Australia - Transfer Pricing - Dispute Resolution - IBFD

Australia - Transfer Pricing & Dispute Resolution - Country Tax Guides (Last Reviewed: 31 May 2023)
Transfer Pricing & Dispute Resolution

Australia
Author
Stewart Grieve[*]
Partner, Johnson Winter & Slattery, Melbourne, Australia
Based on the original chapter written by Reynah Tang.
IBFD Tax Technical Editor

Zachary Somers
Latest Information
This chapter is based on information available up to 31 May 2023. Please find below the main changes made to this
chapter up to that date:
Federal government has extended the funding of the Tax Avoidance Taskforce until 30 June 2026.
The OECD released 2021 MAP statistics of Australia.
The ATO released 2021/2022 APA statistics of Australia.
1. Introduction[1]
1.1. Overview of TP documentation procedure
See Australia – Transfer Pricing section 13.
1.2. Overview of local dispute procedure

The ATO analyses the information that is disclosed in tax returns (including the International Dealings Schedule),[2] together with
other information it collects, to determine which taxpayers to review and, potentially, audit. It is generally only following review and
audit that the Commissioner of Taxation (Commissioner) will issue an assessment for additional tax, penalties and interest. The
audit process is discussed in more detail in section 2.3.
To the extent that transfer pricing adjustments are made by the Commissioner, a taxpayer has an administrative right to object
to any assessment raised.[3] Following objection, a process of internal review is conducted by an “independent” officer within the
ATO. It is only following failure to obtain satisfactory resolution of an objection that a taxpayer has the right to seek review of the
decision by the Administrative Appeals Tribunal (AAT)[4] or appeal to the Federal Court of Australia (Federal Court). The dispute
process is discussed in more detail in section 3.2.
*. Stewart Grieve is a Partner at Johnson Winter & Slattery in Melbourne, Australia. The assistance of Don Spirason and Julian Wan in preparing the latest update is
gratefully acknowledged. The views expressed in this chapter are the authors’ personal views (and do not necessarily represent the views of their organization).
1. This chapter focuses on the administration of Australia’s transfer pricing laws. It does not specifically address the administration of Australia’s diverted profits
tax (DPT) or Multinational Anti-Avoidance Law (MAAL). It should be noted that the DPT and the MAAL may be raised by the ATO in conjunction with a transfer
pricing dispute but they are separate and distinct from Australia’s transfer pricing laws.
2. ATO, International Dealings Schedule, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/International-
transfer-pricing---introduction-to-concepts-and-risk-assessment/?anchor=IDS#IDS (accessed 20 June 2023).
3. Part IVC, Div. 3, Taxation Administration Act 1953 (TAA 1953).
4. In Dec. 2022, the federal government announced that the AAT will be abolished and replaced with a new federal administrative review body. The AAT will
continue to operate until this reform takes effect.
S. Grieve, Australia - Transfer Pricing & Dispute Resolution, Country Tax Guides IBFD (accessed 2 August 2023). 1
© Copyright 2023 IBFD: No part of this information may be reproduced or distributed without permission of IBFD.
Disclaimer: IBFD will not be liable for any damages arising from the use of this information.
Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

1.2.1. Availability of international procedures and relief from double taxation

To the extent that transfer pricing adjustments made by the ATO (or its foreign counterparts) may lead to double taxation, Australia
has mutual agreement procedures (MAPs) in place to resolve any disputes under the relevant tax treaties, which are discussed in
section 4.2.
Multinational enterprises also have the option of seeking to avoid the risk of double taxation in advance by entering into a (bilateral)
advance pricing arrangement (APA) with the ATO and the tax authority in the foreign jurisdiction. This process – including the
use of unilateral APAs – is addressed in section 5.2.4. and is performed by the “competent authority” within the ATO (see section
1.2.2.2.).
1.2.2. Tax authorities

1.2.2.1. Organizational structure with relevant areas of jurisdiction
The ATO is organized into a number of different groups and business lines. The ATO’s Client Engagement Group includes a
number of business lines broadly delineated by type of taxpayer. There is no specific transfer pricing group or business line
identified within the ATO’s Client Engagement Group. However, the Client Engagement Group includes Public Groups and
International business lines which, by virtue of the type of taxpayers they are responsible for, commonly deal with transfer pricing
matters.[5]
In 2016, the government established a Tax Avoidance Taskforce to conduct operations in high-risk sectors. The Tax Avoidance
Taskforce has received significant government funding which was recently extended until 30 June 2026. The ATO claims that
since its inception, Taskforce activity has helped generate AUD 17.2 billion in tax liabilities, leading to an additional AUD 9.7 billion
in cash collections.[6] A number of significant tax dispute settlements have also been credited to the Tax Avoidance Taskforce.[7]
1.2.2.2. Other relevant players

There are a number of other roles within the ATO as well as other government institutions that may be relevant to a transfer pricing
matter.
The “competent authority” under Australia’s tax treaties (who is responsible for negotiating MAPs and APAs) is a number of
specified officers of the ATO.
As indicated in section 3.2., objections against assessments that are raised are considered by a different officer within the ATO. If
the objection is disallowed, the taxpayer can apply for review of the objection decision by the AAT or appeal of the decision to the
Federal Court, both of which are independent of the ATO.
1.2.2.3. Programmes to ensure consistent application of TP policies and penalties

The Commissioner has issued various guidelines (e.g. in the form of rulings, practice statements and practical compliance
guidelines) [8] which are designed to guide ATO officers in the administration of transfer pricing matters.
1.2.2.4. Downward TP adjustments procedure

Under Australia’s current transfer pricing provisions in subdivision 815-B of the Income Tax Assessment Act (ITAA 97), primary
adjustments can only be made to increase taxable income, reduce tax losses, reduce tax offsets or increase withholding
tax. However, if a determination is made to adjust for a transfer pricing benefit, the Commissioner is empowered to make a
“consequential adjustment” for any entity that is disadvantaged as a result of the arm’s length conditions operating rather than the
actual conditions.[9]
5. ATO, Organisational Chart, available at https://www.ato.gov.au/uploadedFiles/Content/CR/downloads/n75148_ATO_organisational_structure.pdf (accessed 20

June 2023).
6. ATO, Tax Avoidance Taskforce extended and expanded (last modified 21 Nov. 2022), available at https://www.ato.gov.au/Business/Business-bulletins-
newsroom/Tax-avoidance/Tax-Avoidance-Taskforce-extended-and-expanded/ (accessed 13 June 2023).
7. Including a USD 381.7 settlement with ResMed in October 2021 (see ATO, ATO welcomes announcement of settlement of tax dispute, available at https://
www.ato.gov.au/Media-centre/Media-releases/ATO-welcomes-announcement-of-settlement-of-tax-dispute/ (accessed 20 June 2023); and the approximately
AUD 1 billion settlement with Rio Tinto in July 2022, one of the largest settlements in Australia’s tax history, see ATO, ATO secures settlement of marketing hub
tax dispute, available at https://www.ato.gov.au/Media-centre/Media-releases/ATO-secures-settlement-of-marketing-hub-tax-dispute/ (accessed 20 June 2023).
8. See e.g. ATO, Practice Statement Law Administration (PS LA) 2015/3, available at https://www.ato.gov.au/law/view/print?DocID=PSR%2FPS20153%2FNAT
%2FATO%2F00001&PiT=99991231235958&Life=20150226000001999912312359 (accessed 20 June 2023).
9. Sec. 815-145 ITAA 97.

1.2.2.5. Contact information

Australian Competent Authority Transfer pricing gatekeeper
APA/MAP Program Management Unit internationalsgatekeeper@ato.gov.au
Public Groups and International
Australian Taxation Office
GPO Box 9977
Brisbane QLD 4001
1.2.2.6. Comment on profile and aggressiveness

