Transfer Pricing 2025

AUSTRALIA Law and Practice Contributed by: Michael Clough, Jerome Tse, Judith Taylor and Scott Heezen, King & Wood Mallesons

1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations Australia’s transfer pricing rules are contained in subdivisions 815-B, 815-C, and 815-D of the Income Tax Assessment Act 1997 and related evidentiary matters in subdivision 284-E of the Tax Administration Act 1953. When relevant, the equivalent rules in Australia’s double tax agree - ments will generally apply to the extent of any inconsistency with the domestic rules. 1.2 Current Regime and Recent Changes Australia’s first attempt at transfer pricing rules were contained in the Income Tax Assessment Act 1936. These were vague rules designed to reallocate profits but were largely ineffectual. Modern rules based on the OECD guidelines were enacted in May 1981 as Division 13 of that Act. Those rules adopted the concepts of arm’s length consideration which would be payable/ receivable by parties dealing with each other at arm’s length. Those rules were replaced in 2012 by Division 815 of the Income Tax Assessment Act 1997. Sub-division 815A was expressed to confirm that the transfer pricing rules contained in Australia’s tax treaties and incorporated into Australia’s domestic law would address treaty- related transfer pricing. The purpose of the rules was to limit taxable profits being shifted or misal - located offshore. Interestingly, these rules were made retrospective to 2004 to overcome per - ceived weaknesses in Division 13, even though subsequent cases suggest that perception was incorrect. Division 815 was updated in 2013, and the transfer pricing rules are now contained in Sub - divisions 815-B, 815-C and 815-D and related provisions in Subdivision 284-E of the Taxation Administration Act. Those amendments were made to improve the alignment between out -

comes achieved for international arrangements involving Australia and another jurisdiction irre - spective of whether the other country forms part of Australia’s tax treaty network. 2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules Australia’s transfer pricing rules will apply if the conditions operating between entities differ from arm’s length conditions – having regard to a number of factors such as the assets, risks and functions of each entity – and that difference results in a tax benefit. Technical legal control is not required. Independent parties can act on a non-arm’s length basis in relation to a transac - tion, usually where they act on a similar basis in relation 3. Methods and Method Selection and Application 3.1 Transfer Pricing Methods The legislation does not prescribe one method to use. This is an acknowledgement that each case depends on its facts and circumstances. Because the legislation is based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (the “OECD Guidelines” ), the models set out there and their applicability are the norm. In court, the favoured method is the comparable uncon - trolled price method, but this is usually difficult in practice. The transactional net margin method is often used when comparables are difficult to find.

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