ATO Tax Ruling Could Prove Bad News For Multinationals

by Mary Swire, Tax-News.com, Hong Kong

06 November 2001

An Australian Taxation Office ruling on international transfer pricing could have major implications for local subsidiaries of multinational information technology providers, claims Deloitte Touche Tohmatsu.

The ruling, issued last week, aims to define the taxable income of a 'permanent establishment' and applies to foreign companies operating in Australia, as well as Australian companies operating in other countries. In a statement released by Deloitte, partner Andrew Fisher said the ruling attempted to broaden the local tax liability base of multinational companies with 'permanent establishments' for their Australian operations.

But, he said, the ruling 'would have a flow-on effect for the IT industry, and may be a potential disincentive for multinational companies wanting to operate in Australia,' because it had the potential to target resellers and distributors of IT equipment and software and related services, and added a new layer of tax complexity.

'It has been the generally accepted view that no residual profit was left in the permanent establishment where a non-resident was operating in Australia via a dependent agent and the agent received an arm's length fee for the provision of its services (e.g. sales or post sales support),' he said.

'However, according to this week's ruling, the ATO does not accept this view. For example, it is argued in the ruling that certain activities performed in the (offshore) head office should be deemed to be associated with the permanent establishment. As such, in order for the permanent establishment to return an 'arm's length' profit, additional income must be attributed to it.'

He added: 'The attributed expenses would be deductible, but less than the amount of extra income. The ruling fails to adequately explain why this should be the case, nor how additional income can be calculated. If this view prevails, the ATO will be out of step with other taxation authorities around the world.'

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