The ATO has been active in making its views on transfer pricing known to the taxpaying community leading to a “somewhat
unbalanced engagement, in which the emphasis has often been on the economic analysis at the expense of the legal
fundamentals”.[10] The ATO seeks to influence taxpayer behaviour through its various publications. The ATO is also very active
in the media (relative to Australia’s size). The ATO published more than 20 rulings, determinations and practice statements, as
well as other guides and Internet resources, in relation to transfer pricing under the former transfer pricing regime (division 13
of the ITAA 36) and has been producing a range of tax rulings, practice statements and practical compliance guidelines on the
current regime in subdivisions 815-B to D of the ITAA 97. By and large, it appears that taxpayers do have regard for the ATO’s
guidance with a view to minimizing the prospect of review, audit and dispute – for example, in relation to marketing hubs, the
ATO estimated that, following the publication of Practical Compliance Guideline (PCG) 2017/1,[11] more than 50% of exports from
Australia associated with marketing hubs fell into the “safe zones” set out in that PCG.[12] At the time that BHP settled its long
running dispute with the ATO over BHP’s marketing hub, BHP expressly mentioned in its press release to the Australian stock
exchange that as part of the settlement, the ownership of its marketing hub would be held wholly under the Australian side of
BHP’s dual listed company structure and its marketing hub operations would be within the “low risk” or “green zone” for offshore
marketing hubs in accordance with PCG 2017/1.[13]
2. Audit
2.1. Historical background
The ATO first established an International Tax Division in 1993 in order to have a better focus, as an organization, on
globalization.[14] Over time, the ATO has continued to build and refine its approach to the review and audit of transfer pricing
issues.
The frequency with which a taxpayer is engaged by the ATO depends on which “client category” the taxpayer falls into.[15] For
example, taxpayers in the “Top 100” justified trust program receive ongoing one-to-one tailored engagement. The ATO offers
three “engagement experiences”, described as “partnering”, “encouraging” and “influencing”. The approach which the ATO
applies is based on a point-in-time assessment of the taxpayer’s transparency in terms of engagement with the ATO, choices and
10. D. Hearder, New Transfer Pricing Legislation, 18 Asia-Pac. Tax Bull. 5, p. 372 (2012), Journal Articles & Opinion Pieces IBFD. In this regard,
it is noted that the ATO issued its first tax ruling on transfer pricing in 1992, Taxation Ruling (TR) 92/11, Income Tax: application of the
Division 13 transfer pricing provisions to loan arrangements and credit balances (1 Oct. 1992) available at https://www.ato.gov.au/law/view/
document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=16&num=5&docid=TXR%2FTR9211%2FNAT%2FATO
%2F00001&dc=false&stype=find&tm=phrase-basic-TR%2092%2F11 (accessed 20 June 2023). This followed a recommendation of the House of
Representatives Standing Committee on Finance and Public Administration (see recommendation (5) in Shifting the tax burden? Interim report on an Auditor-
General’s efficiency audit on the Australian Taxation Office – International profit shifting, para. 3.3.7 (Interim Martin Committee Report) (AGPS, 1988).
11. ATO, Practical Compliance Guideline (PCG) 2017/1, available at https://www.ato.gov.au/law/view/pdf/cog/pcg2017-001.pdf (accessed 20 June 2023).
12. ATO, ATO Submission – Inquiry into Australia’s oil and gas reserves, 8 Nov. 2019, available at https://www.aph.gov.au/Parliamentary_Business/Committees/
Senate/Economics/Australiasoilandgas/Submissions (accessed 20 June 2023).
13. BHP, BHP Settles longstanding transfer pricing dispute, News Release (19 Nov. 2018), available at https://www.asx.com.au/asxpdf/20181119/
pdf/440f9kqqdnxfyh.pdf (accessed 20 June 2023).
14. J. Killaly, Transfer Pricing – Compliance Issues and Insights in the Context of Global Profit Allocation, presentation to Transnational Crime Conference, p. 2 (9-10
Mar. 2000).
15. The ATO uses the Action Differentiation Framework (ADF) to determine how it engages with public and multinational business taxpayers. Under the ADF,
taxpayers will be placed into one of four client categories: (i) “Top 100” for market leaders or businesses with more than AUD 5 billion total business income;
(ii) “Top 1,000” for businesses with more than AUD 250 million total business income; (iii) “Medium” for businesses with between AUD 10 million and AUD 250
million total business income; and (iv) “Emerging” for businesses with less than AUD 10 million total business income; ATO, Action Differentiation Framework,
available at https://www.ato.gov.au/business/large-business/action-differentiation-framework/ (accessed 20 June 2023). For privately owned groups, the ATO
uses the Risk Differentiation Framework for private groups (available at https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/What-you-should-
know/Transparency/How-we-assess-risk/ (accessed 20 June 2023)); and Tax performance programs for privately owned and wealthy groups (available at https://
www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/What-you-should-know/Tax-performance-programs-for-private-groups/ (accessed 20 June
2023)).

behaviours (as evidenced in their tax affairs) and the level of risk exhibited.[16] Taxpayers subject to a “partnering” approach will
generally be subject to “less intensive” compliance interactions whilst taxpayers subject to an “influencing” approach can expect
“firm approaches” from the ATO such as the use by it of formal information gather powers.[17]
The ATO publishes PCGs which provide a self-assessment risk framework to help taxpayers assess the ATO’s likely view of the
risk associated with particular arrangements.[18] It should be noted that taxpayers may be required to disclose the outcome of their
risk assessment under the PCGs (if relevant) in the Reportable Tax Position schedule to their income tax return. The PCGs allow
the ATO to differentiate risk, prioritize the deployment of compliance resources and provide guidance on the type of engagement
taxpayers can expect from the ATO. The ATO has represented that arrangements which are categorised as low risk will not
generally attract the allocation of compliance resources, although resources may still be allocated to confirm the risk categorization
is correct,[19] however, it is important to stress that the guidelines do not create safe harbours for taxpayers. Further, it is important
to understand that PCGs are merely statements of the ATO’s “practical administration approach” and are not “public rulings” – as
such, they do not have a legally binding effect.[20]
Transfer pricing is a key focus area of the ATO and considered a critical component of the Australian taxation system.[21] As noted
at section 1.2.2.1., the federal government has extended the funding of the Tax Avoidance Taskforce until 30 June 2026.
2.2. Primary current controversies

2.2.1. Areas of ATO focus
The broad areas that the ATO is focusing upon include:[22]
- financing transactions, including related-party derivatives, interest-free loans (outbound and inbound), cash pooling
arrangements and guarantee fees;
- offshore hubs (marketing or procurement) or service centres;
- inbound distribution arrangements;
- arrangements relating to intangible assets, in particular the documentation of activities in relation to the development,
enhancement, maintenance, protection and/or exploitation of intangibles;
- inbound and outbound supplies of goods and services;
- management, administrative and technical services, in particular the documentation of the beneficial nature of the service and
the appropriateness of allocation keys;
- research and development performed on behalf of an overseas party; and
- insurance and reinsurance.
16. ATO, Top 100 population, available at https://www.ato.gov.au/Business/Large-business/Top-100-population/ (accessed 20 June 2023).
17. ATO, Action Differentiation Framework, available at https://www.ato.gov.au/business/large-business/action-differentiation-framework/ (accessed 20 June 2023).
18. For example, in relation to transfer pricing, see Practical Compliance Guideline (PCG) 2017/1 concerning centralized operating models involving procurement,
marketing, sales and distribution functions; Practical Compliance Guideline (PCG) 2017/4 in relation to cross-border related-party financing arrangements and
related transactions, Practical Compliance Guideline (PCG) 2017/8 in relation to the use of internal derivatives by multinational banks; Practical Compliance
Guideline (PCG) 2019/1 in relation to transfer pricing issues related to inbound distribution arrangements; Practical Compliance Guideline (PCG) 2020/1 in
relation to transfer pricing issues related to projects involving the use of non-resident owned mobile offshore drilling units in Australian waters; and draft Practical
Compliance Guide (PCG) 2023/D2 in relation to intangibles arrangements.
19. For example, see ATO, Practical Compliance Guideline (PCG) 2017/1, at para. 26, available at https://www.ato.gov.au/law/view/document?
src=rs&pit=99991231235958&arc=false&start=1&pageSize=10&total=10&num=9&docid=COG%2FPCG20171%2FNAT%2FATO
%2F00001&dc=false&stype=find&df=1897&tm=or-basic-PCG%202017%2F1DC2; Practical Compliance Guideline (PCG) 2017/2, at para. 12, available
at https://www.ato.gov.au/law/view/document?DocID=COG/PCG20172/NAT/ATO/00001; Practical Compliance Guideline (PCG) 2017/4, at paras. 17-18,
available at https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=6&num=4&docid=COG
%2FPCG20174%2FNAT%2FATO%2F00001&dc=false&stype=find&tm=phrase-basic-PCG%202017%2F4; Practical Compliance Guideline
(PCG) 2019/1, at paras. 27-32, available at https://www.ato.gov.au/law/view/document?DocID=COG/PCG20191/NAT/ATO/00001;
and, more recently, Practical Compliance Guideline (PCG) 2020/1, at para. 29, available at https://www.ato.gov.au/law/view/document?
src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=1&num=0&docid=COG%2FPCG20201%2FNAT%2FATO
%2F00001&dc=false&stype=find&tm=phrase-basic-PCG%202020%2F1 (all accessed 20 June 2023).
20. See ATO, Practical Compliance Guideline (PCG) 2016/1, at para. 24, available at https://www.ato.gov.au/law/view/document?docid=COG/PCG20161/NAT/
ATO/00001&PiT=20160603000001 (accessed 12 July 2023).
21. J. Hirschhorn, Second Commissioner, Welcome address and opening remarks at the Tax Institute National Transfer Pricing Conference (14 Aug. 2019), available
at https://www.ato.gov.au/Media-centre/Speeches/Other/Transfer-pricing-a-key-focus-for-ATO/ (accessed 12 July 2023).
22. ATO, Findings report top 100 income tax and GST programs, available at https://www.ato.gov.au/Business/Large-business/In-detail/Findings-report-Top-100-
income-tax-and-GST-program/#Taxrisksflaggedtomarket (accessed 20 June 2023).

Common issues that the ATO has stated that it has identified include:
- inadequate information to support transfer pricing positions; and

- changes in transfer pricing methodologies without an underlying change to the functional profile of the taxpayer and the
selection of inappropriate methodologies for a particular functional profile.
2.2.2. COVID-19
The ATO has previously acknowledged that COVID-19 may result in related-party arrangements being terminated, amended or
replaced and encouraged taxpayers which were considering altering their related-party arrangements due to COVID-19 to engage
with the ATO.[23]
The ATO has flagged that, when undertaking compliance activities, it will seek to understand and assess:
- the taxpayer’s function, asset and risk profile before and after COVID-19;
- the actual economic impacts of COVID-19 on the taxpayer’s Australian operations, which may include an analysis of how
COVID-19 has impacted the taxpayer’s industry more broadly;
- the contractual arrangements between the taxpayer and its related parties, and whether any obligations or material terms and
conditions have been varied, amended or terminated;
- evidence of the impact (if any) of COVID-19 on the specific product and service offerings of the taxpayer and how this impacts
upon its financial results; and
- evidence of changes in business strategies as a result of COVID-19, including decisions made, outcomes sorted and actions
taken to give effect to those strategies.[24]
The ATO has emphasized the importance of gathering evidence and contemporaneous documentation regarding the impact of
COVID-19 on the taxpayer’s business and supporting any business changes that were made.[25] The business changes which the
ATO has initially flagged that it will be reviewing include:
- early termination or repayments of related-party dealings and liabilities which trigger deductions for foreign exchange losses;
- changes which reduce ongoing withholding tax obligations;
- changes to rights or property provided that reduce assessable income; and
- changes that increase the risks assumed by, or allocation of, global losses to limited risk entities.[26]
The ATO has stated that it will be examining documentation to assess whether:
- independent parties dealing wholly independently in comparable circumstances would have agreed to change their
arrangements or enter into the new arrangements (for example, do the new arrangements have limited benefits, or result in a
detriment, for the taxpayer);[27]
- there was a mismatch between the substance and form of the changes;
- there was a tax avoidance purpose (presumably to assess the potential application of Australia’s various anti-avoidance
rules rather than to support a transfer pricing adjustment – for a discussion on the relevance of purpose to Australia’s transfer
pricing rules, see section 3.3.); or
23. ATO, COVID-19 economic impacts on transfer pricing arrangements, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/
Transfer-pricing/COVID-19-economic-impacts-on-transfer-pricing-arrangements/ (accessed 12 July 2023).
24. ATO, COVID-19 economic impacts on transfer pricing arrangements – How we assess the economic impacts of COVID-19 on transfer pricing arrangements,
available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/COVID-19-economic-impacts-on-transfer-pricing-
arrangements/?page=1#How_we_assess_the_economic_impacts_of_COVID_19_on_transfer_pricing_arrangements (accessed 12 July 2023).
25. ATO, COVID-19 economic impacts on transfer pricing arrangements – How we assess the economic impacts of COVID-19 on transfer pricing arrangements,
available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/COVID-19-economic-impacts-on-transfer-pricing-
arrangements/?page=1#How_we_assess_the_economic_impacts_of_COVID_19_on_transfer_pricing_arrangements (accessed 12 July 2023).
26. ATO, Changing related party agreements, available at https://www.ato.gov.au/misc/downloads/pdf/qc62954.pdf (accessed 12 July 2023).
27. The author observes that this ATO guidance was published prior to the Full Federal Court handing down its decision in the Glencore Appeal. As discussed further
in the discussion of that case at sec. 3.3. the Full Federal Court in that case had held this line of reasoning was not relevant.

