longer than that affecting comparable independent
parties.
449. It would also generally not be accepted that a
business strategy of sacrificing some level of price or profit in order
to increase market share is something an independent party would do
while there was a level of unmet demand in the relevant market.
Goods leaving Australia
450. It has been argued that subsection 136AD(1) should
not be applied where Australian producing/wholesaling companies reduce
or discount the price at which property is supplied to foreign
marketing/distribution associates where the price reduction or discount
is for the purpose of increasing market share, establishing a new market
in the foreign country, introducing its products into an existing market
in the foreign country or to clear surplus or obsolete stock.
451. Whether Division 13 would be applied in cases where
property is supplied to a foreign associate at discounted prices, will
depend on the facts and circumstances of each case and in particular on:
- (a)
- the discounted prices being charged for only a limited period, in
accordance with a genuine business strategy and with the specific
objective of improving the profits of the Australian producer in the
longer term;
- (b)
- the research and analysis undertaken at the time to support the
business strategy;
- (c)
- the market conditions prevailing at the time;
- (d)
- the market impact of any price discount strategies and the
financial and taxation consequences for the parties involved;
and
- (e)
- regard being given to what independent parties dealing at arm's
length might reasonably have been expected to have done in comparable
circumstances.
It would also be expected that companies would continually
monitor the particular market or markets in which the discounted goods
are being sold.
452. There may be cases where goods are sold to an
independent distributor at discounted prices to increase the
distributor's profit and thereby entice the distributor to become tied
to the supplier's products, or at least provide a reliable competitive
outlet for the goods. Division 13 would not be applied in such a case
unless there is evidence of some back to back or collateral arrangement
or side deal.
453. It is somewhat more difficult to reach a similar
conclusion in relation to a related party distributor, but if the
related party has a high level of independence (see paragraph 291),
operates as a truly separate profit centre with authority (which it
exercises) to deal with third party suppliers, and adopts arrangements
similar to those used by independent distributors in that market,
Division 13 would, in general, not be applied unless the particular case
exhibits other abnormal features that are inconsistent with independent
dealing.
Goods entering Australia
454. The comments made in paragraph 43 of the 1979 OECD
Report (referred to in paragraph 446), while of more general
application, are relevant to the situation where a transferor company
directs an associated company to charge a reduced price to unrelated
parties yet at the same time fails to reduce the transfer price of the
underlying goods or services that it charges to its associate. Where
independent parties dealing at arm's length with each other would not
have entered into a similar arrangement, then subsection 136AD(3) could
be expected to be applied.
455. For example, foreign producer companies selling
goods through an associated marketing/distribution entity in Australia,
may wish to establish a new market in Australia, increase market share,
introduce its products into an established Australian market or to clear
surplus or obsolete stock. Accordingly, they may direct that lower
prices be charged by the Australian distributor to unrelated Australian
buyers, without decreasing the prices charged to their Australian
distributor. The pricing of such arrangements would generally only be
acceptable for taxation purposes where:
- (a)
- the discounted prices were charged for only a limited period, in
accordance with a genuine business strategy and with the specific
objective of improving the profits of both the foreign producer and
Australian marketing entity in the longer term;
- (b)
- they reflected the respective contributions of the producing and
marketing/distribution entities in terms of: the nature of functions
performed; the assets and skills used; and the degree and nature of any
business or financial risks involved; and
- (c)
- regard had been given to what independent parties dealing at
arm's length might reasonably have been expected to have done in
comparable circumstances.
456. In these cases, for taxation purposes, it would be
expected that discounted retail prices in Australia would generally
result in a reduction in the wholesale prices of the goods or services
being charged to the Australian distributor, and that the marketing
entity is properly rewarded for its efforts - taking account of market
realities - if an adjustment under subsection 136AD(3) is to be
averted.
457. In cases where prices to related
marketing/distribution companies are high relative to prevailing market
selling prices and particular market strategies, companies would be
expected to provide information on the issues identified in paragraphs
451 - 453 that would support contentions that the price charged by the
foreign company to its Australian associate in respect of the property
acquired by the Australian associate is arm's length.
The treatment of joint venture arrangements
458. The following discussion is included to reflect the
fact that separate legal entities can have dealings with each other in
the context of an unincorporated joint venture. In those cases each
individual entity within the joint venture will be subject to Division
13 where all the pre-conditions of application are satisfied, unless the
arrangement is a partnership for the purposes of the ITAA - in which
case Division 13 applies as appropriate to the partnership.
