Transfer Pricing 2025

AUSTRALIA Trends and Developments Contributed by: Michael Clough, Jerome Tse, Judith Taylor and Kai-Chen Lamb, King & Wood Mallesons

Political Climate Both major political parties in Australia support a tougher approach to transfer pricing. The government has just allocated a very sig - nificant increase in funding to the Australian Taxation Office (ATO) to combat tax minimisa - tion arrangements, including transfer pricing, and continues to pass legislative amendments to broaden the application of Australia’s laws to multinationals. A federal election will be held on 3 May 2025 and the minority Greens party, or a group of independents, are widely tipped to hold the bal - ance of power in the new Parliament. This is significant because the Greens party and some of those independents have strong views that multinational companies should pay more Aus - tralian tax. The US administration has announced a review of foreign tax measures that are considered dis - criminatory in substance, and it remains to be seen whether the US administration will object to some of Australia’s laws, including unilateral measures to combat bas erosion and profit shift - ing (BEPS), either by way of retaliatory tax meas - Australia continues to adopt the OECD Guide - lines on Transfer Pricing. The OECD 2022 Guide - lines were recently incorporated into the domes - tic legislation. The government has also adopted many of the BEPs proposals and in some cases passed legislation that unilaterally bypasses Australia’s double tax agreements by enact - ing them as a general anti-avoidance measure. Australia reserves the right in its agreements to give paramountcy to the domestic general anti- avoidance rule (GAAR) over the agreement. ures and/or tariffs. Legislation Trends

Australia’s transfer pricing rules are increasingly supplemented by legislation that restricts the deductibility of distributions to non-residents when those distributions would generally be characterised as, or deemed to be, interest or royalties. Developments in Case Law There were two recent decisions of the Full Court of the Federal Court (Australia’s second highest appeal court on tax matters) involving transfer pricing which highlight a number of trends. Intercompany financing The first involved intercompany financing and followed an earlier decision that required the tax - payer to produce evidence to establish a reliable comparable in which the hypothetical lender and borrower were acting as if they were independ - ent. Unfortunately, this reinforces two difficulties for the taxpayer. • Determining what independent parties would have done would normally involve an assess- ment of commercial factors that are likely to differ between different companies, even those involved in the same industry. For example, one bank may be prepared to take on more risk than another for a variety of reasons (eg, because it was not already (as) exposed to the borrower’s industry). Views on currency risk and hedging differ markedly in many industries and are often interlinked with hedging sales revenues. • The Court seems to have accepted that most hypotheticals will involve the provision of a parent guarantee, because the Court expects that an independent borrower would seek the lowest interest rate. This problem is a subset of the conundrum that the Court faces – in an intragroup borrowing, the lender and bor - rower do not require an agreement the terms

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