- the changes to the related party arrangements and the commercial justifications for the changes had originated with a tax
adviser.[28]
The ATO has also acknowledged that, at least in the short term, analyses of comparable benchmarking may not support transfer
pricing outcomes which have been impacted by COVID-19. On that basis, the ATO has stated that it will seek to understand the
financial outcomes a taxpayer would have been able to achieve “but for” COVID-19.[29]
One area where the ATO has provided more guidance is in relation to the transfer pricing treatment of payments received by
businesses under Australia’s COVID-19 wage subsidy program known as “JobKeeper”. The ATO’s position is that independent
parties would not share the benefit of government assistance payments and therefore, Australian entities should retain the benefit
of the JobKeeper payments they have received. In the context of an Australian service provider, this means the ATO expects
that the cost base of services provided should not have been reduced by the benefit of JobKeeper payments that have been
received.[30]
2.3. Audit process and milestones

2.3.1. Authorities involved
Reviews and audits are carried out by the relevant business line within the ATO responsible for the taxpayer. For instance, the
Public Groups Compliance Section conducts reviews and audits of listed Australian companies and multinational companies.
2.3.2. Joint audits

ATO investigations can include the cooperative involvement of many different parts of the ATO and the examination of multiple
issues. For example, a taxpayer can be simultaneously audited by the ATO on any number of issues, including direct and indirect
taxes administered by the ATO. Indeed, it is not unheard of for taxpayers to attend meetings with the ATO on a particular issue to
find representatives from other ATO teams attending.
The ATO also works with revenue authorities of other jurisdictions to address tax evasion and crime on a global scale. The ATO’s
“global cooperation” includes strategies such as investigations and audits with international tax administrations using Australia’s
bilateral tax treaties and the OECD’s Convention on Mutual Administrative Assistance on Tax Matters.[31] Australia was an original
member of the Joint International Tax Shelter Information Centre, originally established in 2004 to combat cross-border tax
avoidance and is a member of the reformed Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC)
initiative. Australia’s Commissioner, Mr Chris Jordan AO, is currently the Vice-Chair of the OECD’s Forum on Tax Administration
with sponsorship of the JITSIC.[32] The ATO is also a member of the J5 (the Joint Chiefs of Global Tax Enforcement) formed in
2018 to tackle, amongst other, international tax crime and those who act as the facilitators of global tax evasion.[33] The other
members of the J5 are His Majesty’s Revenue and Customs, the Internal Revenue Service Criminal Investigations from the United
States, the Canada Revenue Agency and the Dutch Fiscal Information and Investigation Service.[34]
Whilst the ATO has participated in joint audits with foreign tax administrations, it is uncertain how prevalent this practice is.
In November 2017, Mr Chris Jordan, Commissioner, commented that he planned to launch co-ordinated investigations with
authorities in Europe and around the world with “more real-time, multi-country projects and joint audits”.[35]
2.3.3. Audit timeline

ATO compliance activity typically comprises the following phases: general information gathering, risk review, audit and
assessment. Where an issue can be resolved at a particular phase, it obviously does not proceed to the next phase. Where
an issue is unable to be resolved and an assessment is raised, the taxpayer may pursue an objection and if the objection is
determined unfavourably then proceed to litigation (discussed in section 3.2.).
28. ATO, Changing related party agreements, available at https://www.ato.gov.au/misc/downloads/pdf/qc62954.pdf (accessed 12 July 2023).
29. ATO, COVID-19 economic impacts on transfer pricing arrangements – How to support the arm’s length nature of your transfer pricing outcomes, available at
https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/COVID-19-economic-impacts-on-transfer-pricing-arrangements/?
page=1#How_to_support_the_arm_s_length_nature_of_your_transfer_pricing_outcomes (accessed 12 July 2023).
30. ATO, Transfer pricing arrangements and JobKeeper payments, available at https://www.ato.gov.au/general/JobKeeper-payment/ (accessed 12 July 2023).
31. See ATO, Global Cooperation, available at https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Global-cooperation/ (accessed 12 July 2023).
32. OECD, Forum on Tax Administration - Joint International Taskforce on Shared Intelligence and Collaboration, available at https://www.oecd.org/tax/forum-on-tax-
administration/jitsic/ (accessed 12 July 2023).
33. See ATO, The fight against tax crime - Joint Chiefs of Global Tax Enforcement, available at https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-
focus/Joint-Chiefs-of-Global-Tax-Enforcement/ (accessed 12 July 2023).
34. See ATO, The fight against tax crime - Joint Chiefs of Global Tax Enforcement, available at https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-
focus/Joint-Chiefs-of-Global-Tax-Enforcement/ (accessed 12 July 2023).
35. The Australian newspaper, $5bn tax crackdown targets multinational technology giants (30 Nov. 2017).

General information gathering

The ATO reviews publicly available sources of information (such as annual reports) for potential issues of interest. Taxpayers must
also provide extensive and detailed information to the ATO about their interactions with related foreign entities, e.g. as part of their
income tax return or CbC reporting. The ATO can also initiate programs to gather information directly from taxpayers (for example,
by initiating a risk review).
Large taxpayers may also be required by the ATO to complete a Reportable Tax Position (RTP) schedule as part of their company
tax returns. An RTP schedule requires a taxpayer to disclose its contestable and material tax positions. Since the year ended 30
June 2019, taxpayers have been required to lodge an RTP schedule if they are a public or foreign-owned company and have either
a total business income of AUD 250 million or more, or have a total business income of AUD 25 million or more, and are part of an
economic group with a total business income of AUD 250 million or more in the current or immediately prior year.[36] From 1 July
2020, the ATO expanded the requirement to lodge an RTP schedule to large private companies as well. However, for the first year
(i.e. the 2020/21 income year), only large private companies which the ATO notified of the requirement to lodge an RTP schedule
were required to do so.[37]
As discussed in section 2.1., the ATO has now published a number of PCGs which allow taxpayers to self-assess their risk
profile in relation to specific arrangements, including in relation to their marketing hub arrangements[38] and intra-group financing
transactions.[39] The ATO can request that a taxpayer provide the ATO with its self-assessed risk weighting (as determined using
those PCGs). Australia’s Foreign Investment Review Board will also apply these PCGs when assessing a proposed foreign
investment.[40] For taxpayers which are required to complete an RTP schedule, the RTP schedule requires taxpayers to disclose
their self-assessed risk zones under the PCGs.[41]
The ATO may decide to institute a risk review based on the general information it has gathered through these processes.
Risk review
The first formal step in the compliance review process is for the ATO to undertake a transfer pricing risk review.[42]
The broader and more significant a taxpayer’s international related-party dealings are, the more likely the ATO will devote
compliance resources to undertaking a risk review. The ATO has flagged that a taxpayer will be more likely to be subject to a risk
review if it:
- has significant levels of international dealings with related parties;

