Australian transfer pricing penalities

Australian multinational entities with turnover greater than AUD$1 billion now need to submit a range of additional transfer pricing documents, but the current penalty provides little incentive.

Following on from the recent introduction of Australia’s new country-by-country reporting regulations, Australian multinational entities with turnover greater than AUD$1 billion are now required to prepare and submit a range of additional transfer pricing documentation with their annual income tax returns. These include;

  • a Masterfile,
  • a local file and
  • a country-by-country report

These rules apply to companies with tax years beginning 1 January 2016 onwards. The lodgement of this additional documentation is required no later than 12 months following the end of the company’s financial year end.

What are the consequences of not producing these three documents?

Under the current law, the maximum financial penalty that can be applied in instances where the required three documents are not filed with the relevant income tax return is $5,400. While not submitting these documents will no doubt raise the a company’s ATO risk profile, some multinational company head offices are unwilling to provide such sensitive global transfer pricing information, both to the local Australian subsidiary or the ATO. With a punitive maximum penalty of $5,400, there is little incentive for some companies to comply with these more onerous transfer pricing documentation obligations. Especially where the head office is located within a country that has not adopted the OECD’s country-by-country reporting obligations.

The likely limited impact of this low non-compliance penalty was recently recognised by a number of Federal parliamentarians. On February 29, Labor MP Andrew Leigh introduced the Tax Laws Amendment (tougher penalties for country-by-country reporting) Bill to provide a greater incentive for large multinationals to comply with the new rules. The amendment calls for an increase in the maximum penalty for non-compliance to $270,000. The Bill also proposes that the Commissioner of Taxation consider auditing the transfer pricing affairs of an entity, if it does not comply with the new country-by-country reporting requirements. The audit should take place within a year of the date in which the documentation is due.

Although it is uncertain as to whether this Bill will traverse through Parliament and become law, it does demonstrate that the issue of potential multinational tax avoidance is one which remains a hot topic in Australia. It is likely that this will be fiercely debated by Parliamentarians, businesses and tax professionals in the months and years to come.

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