459. A joint venture is an unincorporated contractual
association, other than a partnership or a trust, between two or more
parties to undertake a specific business project in which the joint
venturers meet the costs of the project and receive a share of any
resulting output (see the definitions of "joint venture" in Accounting
Standards Review Board Approved Accounting Standard, ASRB 1006 and the
Statement of Accounting Standards, AAS 19). The establishment of a joint
venture does not create a separate legal entity. Often a joint venture,
as defined in the accounting standards, will fall within the definition
of the word "partnership" in subsection 6(1) of the ITAA. It is not the
purpose of this Ruling to discuss such situations.
The term joint venture has also been found to include
references to "joint venture companies" which are not joint ventures in
the sense referred to in the accounting standards, but special purpose
companies incorporated to carry out a specific business purpose. The
incorporation of a company to carry out a specific business purpose
creates a new legal entity. This section of the Ruling is directed
towards joint ventures in the sense referred to in the accounting
standards. Joint venture companies, being separate legal entities, would
be treated no differently to any other separate legal entity to which
Division 13 may have application.
461. In joint venture arrangements, it is common for
some or all of the parties to the joint venture to provide property
instead of or in addition to finance. While legal title to property may
not transfer (though equitable interests or other equitable rights may
be created), it is clear that making property available confers a
benefit on the other joint venturers. Using the Division 13 concepts,
the property provided could include, inter alia , plant and equipment,
rights, services and/or the making available of intangible assets (such
as processes or patents) for use by the joint venture. The provision of
property to a joint venture in these circumstances clearly falls within
paragraph (b) of the definition of "supply" in subsection
136AA(1).
462. Paragraph 136AA(3)(b) provides that a reference in
Division 13 to "consideration" includes a reference to property supplied
or acquired as consideration and a reference to the amount of any such
consideration is a reference to the value of the property. Accordingly,
where property is supplied to or acquired from a joint venture, it will
be the value of that property which will be relevant for the purposes of
the Division.
463. In many joint venture arrangements, the
"consideration" for the supply of property to the joint venture may be a
share of the proceeds of the joint venture (i.e the product produced by
the joint venture). For example, two mining companies may agree to
jointly develop a lease with a view to each of them obtaining 50% of the
coal. Each is free to independently market the coal or use it in
production etc. In such cases, subsections 136AD(1), (2) or (3) may be
applied to either or both of the supply or acquisition of property
having regard to the value of the contribution to the joint venture, the
product sharing agreement and the division of output between the joint
venturers.
464. Where property is supplied to a joint venture under
an international agreement, subsection 136AD(1) could normally be
expected to apply to any of the joint venturers who were not dealing at
arm's length with each other and where the consideration in respect of
the supply of property was less than an arm's length consideration.
Similarly, subsection 136AD(2) may be expected to apply where no
consideration was received in respect of the supply of property. While,
on the face of it, it might be expected that the real risk of non-arm's
length dealing would occur in joint ventures between related parties,
there is still the possibility of back to back and collateral
arrangements between unrelated parties. Accordingly, these principles
are stated in relation to joint ventures generally.
465. The output or product of a joint venture obtained
by each joint venturer would also clearly fall within paragraph (b) of
the definition of "acquire" in subsection 136AA(1). The property
obtained might, for example, include minerals, partly finished goods or
finished goods. Where property is obtained from a joint venture under an
international agreement, subsection 136AD(3) could normally be expected
to apply to any of the joint venturers who were not dealing at arm's
length with each other and where the consideration in respect of the
acquisition of property was more than an arm's length
consideration.
466. The fact that the joint venturers may have agreed
upon the value to be ascribed to the property provided by each of the
joint venturers or to the share of the product of the joint venture
obtained by each of the joint venturers does not automatically mean that
such agreed values represent the arm's length consideration in respect
of the supply or acquisition of the relevant property. The facts of each
case will be relevant when trying to ascertain the value (and product
share) that independent parties dealing at arm's length would have
allocated to the supply or acquisition of the relevant property by each
of the joint venturers.
467. In ascertaining the arm's length consideration in
respect of property provided to or obtained from a joint venture, regard
should be had, inter alia , to such matters as:
- (a)
- the terms of the joint venture agreement;
- (b)
- the relevant interests in the joint venture of the individual
joint venturers;
- (c)
- the value of the property provided to the joint venture by the
other joint venturers, whether in money or in property (including
services) or both;
- (d)
- the value of the property obtained from the joint venture by each
of the joint venturers (such as minerals, partly finished goods or
finished goods);
- (e)
- the functions performed, the assets and skills employed and the
risks and responsibilities borne by each of the joint
venturers;
- (f)
- any broader "agreement" which may exist; and
- (g)
- any agreement as to the disposition of assets upon cessation of
the joint venture.