- pays less tax compared to industry standards; or
- has recently undertaken business restructures that materially affect its related-party international dealings.[43]
In the event that the ATO decides to proceed with a review, it usually requests detailed background information on the taxpayer’s
business and tax position and a taxpayer will often need to devote considerable resources to the review.
The risk for a taxpayer of the ATO proceeding from a review to a transfer pricing audit is impacted by the quality of the
documentation maintained by the taxpayer, as illustrated in Figure 1.[44]
36. For example, see ATO, Reportable tax position instructions 2022 – Who needs to complete the schedule, available at https://www.ato.gov.au/Forms/Reportable-
tax-position-schedule-instructions-2022/?page=2#Who_needs_to_complete_the_schedule_ (accessed 12 July 2023).
37. See ATO, Large Business – Reportable tax position schedule, available at https://www.ato.gov.au/Business/Large-business/Compliance-and-governance/
Reportable-tax-positions/ (accessed 12 July 2023).
38. ATO, Practical Compliance Guideline (PCG) 2017/1, available at https://www.ato.gov.au/law/view/document?
src=rs&pit=99991231235958&arc=false&start=1&pageSize=10&total=10&num=9&docid=COG%2FPCG20171%2FNAT%2FATO
%2F00001&dc=false&stype=find&df=1897&tm=or-basic-PCG%202017%2F1DC2 (accessed 12 July 2023).
%2F00001&dc=false&stype=find&tm=phrase-basic-PCG%202017%2F4 (accessed 12 July 2023).
40. Foreign Investment Review Board, Guidance Note 12 – Tax Conditions (last updated 9 July 2021).
41. For example, see questions 9 and 14 of Section C: Category C reportable tax positions.
42. See ATO, Taxation Ruling (TR) 98/11, Documentation and practical issues with setting and reviewing transfer pricing in international dealings para. 4.6 (24 June
1998), available at https://www.ato.gov.au/law/view/document?DocID=TXR/TR9811/NAT/ATO/00001 (accessed 12 July 2023). Although it should be noted that
this ruling was written in the context of the former TP rules in division 13 ITAA 36. Of course, the ATO may identify a transfer pricing issue as a result of one of its
other investigative activities (e.g. a broader client risk review).
43. ATO, International transfer pricing – introduction to concepts and risk assessment – Transfer pricing risk assessment, available at https://www.ato.gov.au/
Business/International-tax-for-business/In-detail/Transfer-pricing/International-transfer-pricing---introduction-to-concepts-and-risk-assessment/?
anchor=TransferPricing#TransferPricing (accessed 12 July 2023).
44. ATO, Taxation Ruling (TR) 98/11, Documentation and practical issues with setting and reviewing transfer pricing in international dealings para. 4.27 (24 June
1998) available at https://www.ato.gov.au/law/view/document?DocID=TXR/TR9811/NAT/ATO/00001 (accessed 12 July 2023). See also ATO, International
transfer pricing – Introduction to concepts and risk assessment – Documentation requirements, available at https://www.ato.gov.au/Business/International-tax-

Figure 1: Risk of a transfer pricing audit
Where the review identifies that the taxpayer has poor documentation, and consistently returns losses, the taxpayer is at “very
high” risk of progressing to an audit. Conversely, a taxpayer with high-quality documentation, and which produces a “commercially
realistic result”, is at “low” risk of audit.
Audit
Once in an audit phase, the ATO will gather further information, usually by the issue of “information requests”. These requests
can take the form of “informal” requests, rather than requests involving the exercise of the ATO’s statutory access powers.[45]
Historically, the use of informal requests for information had been relatively common, however, the ATO’s use of its statutory
powers has been increasing, from 16,366 formal notices being issued in 2016-17 to 31,359 such notices in 2021-22.[46]
Most taxpayers would comply with informal requests, except to the extent they:
- relate to third-party information for which there may be confidentiality issues that necessitate a formal request;[47]
for-business/In-detail/Transfer-pricing/International-transfer-pricing---introduction-to-concepts-and-risk-assessment/?page=5#Documentation_requirements
(accessed 12 July 2023).
45. Formal access powers exist to require the provision of information held onshore and to request a taxpayer to obtain information held offshore, under secs. 353-10
and 353-25, sch. 1 TAA 1953 respectively. The ATO also has powers to access premises to, amongst other things, inspect and make copies of documents under
sec. 353-15, sch. 1 TAA 1953.
46. ATO, Annual Report 2021/22, Appendix 10: Use of access powers.
47. Confidentiality obligations do not override the statutory obligation to comply with a notice issued under sec. 353-10, sch. 1 TAA 1953; see Australia and New
Zealand Banking Group Limited v. Konza [2012] FCA 196 (in the context of the predecessor provision in sec. 264 ITAA 36).

- seek access to confidential communications comprising legal advice or requests for legal advice or service protected by legal
professional privilege;[48]
- include professional accounting advice which the Commissioner accepts should be confidential (protected under the
administrative concession known as the “Accountants’ Concession”);[49] or
- relate to advice on tax compliance risk given to a company’s board of directors (protected under the administrative
concession known as the “Corporate Board Advice Concession”).[50]
Apart from these matters, there are effectively no restrictions on the information which the ATO may request,[51] and which may
include commercially sensitive information. In the latter respect, taxpayers would usually draw some comfort from the strict secrecy
provisions that apply to the collection and use of this information,[52] and which extends to experts engaged by the ATO.[53] Indeed,
at the Senate Economics References Committee inquiry into Corporate Tax Avoidance (Senate Inquiry), the Commissioner
initially refused to disclose confidential taxpayer information at the public hearings,[54] although subsequently he did reveal some
information to correct perceived “errors” in the evidence given by particular taxpayers to the Senate Inquiry.[55]
ATO economists will also become involved at the audit stage to assist the audit team to arrive at the ATO’s view of the relevant
arm’s length conditions.[56] If this is materially different to that adopted by the taxpayer, a position paper is issued by the ATO
setting out the basis for the ATO’s determination. Generally, the taxpayer has an opportunity to respond to the position paper
before the ATO issues a Statement of Audit Position.[57]
Taxpayers with a turnover greater than AUD 250 million may also request an independent review of the ATO’s Statement of Audit
Position within 10 working days of receiving the statement.[58] However, the circumstances in which this process is available, are
very limited in transfer pricing matters.
Amended assessment
Once the audit is complete, the ATO will notify the taxpayer of the outcome (for example, through the issue of a Statement of Audit
Position) and a delegate of the Commissioner will then decide whether to issue an amended assessment. It should be noted that
under division 13 of the ITAA 36 and subdivision 815-A of the ITAA 97, a determination had to be made before the ATO could
issue an amended assessment in relation to the transfer pricing issue. However, this does not apply for subdivisions 815-B to
D, which operate on a self-assessment basis; that is, corporate taxpayers are required to consider the application of the transfer
pricing provisions in preparing their tax returns, with an assessment being deemed to arise for the tax shown in the return. The
Commissioner can then issue an amended assessment, subject to certain time limitations, if he disagrees with the taxpayer’s self-
assessment. Subdivisions 815-B, 815-C and 815-D apply in relation to income years starting on or after 1 July 2013.[59]
48. In Daniels Corporation International v. Australian Competition and Consumer Commission (2002) HCA 49, the High Court of Australia confirmed that statutory
access powers similar to those of the ATO did not abrogate legal professional privilege.
49. ATO, Our Approach to Information Gathering (22 June 2022) available at https://www.ato.gov.au/about-ato/commitments-and-reporting/in-detail/privacy-and-
information-gathering/our-approach-to-information-gathering/ (accessed 12 July 2023).
50. ATO, Practice Statement Law Administration (PS LA) 2004/14, Access to ‘corporate board documents on tax compliance risk’ (11 Mar. 2016), available at
https://www.ato.gov.au/law/view/document?Docid=PSR/PS200414/NAT/ATO/00001 (accessed 12 July 2023).
51. Enquiries must be for the purposes of administering the tax legislation, but this is a very broad concept (AU: HCA, 30 Nov. 1990, 46, Industrial Equity Ltd v.
Deputy Commissioner of Taxation). In that case, the High Court of Australia indicated that the access powers allow the Commissioner to engage in a “fishing
expedition”, (at para. 24 per Chief Justice Mason, Justice Brennan, Justice Deane, Justice Dawson, Justice Toohey and Justice McHugh) or a “roving
enquiry” (at para. 16, per Justice Gaudron). See also AU: FCAFC, 26 Feb. 2021, 43, CUB Australia Holding Pty Ltd v. Commissioner of Taxation, discussed in
sec. 2.3.14.
52. Div. 355, sch. 1 TAA 1953.
53. AU: FCA, 15 Mar. 1995, 1214, Consolidated Press Holding Ltd v. Commissioner of Taxation,
54. Official Committee Hansard, Senate Economics References Committee – Corporate tax avoidance, transcript of 8 Apr. 2015, pp. 21, 23, 24 and 30.
55. Senate Inquiry, Answers to questions on notice from a public hearing held in Sydney on 8 April 2015, received from the Australian Taxation Office on 24
April 2015; Answers to questions on notice from a public hearing held in Sydney on 22 April 2015, received from the Australian Taxation Office on 1 May
2015; and Answers to additional questions on notice, received from the Australian Taxation Office on 8 May 2015, available at https://www.aph.gov.au/
Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Additional_Documents?docType=Answer%20to%20Question%20on
%20Notice (accessed 12 July 2023).
56. ATO, Practice Statement Law Administration (PS LA) 2013/2, Provision of accredited economic advice (13 May 2014).
57. See, for example, ATO, Practical Compliance Guideline (PCG) 2017/1, at para. 99, available at https://www.ato.gov.au/law/view/document?docid=COG/
PCG20171/NAT/ATO/00001 (accessed 12 July 2023).
58. ATO, Independent review of the Statement of Audit Position for groups with a turnover greater than $250m, available at https://www.ato.gov.au/General/
Dispute-or-object-to-an-ATO-decision/In-detail/Avoiding-and-resolving-disputes/Independent-review/Large-market-independent-review---turnover-over-$250m/
(accessed 12 July 2023). For completeness, there is also an independent review service for certain small businesses with a turnover of less than AUD 10 million,
see ATO, Independent review for small businesses with turnover less than $10 million, available at https://www.ato.gov.au/General/Dispute-or-object-to-an-ATO-
decision/In-detail/Avoiding-and-resolving-disputes/Independent-review/Independent-review-for-small-businesses-with-turnover-less-than-$10-million/ (accessed
12 July 2023).
59. Division 815 Income Tax (Transitional Provisions) Act 1997 (Cth).

The transfer pricing review and audit process is illustrated in Figure 2, published by the ATO as part of Taxation Ruling (TR) 98/11
- Income tax: Documentation and practical issues associated with setting and reviewing transfer pricing in international dealings:[60]
60. ATO, Taxation Ruling (TR) 98/11, at para. 4.25, available at https://www.ato.gov.au/law/view/document?DocID=TXR/TR9811/NAT/ATO/00001 (accessed 12
July 2023).

