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ATO Reviews Advance Pricing Arrangements

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

12 November 2010


The Australian Taxation Office (ATO) has provided an update on its Advance Pricing Arrangement (APA) programme, which describes its operation during the financial year ended June 30, 2010 and provides details of how the programme is being further developed.

The ATO confirms that APAs continue to be an important part of the ATO’s international tax strategy because they provide complementary benefits to both the ATO and to taxpayers, create greater certainty for all parties, reduce compliance costs, and reduce the risk of audit and penalty. The ATO discloses that it will continue to promote and use APAs to assist in gaining cooperative tax compliance.

An APA lets companies that are members of a multinational group reach an agreement with the ATO on how to apply the arm’s length principle in their future dealings with international related parties. The arrangement establishes the transfer pricing method they must use for transactions covered by the APA, generally covers three to five years, and may be reviewed if their trading circumstances change.

APAs can be between the ATO, the taxpayer and one, or more than one, foreign tax authority. If so, they are entered into under the mutual agreement procedure article of the relevant double tax agreement. APAs between the ATO and the taxpayer alone are entered into under the ATO’s normal administration of the country’s income tax law.

The ATO states that it completed 39 APAs in the 2010 financial year, made up of 21 renewals, 12 new APAs encouraged by compliance activity, and six unprompted new APAs. Both large businesses and small-to-medium enterprises (SMEs) requested APAs. In 2009–10, 18 APAs were completed with large businesses and 21 APAs were completed with SMEs.

The completed APAs covered a wide range of related party inbound and outbound dealings including tangible goods for personal consumption and as business inputs; business and management services; IT software and hardware; mineral exports; the licensing of marketing intangibles; financial services; and contract research and development.

The principal transaction covered in 26 of the 39 completed APAs was an import of goods, services or intellectual property. In 2009–10, APAs were completed with South Korea, Japan, New Zealand, Switzerland, the United States and, for the first time, Singapore.

The changes to the way the ATO processes applications are being progressively implemented. They include a differentiation of the ATO’s APA processing so its level of examination matches the nature and complexity of the issues involved and the perceived level of transfer pricing risk.

The ATO has developed a new range of APA services that will comprise the updated programme. The ATO is structuring simplified APAs, APA renewal and APA term extension services for large and small-to-medium market taxpayers with low value and low risk international related party dealings; standard unilateral and bilateral APA processes for standard international related party dealings; and complex APA process for complex and/or high risk unilateral or bilateral international related party dealings.

The pre-lodgement phase will also be expanded to better develop the scope of an APA and, where necessary, agree on the approach for the treatment of any collateral issues. A web-based APA guide will be provided with comprehensive information about the APA programme. It will include an overview of the APA process and will highlight its key provisions and requirements.

This comprehensive report in our Intelligence Report series examines the global and national landscapes in which companies can use transfer pricing to improve their after-tax returns, including summaries of recent developments in design of the corporate supply train, the usefulness of 'offshore' in international corporate tax planning, and a section covering the spread of DTAAs and CFC laws. It is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report16.asp
TAGS: compliance | tax | business | tax compliance | law | Australia | small and medium-sized enterprises (SME) | tax planning | transfer pricing | regulation

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