The treatment of barter and countertrade
arrangements
468. It needs to be recognised that separate legal
entities can engage in barter and countertrade arrangements amongst
themselves on a cross-border basis. This part of the Ruling considers
how Division 13 applies in these situations where the pre-conditions of
its operations are met.
469. For the purposes of this Ruling, barter and
countertrade arrangements will have the same meanings as given in
paragraphs 2 and 3 of Taxation Ruling IT 2668. Paragraph 2 of IT 2668
states that:
"In its simplest form, bartering involves the direct exchange of
goods or services for other goods or services without reference to money
or a money value."
470. In respect of arrangements where a company issues
shares in itself in exchange for property, the general principles
espoused in this Ruling would apply.
471. Taxation Ruling IT 2668 covers the income tax
implications of barter and countertrade arrangements, other than the
application of Division 13. Paragraph 7 of IT 2668 states that the
essential principle is that these dealings are assessable and deductible
only to the same extent as similar cash or credit dealings. Similarly,
timing principles for the derivation of income and the incurring of
expenditure that apply to cash or credit dealings apply equally to
barter and countertrade arrangements.
472. Section 136AD could be expected to apply to barter
and countertrade arrangements involving the supply or acquisition of
property under international agreements where the parties to the barter
or countertrade arrangement were not dealing at arm's length with each
other and the value of the consideration is not arm's length in respect
of the relevant supply or acquisition. The effect of subsection 136AA(3)
is to convert consideration "in specie" into the money value of the
property supplied or acquired.
473. In barter arrangements under international
agreements, there is both a supply and acquisition of property (by
virtue of the word "exchange" in paragraph (a) of the definitions of
"supply" and "acquisition" in subsection 136AA(1)). Both sides of any
barter or countertrade arrangement should be benchmarked against arm's
length prices to ensure that the consideration received or given
respectively is equivalent to the value of what is being supplied or
acquired.
474. For the purposes of ascertaining the arm's length
consideration that might reasonably be expected to have been agreed in
respect of the supply and acquisition of property under a barter
arrangement, we will accept as indicative of an arm's length
consideration:
- (a)
- the cash price and terms which the company would normally have
obtained from an independent party dealing with the company at arm's
length for the supply of the property (see also paragraph 15 of IT
2668); and
- (b)
- the cash price and terms which the company would normally have
expected to have agreed to with an independent party dealing with the
company at arm's length for the acquisition of the
property.
475. The fact that the parties to a barter arrangement
may have agreed upon the value to be ascribed to the property
contributed by each of them, does not automatically mean that such
agreed values represent the arm's length consideration in respect of the
supply or acquisition of the relevant property. The facts of each case
will be relevant when trying to ascertain the arm's length consideration
in respect of the relevant property exchanged by each of the parties to
the barter arrangement. The arm's length consideration will be relevant
for a range of purposes including depreciation, trading stock valuation
and capital gains calculations.
Commissioner of Taxation
31 May 1994
Previously released in draft form as TR 93/D40
References
ATO references:
NO NO 94/3061-0
ISSN 1039 - 0731
Subject references:
acquisition of property
agreement
apportionment of expenditure
arm's length consideration
arm's length principle
barter transactions and countertrade
baskets of goods
benefits
Commissioner's discretion
company groups
consideration
course of conduct
dealing at arm's length
documentation
double tax agreements
international agreement
international profit shifting
joint ventures
methodologies
multinational enterprises (MNEs)
non-arm's length transfer pricing
not dealing at arm's length
OECD
profit shifting
property
services
source of income
supply of property
tax avoidance
trading stock
transfer pricing
Legislative references:
Acts Interpretation Act 1901 15AA
Income Tax Assessment Act 1936 6(1)
ITAA former 23(q)
ITAA 23AH
ITAA 23AJ
ITAA 25(1)
ITAA 26AAA
ITAA 28
ITAA 29
ITAA 31
-ITAA31C
ITAA 44
ITAA 46
ITAA 51(1)
ITAA 63
ITAA 79E
ITAA 80
ITAA 102A
ITAA 102AG(3)
ITAA 128B
ITAA Pt III Div 13
ITAA former 136
ITAA 136AA
ITAA 136AB
ITAA 136AC
ITAA 136AD
ITAA 136AE
ITAA 136AF
ITAA 170(1)
ITAA Pt IVA
ITAA 225
ITAA 260
ITAA 262A
ITAA 263
ITAA 264
ITAA 264A
Income Tax Assessment (Amendment) Act 1982
Income Tax (International Agreements) Act 1953 4(2)
Taxation Administration Act 1953 14ZZK
TAA 14ZZO
Case references:
Case N69 / Case 53
(1962) 13 TBRD 270
11 CTBR (NS) 261
Allina Pty Ltd v. FC of T
91 ATC 4195
(1990) 21 ATR 638
Barnsdall v. FC of T
88 ATC 4565
(1988) 19 ATR 1352
Barron (Inspector of Taxes) v. Littman
[1953] AC 96
(1952) 2 All ER 548
Birks v. C of T
(1953) 10 ATD 266
Bowman v. Durham Holdings Pty Ltd
(1973) 131 CLR 8
British Slag Ltd v. Registrar of Restrictive Trading Agreements
[1962] 3 All ER 247
British Slag Ltd v. Registrar of Restrictive Trading Agreements
[1963] 2 All ER 807
Brogden v. Metropolitan Railway Co.