Figure 2: ATO transfer pricing review and audit process

2.3.4. Rights and obligations of taxpayers

The main rights and obligations of taxpayers vis-à-vis the ATO are set out in the ATO Charter (previously known as the Taxpayers’
Charter).[61] The Taxpayers’ Charter is a policy guide published by the ATO which is intended to provide information to taxpayers
on their legal rights and what they can expect from their dealings with the ATO.[62]
Taxpayers’ rights include the right to be treated fairly and reasonably by the ATO. Specifically, the ATO will (i) treat taxpayer’s
with courtesy, consideration and respect; act with honesty and integrity; (ii) be impartial and act in good faith; (iii) treat taxpayers
as being honest unless the ATO has reason to think otherwise and give taxpayers an opportunity to explain; and (iv) work with the
people who taxpayers have chosen to represent them.[63]
The main obligations of taxpayers include: (i) being truthful and acting within the law; (ii) responding to queries in a timely manner
and providing all relevant information; (iii) meeting lodgement and payment obligations on time; and (iv) keeping proper records.[64]
2.3.5. Rights and obligations of tax authorities

The Commissioner’s rights include broad statutory access and information-gathering powers, which can be used not only in
relation to specific taxpayers, but also in respect of third parties and advisors.[65] [66] The extent of the Commissioner’s powers has
previously come under criticism.[67]
The obligations of the ATO are set out in the ATO Charter. In particular, the ATO is required to treat taxpayers fairly and
consistently, help taxpayers understand how the law applies to their circumstances and inform taxpayers of their review rights.[68]
The ATO has the right to discontinue its investigation or audit of a taxpayer at any time, although in this event, the taxpayer does
not have any real ability to recover the costs it has incurred in defending its position.
2.3.6. Information used in tax audits

In undertaking an audit, the ATO aims to obtain a broad sense of the commerciality of an arrangement, in order to determine
whether a taxpayer has complied with its tax obligations. In doing so, the ATO will consider a wide range of information and
documentation. As the conduct of audits is not governed by legislation, the information examined by the ATO can be extensive.
2.3.7. Confidentiality of information

As noted in section 2.3.3., the Commissioner is bound by a number of statutory secrecy and privacy rules.[69] These rules bind not
only those ATO officers who come into possession of confidential information directly, but also any other government agency that
comes into possession of the information and experts engaged by the ATO. However, there are exceptions to the obligation of
secrecy.[70]
In 2012, the government ratified the Convention on Mutual Administrative Assistance in Tax Matters (MAA Convention), which
took effect from 1 December 2012. The MAA Convention provides for further exchange of information and administrative
cooperation between national tax authorities. Information obtained by a party under the MAA Convention is subject to the same
domestic confidentiality rules as if that information was obtained under domestic law.[71]
In June 2014, the government released a discussion paper to seek the views of stakeholders on the Common Reporting Standard
for the automatic exchange of tax information (CRS) which was endorsed by G20 Finance Ministers and Central Bank Governors
61. ATO, ATO Charter: About our Charter, QC 57115 (last modified 26 June 2023), available at https://www.ato.gov.au/About-ATO/Commitments-and-reporting/
ATO-Charter/Our-Charter/ (accessed 30 July 2023).
62. Although the Taxpayers’ Charter is not legally binding, taxpayers have a legitimate expectation that it will be followed and may be denied procedural fairness if this
is not the case. See AU: FCA, 13 Nov. 1998, 1439, Deloitte Touche Tohmatsu v. Deputy Commissioner of Taxation; AU: FCA, 13 Mar. 2000, 270, ONE.TEL Ltd
v. Deputy Commissioner of Taxation.
63. ATO, ATO Charter: Our Commitment to you; QC 57115 (last modified 26 June 2023), available at https://www.ato.gov.au/About-ATO/Commitments-and-
reporting/ATO-Charter/Our-Charter/#Yourrightswhatyoucanexpectfromus1 (accessed 30 July 2023).
64. ATO, ATO Charter: What we ask of you; QC 57115 (last modified 26 June 2023), available at https://www.ato.gov.au/About-ATO/Commitments-and-reporting/
ATO-Charter/Our-Charter/#Whatweaskofyou1 (accessed 30 July 2023).
65. Secs. 353-10, 353-15 and 353-25, sch. 1 TAA 1953.
66. ATO, ATO Charter: Our Commitment to you; QC 57115 (last modified 26 June 2023), available at https://www.ato.gov.au/About-ATO/Commitments-and-
reporting/ATO-Charter/Our-Charter/#Yourrightswhatyoucanexpectfromus1 (accessed 30 July 2023).
67. Sydney Morning Herald, Tax Commissioner's power 'lurks beneath surface like a salt-water crocodile': expert (14 Mar. 2018), available at https://
www.smh.com.au/business/the-economy/tax-commissioner-s-power-lurks-beneath-surface-like-a-salt-water-crocodile-expert-20180312-p4z40i.html (accessed
12 July 2023).
68. ATO, ATO Charter: Steps to take if you would like a decision reviewed; QC 57115 (last modified 26 June 2023).
69. Div. 355, sch. 1 TAA 1953 and, more generally, under the Privacy Act 1988.
70. For example, see secs. 355-45 to 355-55 and 355-65 to 355-72, sch. 1 TAA 1953. See also the example in sec. 2.3.3.
71. The Hon D. Bradbury MP, Australia ratifies multilateral tax cooperation agreement, Media release No. 114 (5 Oct. 2012). See also art. 22 Convention on Mutual
Administrative Assistance in Tax Matters. See also the Hon Joe Hockey MP and Hon Steven Ciobo MP, Australia signs up to combat tax evasion (3 June 2015).

in February 2014 and recommitted to at the G20 summit in November 2014.[72] Australia signed the Multilateral Competent
Authority Agreement on Automatic Exchange of Financial Account Information on 3 June 2015.
The CRS provides a common international standard for:
- the collection of financial account information by financial institutions in participating jurisdictions on account holders who are
residents in another jurisdiction;
- the reporting of that information to the jurisdictions’ tax authorities; and
- the exchange of that information with the respective tax authorities of the non-residents.
This has now been implemented domestically in subdivision 396-C of Schedule 1 to the TAA 1953.
The CRS commenced operation in Australia on 1 July 2017, with the first reporting of reportable accounts to the ATO on 31 July
2018 and the first automatic exchange having been planned for 30 September 2018.[73] Australia exchanged information with 72
partners during 2021 and with 76 partners in 2022[74] under the OECD’s Standard on Automatic Exchange of Financial Account
Information (referred to as the AEOI Standard).[75]
In 2020, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes conducted peer reviews of the
domestic and international legal frameworks established by the first 100 jurisdictions to implement the AEOI Standard. The overall
findings in relation to Australia’s legal framework were that it is “in place but needs improvement” due to Australia’s domestic law
providing for non-reporting financial institutions and excluded accounts which were found not to meet the requirements of the AEOI
Standard.[76] Australia’s rules for preventing the adoption of practices to circumvent reporting and due diligence procedures were
also found to be insufficient.[77] In May 2021, the ATO published additional guidance on its website stating that reporting financial
institutions must have strong measures in place to obtain self-certifications from account holders of their CRS status as part of their
account opening process (as opposed to previous guidance which required reporting financial institutions take all reasonable steps
to compel compliance).[78]
In addition, subdivision 396-A facilitates the sharing of information with the United States in relation to the Foreign Account Tax
Compliance Act (FATCA). Information that is exchanged under FATCA is subject to the confidentiality protections in article 25 of
the Australia-United States tax treaty.[79] In September 2015, the ATO announced the first exchange of information pursuant to the
FATCA arrangements.[80] The ATO has issued combined guidance covering both FATCA and CRS.[81]
Australia has also implemented BEPS Action 13 (CbC reporting) with effect from income years commencing on or after 1 July
2016. Australia has also signed the OECD’s multilateral treaty for the exchange of CbC reports which requires signatories to have
the necessary legal framework and infrastructure to safeguard the confidentiality of exchanged CbC reports.[82] However, it is worth
noting that as part of a push for increased transparency in recent times, the federal government announced in its October 2022-23
Budget that it would introduce a separate public country-by-country (CbC) reporting regime which would require multinational
entities to release certain tax-related information on a CbC basis.
Finally, Australia has considered implementing BEPS Action 12 (mandatory disclosure rules). On 3 May 2016, the government
released a discussion paper seeking the community’s input on how mandatory disclosure rules should be framed in the Australian
72. The Treasury, Discussion Paper – Common Reporting Standard for the automatic exchange of tax information, June 2014; The Hon Tony Abbott MP, G20 Helps
Restore Fairness to Global Tax System, Media Release (16 Nov. 2014).
73. ATO, Automatic exchange of information guidance - CRS and FATCA, available at https://www.ato.gov.au/General/International-tax-agreements/In-detail/
International-arrangements/Automatic-exchange-of-information---CRS-and-FATCA/?page=1#1_4_Implementation_timelines (accessed 12 July 2023).
74. See OECD, exchanges of information that took place in 2021 and 2022 under the AEOI Standard (as of 20 Feb. 2023), available at https://www.oecd.org/tax/
automatic-exchange/commitment-and-monitoring-process/AEOI-exchanges.pdf (accessed 12 July 2023).
75. OECD, Automatic Exchange Portal – Commitment and Monitoring Process, available at http://www.oecd.org/tax/automatic-exchange/commitment-and-
monitoring-process/ (accessed 12 July 2023).
76. See OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes, Peer Review of the Automatic Exchange of Financial
Account Information 2020, at pp. 49-51, available at https://www.oecd-ilibrary.org/taxation/peer-review-of-the-automatic-exchange-of-financial-account-
information-2020_175eeff4-en (accessed 12 July 2023).
77. See OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes, Peer Review of the Automatic Exchange of Financial
Account Information 2020. at pp. 49-51, available at https://www.oecd-ilibrary.org/taxation/peer-review-of-the-automatic-exchange-of-financial-account-
information-2020_175eeff4-en (accessed 12 July 2023).
78. See ATO, Obtaining valid self-certifications for all new accounts, available at https://www.ato.gov.au/General/International-tax-agreements/In-detail/Obtaining-
valid-self-certifications-for-all-new-accounts/ (accessed 12 July 2023).
79. Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement
FATCA, art. 3(7).
80. ATO, A major step in global transparency, media release (23 Sept. 2015).
81. ATO, Automatic exchange of information guidance – CRS and FATCA, https://www.ato.gov.au/General/International-tax-agreements/In-detail/International-
arrangements/Automatic-exchange-of-information---CRS-and-FATCA/ (accessed 12 July 2023).
82. Multilateral Competent Authority Agreement on the exchange of Country-by-Country reports, secs. 5 and 8.