(1877) 2 App Cas 666
Cecil Bros Pty Ltd v. FC of T
(1964) 111 CLR 430
Cooper Brookes (Wollongong) Pty Ltd v. FC of T
(1981) 147 CLR 297
Currie v. Misa
(1875) 10 LR Exch 153
Emery v. IRC
[1981] STC 150
Estate of Ball v. FC of T
84 ATC 4920
15 ATR 1296
FC of T v. Ball
82 ATC 4701
13 ATR 746
FC of T v. Commonwealth Aluminium Corporation Ltd
(1980) 143 CLR 646
FC of T v. Isherwood & Dreyfuss Pty Ltd
79 ATC 4031
9 ATR 473
FC of T v. Lutovi Investments Pty Ltd
(1978) 140 CLR 434
FC of T v. Miranda
76 ATC 4180
6 ATR 367
Fletcher & Ors v. FC of T
(1991) 173 CLR 1
Grey v. Australian Motorists & General Insurance Co.
[1976] 1 NSWLR 669
Goodwin v. Temple
[1957] St.R.Q. 376
Hooker Rex Pty Ltd v. FC of T
(1988) 19 ATR 1241
88 ATC 4392
Investment and Merchant Finance Corporation Ltd v. FC of T
(1970) 120 CLR 177
Isherwood & Dreyfuss Pty Ltd v. FC of T
1978 ATC 4311
8 ATR 735
Jones v. Skinner
5 LJ Ch 90
Lahey v. Canavan
[1970] 1 Qd.R. 224
Lustre Hosiery Ltd v. York
(1935) 54 CLR 134
Minister of National Revenue v. Merritt & Anor
69 DTC 5159
Mobil Oil Australia Pty Ltd v. FC of T
(1963) 113 CLR 475
Morphett Arms Hotel Pty Ltd v. TPC
(1979-80) 30 ALR 88
Myer v. FC of T
(1987) 163 CLR 199
Newton v. FC of T
(1958) 98 CLR 1
Norman v. FC of T
(1963) 109 CLR 9
Palmer v. C of T (WA)
(1976-1977) 136 CLR 406
R v. Canavan and Busby
[1970] 3 OR 353
Re Nanaimo Community Hotel Ltd
[1944] 4 DLR 638
Re Symon,Public Trustee v. Symon
[1944] SASR 102
Robertson v. IRC
[1959] NZLR 492
Ronpibon Tin NL and Tongkah Compound NL v. FC of T
(1949) 78 CLR 47
Sharpe v. Wakefield & Others
(1891) AC 73
Shepherd v. FC of T
(1965) 113 CLR 385
The Trustee for the Estate of the late AW Furse No. 5 Will Trust v. FC of T
91 ATC 4007
21 ATR 1123
Thomas v. Thomas
[1842] 2 QB 851
Top Performance Motors Pty Ltd v. Ira Berk (Queensland) Pty Ltd
5 ALR 465
(1975) 24 FLR 286
TPC v. Nicholas Enterprises
26 ALR 609
Ure v. FC of T
81 ATC 4100
11 ATR 484
Winks v. W.H. Heck & Sons Pty Ltd
[1986] 1 Qd.R. 226
XCO Pty Ltd v. FC of T
(1971) 124 CLR 343
Other references
Explanatory Memorandum: Income Tax Assessment Amendment Bill 1982
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