context.[83] The consultation process concluded on 15 July 2016 and there is yet to be any domestic legislation introduced to
implement disclosure rules.
2.3.8. Right of access to information

The ATO has formal access and information-gathering powers under sections 353-10, 353-15 and 353-25 of Schedule 1 to the
TAA 1953. See section 2.3.5.
2.3.9. Penalties
Penalties imposed under subdivisions 815-B to D are explicitly linked to contemporaneous transfer pricing documentation
requirements.[84] Taxpayers may be liable for a base penalty of 25% or 50%, depending on whether the taxpayer entered the
transaction for the sole or dominant purpose of obtaining a scheme benefit, if they fail to keep the relevant records.[85] The
base penalty is reduced to 10% if the taxpayer did not possess the requisite purpose of obtaining a scheme benefit and the
documentation supports a “reasonably arguable position”. The base penalty rate may also be reduced in cases where the taxpayer
makes a “voluntary disclosure” to the ATO.[86]
For the purposes of penalty mitigation, documentation is considered contemporaneous if it has been prepared before the time by
which the entity lodges its income tax return for the income year.[87]
The maximum administrative penalties are doubled for companies with a global revenue of AUD 1 billion or more that enter into
tax avoidance or profit shifting schemes for income years commencing on or after 1 July 2015 (and that do not have a “reasonably
arguable position”).[88] In June 2020, the regime to double penalties for significant global entities was extended with retrospective
effect from 5 December 2019 to cover significant global entities that are also subsidiary members of consolidated groups and
multiple entry consolidated groups.[89]
2.3.10. Access to foreign-based information

There are three main ways that the ATO can seek information from outside Australia:
- by relying on the exchange of information article in the applicable tax treaty;[90]

- by issuing the taxpayer with an “offshore information notice”;[91] and
- where the information relates to a non-OECD country with which Australia has a tax information exchange agreement, by
relying on the information exchange article in that agreement.[92]
As referred to in section 2.3.7., the government now has access to foreign based information by virtue of information exchanged
under FATCA and the CRS as well as through exchanged CbC reports.
Whilst not strictly a transfer pricing measure, the ATO also has the ability, in a practical sense, to access foreign-based information
by virtue of Australia’s Diverted Profits Tax (DPT) regime. Under Australia’s DPT regime, only information provided to the ATO
during the period of review for a DPT assessment (i.e. 12 months from the date of that assessment) can be admitted into evidence
in any proceedings challenging that DPT assessment.[93] Accordingly, it may be necessary for taxpayers which find themselves
the subject of both transfer pricing and DPT action to provide the ATO with foreign-based information which they might otherwise
previously not have been under practical compulsion to provide. The ATO has released guidance to assist taxpayers comply
with their DPT obligations, including Practical Compliance Guideline (PCG) 2018/5.[94] PCG 2018/5 outlines the ATO’s client
engagement framework and its approach to risk assessment and compliance activity for the DPT, including information the ATO
83. The consultation paper is available at https://treasury.gov.au/consultation/oecd-proposals-for-mandatory-disclosure-of-tax-information/ (accessed 20 July 2023).

84. Sec. 284-250, sch. 1 TAA 1953.
85. Sec. 284-160, sch. 1 TAA 1953.
86. Sec. 284-225, sch. 1 TAA 1953.
87. Sec. 284-255(1)(a), sch. 1 TAA 1953.
88. Sec. 284-155(3) Schedule 1 TAA 1953.
89. See items 139 to 144 Treasury Laws Amendment (2019 Measures No. 3) Act 2020.
90. See e.g. art. 27 Australia-United Kingdom Income Tax Treaty (21 Aug. 2003), Treaties & Models IBFD, as defined in sec. 3AAA International Tax Agreements Act
1953 (Int AA).
91. Sec. 353-25, sch. 1 TAA 1953. The notice requests the taxpayer to give or produce such information to the Commissioner. If the taxpayer fails to comply, the
information may not be relied on later in evidence in legal proceedings without the consent of the Commissioner; sec. 353-30 sch. 1 TAA 1953.
92. See e.g. art. 5 Australia-Isle of Man Exchange of Information Treaty (29 Jan. 2009), Treaties & Models IBFD, as defined in sec. 3AAA Int AA.
93. Sec. 145-25, sch. 1 TAA 1953.
94. ATO, Practical Compliance Guideline (PCG) 2018/5, Diverted Profits Tax, at paras. 62-64 available at https://www.ato.gov.au/law/view/document?DocID=COG/
PCG20185/NAT/ATO/00001&PiT=99991231235958 (accessed 12 July 2023).

will have regard to when applying the DPT. The ATO has also released Law Companion Ruling LCR 2018/6 which sets out the
ATO’s view on how various aspects of the DPT will apply.
2.3.11. Burden of proof

In any litigation, the burden of proof is on the taxpayer (see section 3.2.). Unfortunately, calls to create better alignment with other
OECD countries by reversing the onus of proof in respect of adjustments under subdivisions 815-B to D of the ITAA 97[95] were not
accepted by the government.
2.3.12. Statute of limitations

Under the former transfer pricing rules in division 13 of the ITAA 36 and subdivision 815-A of the ITAA 97, there was no time limit
on the ability of the Commissioner to amend assessments to give effect to a transfer pricing determination under domestic law.[96]
However, subdivisions 815-B to D of the ITAA 97 now impose a 7-year limitation period on transfer pricing adjustments from the
date of the original assessment, usually being the date when a taxpayer lodges its income tax return.[97] Subdivisions 815-B to D
apply in relation to income years starting on or after 1 July 2013.[98]
2.3.13. Information requests

In addition to requests made pursuant to the formal rights of access described in section 2.3.8., the Commissioner may (and
typically will) also make informal requests for information or access from a taxpayer.
2.3.14. Solicitor-client privilege

As discussed in section 2.3.3., the Commissioner’s access and information-gathering powers are subject to the right of taxpayers
to claim legal professional privilege in respect of certain communications. Legal professional privilege applies to communications
between:
- lawyers and their clients (or agents) which are for the dominant purpose of giving or obtaining legal advice; and
- lawyers and third parties where the communication is for the dominant purpose of conducting litigation.[99]
Communications between tax advisors that are accountants and their clients are not protected in and of themselves by
legal professional privilege. However, the Commissioner recognizes that such documents should be afforded some level of
confidentiality, and the Commissioner’s current policy is to refrain from seeking access to certain categories of accountants’
papers other than in “exceptional circumstances”.[100]
In recent years, the ATO has grown increasingly, concerned that legal professional privilege claims are being made
inappropriately, and in some cases, may even be “reckless and false”[101] leading to a legal challenge to claims made by
PricewaterhouseCoopers and one of its clients (refer further below).
The scope of legal professional privilege in Australia was recently the subject of litigation in the High Court (Australia’s highest
court). In broad terms, the question before the Court was whether a taxpayer is entitled to injunctive relief which would prevent
the ATO from using privileged documents which were stolen from the Bermuda law firm Appleby.[102] The High Court dismissed
the taxpayer’s application for relief on the basis that whilst legal professional privilege provides a right to resist the compulsory
disclosure of confidential communications or documents, legal professional privilege is not an actionable legal right.[103] The High
95. Law Council of Australia, Submission to The Treasury – Modernisation of Transfer Pricing Rules: Exposure Draft of Tax Laws Amendment (Cross Border Transfer
Pricing) Bill 2013 (17 Dec. 2012), at paras. 10-13.
96. Sec. 170(9B) ITAA 36. This may be contrasted to the general time limit for the amendment of assessments of 4 years (item 4 of the table in sec. 170(1)) in the
absence of fraud or evasion. However, this is subject to any time limit in an applicable tax treaty, such as art. 9(4) Australia-New Zealand Income Tax Treaty (26
June 2009), Treaties & Models IBFD, and the Australia-Japan Income Tax Treaty (1 Jan. 2009), Treaties & Models IBFD, which both specify a 7-year time limit
for transfer pricing adjustments.
97. Broadly, a 7-year limitation period also applies to the DPT; see sec. 145-10, sch. 1 TAA 1953.
98. Division 815 Income Tax (Transitional Provisions) Act 1997 (Cth).
99. AU: FCA, 19 Apr. 1989, 161, Commissioner of Taxation v. Citibank Ltd; AU: HCA, 21 Dec. 1999, 67, Esso Australia Resources v. Federal Commissioner of
Taxation; AU: FCAFC, 12 May 2004, 122, Pratt Holdings Pty Ltd v. Commissioner of Taxation; Evidence Act 1995 secs. 118 and 119.
100. ATO, Our Approach to Information Gathering – Accountants’ concession, available at https://www.ato.gov.au/About-ATO/Commitments-and-reporting/In-detail/
Privacy-and-information-gathering/Our-approach-to-information-gathering/?page=51 (accessed 12 July 2023).
101. For example, see the Australian Financial Review, ATO calls out 'reckless and false' legal privilege claims in tax avoidance cases (4 Jan. 2019), available at
https://www.afr.com/news/politics/ato-calls-out-reckless-and-false-legal-privilege-claims-in-tax-avoidance-cases-20190104-h19psh (accessed 12 July 2023).
102. AU: HCA, 17 Apr. 2019, 82, Glencore International AG & Ors v. Commissioner.
103. AU: HCA, 14 Aug. 2019, 26, Glencore International AG v. Commissioner of Taxation, at paras. 21-26.

Court observed that once privileged communications have been disclosed, a taxpayer that wishes to prevent the use of those
communications will need to rely on the equitable doctrine of breach of confidence.[104]
The use of legal professional privilege during reviews and audits has been identified as a focus area for the ATO’s Tax Avoidance
Taskforce.[105]
In early 2022, the Federal Court handed down its much-anticipated judgment in the PricewaterhouseCoopers case. This case
appears to be one of the first cases resulting from the ATO’s increased focus on legal professional privilege claims. The case
concerned an action by the Commissioner to challenge claims for privilege made by PricewaterhouseCoopers, a multi-disciplinary
practice (broadly, a practice comprising both lawyers and non-lawyers) and its client. The claims were made in response to formal
notices to produce documents issued to PricewaterhouseCoopers by the Commissioner. The Commissioner was unsuccessful in
arguing that, either as a matter of form or substance, there was no lawyer-client relationship between PricewaterhouseCoopers
and its client sufficient to ground a claim for privilege.
Justice Moshinsky found that:
In my view, as a matter of form, the Statements of Work do establish a relationship of lawyer and client sufficient to be able
to ground a claim for legal professional privilege. The key features of the Statements of Work have been summarised at
[89] above. Each Statement of Work identifies the client, the [Australian Legal practitioners (ALPs)] who are to provide the
services, the [Non legal practitioners] who will assist the ALPs in the provision of those services, and describes the services
to be provided as legal services. The identified ALPs are lawyers qualified such as to be capable of being in a lawyer and
client relationship which gives rise to privileged communications.[106]
and
In circumstances where I have concluded that the form of the Statements of Work establishes a relationship of lawyer and
client sufficient to be able to ground a claim for legal professional privilege (see ground (a), above), it is not possible, by
reference to the expertise, experience, seniority and quantitative contribution of the ALPs and NLPs involved in the provision
of services under the Statements of Work, to conclude as a global matter that the services performed pursuant to them were
not fairly referable to a lawyer and client relationship, so as not to be protected by legal professional privilege.
[…]
Many of the matters relied on by the Commissioner in support of this ground may well be relevant when it comes to consider,
in the course of ground (c), each of the Sample Documents. However, I do not consider those matters, whether considered
individually or cumulatively, to be sufficient to conclude that, as a matter of substance, services provided pursuant to
the engagements were not provided pursuant to a relationship of lawyer and client sufficient to ground a claim for legal
professional privilege.[107]
Had the Commissioner been successful in either of those arguments, then no claims for privilege over the documents could have
been maintained. However, of the 116 sample documents individually reviewed by Justice Moshinsky, His Honour assessed that
61 were not privileged in whole as the dominant purpose of each document was not the provision of or request for legal advice.
In another case decided in October 2021, CUB Australia Holding Pty Ltd v. Commissioner of Taxation [2021] FCAFC 171, the
taxpayer was unsuccessful in relation to a preliminary question concerning the Commissioner’s right to issue the taxpayer with a
formal notice requesting further particulars about the taxpayer’s privilege claims over certain documents, over and above what
the taxpayer had already provided to the Commissioner. Broadly speaking, the taxpayer was unsuccessful in asserting that the
Commissioner had issued the formal notice for an improper purpose, given (according to the taxpayer) the Commissioner had
already been provided with sufficient information to determine whether or not to accept or challenge the taxpayer’s privilege claims
(the only possible legitimate reason for the Commissioner requesting such information in the circumstances). The Federal Court, at
first instance and on appeal, found that the taxpayer had not proved that the Commissioner’s purpose in issuing the formal notice
was otherwise than to enable him to gather such information necessary to make an informed decision about whether to accept
or challenge the taxpayer’s privilege claims. The primary substantive question in the case was whether the Commissioner was
entitled to request the titles or subject lines of privileged documents. Ultimately, the case was discontinued so that the Court did not
get the opportunity to rule upon this primary substantive question.
104. AU: HCA, 14 Aug. 2019, 26, Glencore International AG v. Commissioner of Taxation, at para. 34.
105. See e.g. ATO, Tax Avoidance Taskforce highlights 2020-21, available at https://www.ato.gov.au/General/Tax-avoidance-taskforce/Tax-Avoidance-Taskforce-
highlights-2020-21/ https://www.ato.gov.au/General/Tax-avoidance-taskforce/Tax-Avoidance-Taskforce-highlights-2020-21/(accessed 20 June 2023).
106. AU: FCA, 25 Mar. 2022, 278, Commissioner of Taxation v. PricewaterhouseCoopers, at para. 190.
107. AU: FCA, 25 Mar. 2022, 278, Commissioner of Taxation v. PricewaterhouseCoopers, at paras. 204-207.

In June 2022, the ATO published its Legal Professional Privilege Protocol (LPP Protocol).[108] The LPP Protocol sets out the ATO’s
recommended approach for taxpayers (and their advisors) for making LPP claims when responding to formal information gathering
notices. The LPP Protocol includes a list of particulars which the ATO considers should be provided on a communication-
by-communication basis so that it has sufficient information to assess whether to accept the privilege claims or not. The LPP
Protocol is voluntary. However, the ATO has stated that, if a taxpayer departs from the LPP Protocol and does not explain why
the recommended approach has not been followed, then the ATO will likely make further enquiries. Notwithstanding its voluntary
nature, concern has been expressed about the LPP Protocol – for example, there is a view that some of the particulars requested
by the ATO are themselves privileged information, creating a risk that taxpayers could unwittingly be led to disclose privileged
information.[109]
2.4. Recommendations for taxpayers during a tax audit

Preparation and planning are the key to dealing with any tax review or audit,[110] and transfer pricing is no exception. Taxpayers
who find themselves under review need to have a clear idea of their objectives, which may range from obtaining a “clean bill
of health” from the ATO, seeking to compromise on the level of adjustments and tax and/or penalties payable or preparing for
litigation.
There is no single recommendation that can apply in all cases. However, whichever course is followed, it would generally be
recommended that taxpayers:
- adopt a professional approach;

- cooperate with the ATO, but feel confident to assert their legal rights (e.g. to maintain the confidentiality of communications
covered by legal professional privilege); and
- take most (if not all) opportunities to explain their position on their own terms (while ensuring that they can adequately support
any statements that they make to the ATO).
Indeed, for taxpayers with contestable, material tax positions, it is important to identify tax positions that may be challenged as
early as possible and prepare a defence. Success in defending tax positions will largely depend on three things: strategy, facts and
the evidence that proves the facts.[111]
The economic implications of the COVID-19 pandemic and other recent world events will likely see governments under continuing
pressure to raise revenue. In this context, preparing a contemporaneous (or as contemporaneous as possible) defence file to
support any adjustments which are made to transfer pricing arrangements could prove invaluable, particularly given the fallibility of
human memory and the fact that it will likely be a number of years before the transfer pricing positions being adopted are reviewed
by the ATO. This similarly extends to any decisions which are made to restructure a business in response to risks and structural
deficiencies or vulnerabilities (for example, with supply chains). Taxpayers should also consider whether historical benchmarks
continue to be appropriate for current economic circumstances after major disruptive events.
3. Appeals and Litigation

3.1. Historical statistics
There has been remarkably little transfer pricing litigation in Australia. However, a number of cases, discussed at section 3.3.
have shed light on the approach the courts take to the interpretation of the former transfer pricing regime in division 13 of the
ITAA 36 and its interaction with Australia’s tax treaties. In particular, the SNF Appeal,[112] discussed at section 3.3., significantly
impacted conventional wisdom regarding transfer pricing in Australia and prompted the introduction of subdivision 815-A and
subdivisions 815-B to D of the ITAA 97. In recent cases such as the Chevron,[113] Glencore [114] and SingTel , [115] both division 13
108. ATO, Compliance with formal notices - claiming legal professional privilege in response to formal notices, available at https://www.ato.gov.au/law/view/
document?DocID=SGM/LPP-FINAL (accessed 12 July 2023).
109. See, for example, Law Council of Australia, ATO Legal Professional Privilege Protocol (22 June 2022), available at https://www.lawcouncil.asn.au/media/media-
releases/ato-legal-professional-privilege-protocol (accessed 12 July 2023).
110. F. O’Loughlin, Tax Audits – Practical Issues, presentation to the Taxation Institute of Australia Corporate Tax Retreat, Cape Schanck, p. 3 (19-20 Nov. 1998).
111. S. Grieve, Don’t wait for the ATO to come knocking: Prepare your tax defence now (21 Aug. 2012), available at https://www.mondaq.com/australia/corporate-
tax/193480/don39t-wait-for-the-ato-to-come-knocking-prepare-your-tax-defence-now (accessed 12 July 2023). This is particularly relevant where the ATO seeks
to apply the DPT, as any evidence not provided to the ATO during the 12-month review period for a DPT assessment will generally not be admissible as evidence
when challenging that assessment (sec. 145-25, sch. 1 TAA 1953).
112. AU: FCAFC, 1 June 2011, 74, Federal Commissioner of Taxation v. SNF (Australia) Pty Ltd.
113. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation.
114. AU: HCA, 14 Aug. 2019, 26, Glencore International AG v. Commissioner of Taxation.

and subdivision 815-A were considered (albeit SingTel primarily focused on subdivision 815-A); however, subdivisions 815-B to D
have yet to be judicially considered.
3.2. Appeals and litigation process

Following the receipt of an assessment, a taxpayer has 4 years from the original assessment or 60 days from the date the
amended assessment is received, whichever is later, in which to lodge an objection.[116] However, once an assessment is issued,
a taxpayer has an obligation to pay the amount of the assessment (subject to coming to an administrative arrangement with the
ATO).[117] Accordingly, it is generally in a taxpayer’s interests to seek to resolve any dispute as soon as possible.
There is no set time period for the Commissioner to consider the taxpayer’s objection. However, if the Commissioner fails to make
a decision or to request additional information within 60 days, the taxpayer may give a notice to the Commissioner under section
14ZYA of the TAA 1953 requesting that the Commissioner determine the objection. If the Commissioner fails to make a decision
within 60 days of that notice, the objection is deemed to have been disallowed.[118]
If an objection has, or is deemed to have, been disallowed, the taxpayer has the right to seek review of the decision by the AAT
or appeal the decision to the Federal Court within 60 days, in what are termed “Part IVC proceedings”.[119] There is no ability to
seek judicial review of the decision to issue an assessment (as opposed to the right to appeal or seek administrative review of the
substance of the assessment)[120] or, in the context of the former transfer pricing rules in division 13 of the ITAA 36, the decision to
issue determinations which have led to the assessment being made.[121]
There are some fundamental differences between a review by the AAT and an appeal to the Federal Court.
The AAT is not a court, but rather an administrative body established by the government.[122] The AAT is intended to provide a
review of decisions of Commonwealth government agencies that is “fair, just, economical, informal and quick”.[123] As such, the
AAT is not bound by all of the rules that would apply to court hearings,[124] and has the power to make a wider range of decisions
and orders. Importantly, the AAT conducts a hearing “de novo”[125] and steps into the shoes of the original decision-maker,
enabling the tribunal to exercise that decision maker’s powers (including the exercise of statutory discretions).[126] Unlike court
costs, the costs of an AAT proceeding are not awarded to the successful party as of right.[127] A taxpayer may appeal from the AAT
to the Federal Court only in relation to a question of law.[128]
By contrast, the Federal Court is governed by the usual laws and procedures applicable to court proceedings, including as to the
admissibility of evidence and the entitlement of the successful party to recover some or (in certain cases) most of its costs.[129]
Where the case turns on the exercise of a discretion by the Commissioner, the Federal Court is unable to exercise that discretion
and would generally have to remit the matter to the original decision-maker for the exercise of the discretion to be made.[130] A
taxpayer may appeal from a decision of the Federal Court on a question of law, initially to the Full Federal Court[131] and then, with
“special leave”, to the High Court of Australia (High Court).[132]
Whether the matter is pursued by way of review or appeal, it is the taxpayer that bears the burden of showing that the assessment
raised is excessive or otherwise incorrect and what the assessment should have been, i.e. the consideration or profit determined
by the Commissioner to be at arm’s length is actually more or less than the true arm’s length consideration or profit.[133] The
Commissioner is not required to put forward a positive case or lead evidence, as it is for the taxpayer to displace the figure
115. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation.
116. Secs. 14ZW(1)(aa)(ii) and (1)(c) TAA 1953.
117. ATO, Practice Statement Law Administration (PS LA) 2011/4, Collection and recovery of disputed debts para. 2 (14 Apr. 2011).
118. Sec. 14ZYA(3) TAA 1953.
119. Secs. 14ZZC and 14ZZN TAA 1953.
120. Items 3(e) and 3(ga), sch. 1 Administrative Decisions (Judicial Review) Act 1977.
121. AU: FCA, 20 Nov. 2000, 1658, Daihatsu Australia Pty Ltd v. Commissioner of Taxation.
122. Sec. 5 Administrative Appeals Tribunal Act 1975 (AAT Act).
123. Sec. 2A AAT Act.
124. Sec. 33(1)(c) AAT Act.
125. That is, a new hearing of the dispute.
126. Sec. 43(1) AAT Act. San Remo, at para. 72 (per Justice Hill).
127. Costs can be awarded in certain situations, see AAT, Practice Direction – Taxation of Costs (30 June 2015).
128. Sec. 44(1) AAT Act.
129. See, generally, the Federal Court Rules 2011.
130. AU: HCA, 3 Aug. 1949, 26, Avon Downs Proprietary Limited v. Federal Commissioner of Taxation.
131. A Full Court consists of three or more judges (sec. 14 Federal Court of Australia Act 1976).
132. Sec. 33(3) Federal Court of Australia Act 1976.
133. Secs. 14ZZK(b) and 14ZZO(b) TAA 1953. In a transfer pricing context, see AU: FCAFC, 1 June 2011, 74, Federal Commissioner of Taxation v SNF (Australia)
Pty Ltd, at para. 126 and AU: FCA, 9 Nov. 2005, 1646, Syngenta Crop Protection Pty Ltd v. Federal Commissioner of Taxation, para. 10 (per Justice Gyles).

determined by the Commissioner.[134] In Chevron, the taxpayer was unsuccessful at trial because its expert evidence was largely
rejected and, as such, it was unable to prove:
- that the consideration it contended for was the arm’s length consideration or (noting that it was a payment case) less than an
arm’s length consideration; and
- (as a consequence) that the Commissioner’s assessment was excessive.[135]
In pursuing litigation, the Commissioner is required to be a “model litigant”.[136] This means that the Commissioner must act
honestly and fairly in handling litigation brought against it, which includes paying legitimate claims without litigation, considering
alternative dispute resolution, not requiring a party to prove a matter known to be true and not relying on technical defences.[137]
The ATO and the taxpayer may also agree to settle a dispute prior to its resolution by the Courts.[138] In deciding whether it will
agree to settle a dispute or not, the ATO’s “Code of Settlement”[139] requires that the ATO have regard to all of the following
factors:
- the relative strength of the competing positions;

- the cost versus the benefits of continuing the dispute; and
- the impact on future compliance for the taxpayer and broader community.
The Code also provides that the ATO will not generally consider a settlement where:
- there is a contentious point of law requiring clarification;

- it is in the public interest to litigate; and
- the behaviour is such that the ATO needs to send a strong message to the community.
During the 2015 Senate hearings on Corporate Tax Avoidance, concern was expressed about the appropriateness and
transparency of the ATO’s use of settlements to resolve disputes.[140] As a result, the ATO implemented an “Independent
Assurance of Settlements” review programme in 2016. The programme is directed at the ATO’s largest and most complicated
settlements, with a focus on large taxpayers and multinational enterprises. Under this programme, former justices of the Federal
Court are appointed by the ATO to independently review settlements which have been entered into to provide assurance that the
settlements entered into are appropriate, fair and reasonable.[141]
Settlements are automatically selected for review under this programme if:
- the ATO’s pre-settlement position is greater than AUD 50 million;

- the settlement amount is greater than AUD 20 million; or
- the variance between the ATO’s pre-settlement position and the settlement amount is greater than AUD 20 million.[142]
134. AU: FCA, 25 June 2010, 635, SNF (Australia) Pty Ltd v. Commissioner of Taxation, at para. 36.
135. AU: FCAFC, 241, Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at para. 525.
136. The Commonwealth’s obligation to act as a model litigant, Appendix B to the Legal Services Directions 2017 made pursuant to sec. 55ZF Judiciary Act 1903
(Directions). It should be noted that the Directions are not directly enforceable by taxpayers.
137. The Directions are based on the common-law model-litigant rule. For examples of the application of the rule, see AU: HCA, 21 Oct. 1912, 69, Melbourne
Steamship Ltd v. Moorehead, at 342 (per Chief Justice Griffith); AU: FCA, 6 June 1997, 495, Yong Jin Qin v. Minister for Immigration and Multicultural Affairs.
138. For example, as noted below, the ATO and Chevron Australia Holdings Pty Ltd reportedly entered into a settlement prior to the hearing of Chevron Australia
Holdings Pty Ltd’s application to the High Court for special leave to appeal.
139. The ATO’s code of settlement is available at https://www.ato.gov.au/General/Dispute-or-object-to-an-ATO-decision/In-detail/Avoiding-and-resolving-disputes/
Settlement/Code-of-settlement/ (accessed 12 July 2023). Also refer to Practice Statements PS LA 2015/1 – Code of settlement, PS LA 2013/3 – Alternative
Dispute Resolution (ADR) in ATO disputes and PS LA 2007/6 – Guidelines for settlement of widely-based tax disputes.
140. For example, see The Guardian, ATO has 'comfortable' relationship with big accountancy firms, Senate hears (10 Apr. 2015), available at https://
www.theguardian.com/australia-news/2015/apr/10/ato-has-comfortable-relationship-with-big-accountancy-firms-senate-hears (accessed 12 July 2023); and The
Australian Financial Review, ATO forfeited $1.9 billion in out-of-court settlements (13 Dec. 2017), available at http://www.afr.com/news/policy/tax/ato-forfeited-19-
billion-in-outofcourt-settlements-20171213-h03sfr (accessed 12 July 2023).
141. ATO, Managing disputes with large corporate groups, available at https://www.ato.gov.au/General/Tax-and-Corporate-Australia/In-detail/Managing-disputes-
with-large-corporate-groups/ (accessed 12 July 2023).
142. ATO, Independent Assurance of Settlements program, available at https://www.ato.gov.au/misc/downloads/pdf/qc57334.pdf (accessed 20 June 2023).

A Deputy Commissioner can also approve any other settlement for review where the case is considered “significant” in the
ATO’s view (examples provided by the ATO of relevant factors in determining whether a case is “significant” include its potential
reputational significance or the presence of media interest).[143]
3.3. Notable court decisions

Carpenter: Relevance of anti-avoidance purpose?
In Carpenter,[144] the ATO had raised assessments under the former transfer pricing provisions in division 13 of the ITAA 36. The
taxpayer objected to the assessments and ultimately Part IVC proceedings were commenced. As part of those proceedings, the
taxpayer requested particulars of the matters the Commissioner considered in making his determinations under division 13.
The taxpayer’s application for particulars was denied because the High Court considered that the information regarding the
Commissioner’s state of mind was not relevant to the issues in the Part IVC proceedings and the application was a “fishing”
exercise.
However, in dismissing the application, the Court made some interesting observations. The High Court held that the Commissioner
was not obliged, in reaching a determination under division 13, to consider issues of fairness and reasonableness to the taxpayer;
and the absence of a tax avoidance purpose or profit shifting motive was not relevant.[145] This was so despite the description of the
provision as an anti-avoidance measure at the time of its introduction.[146]
It is worth noting that, more recently in the Chevron, Justice Pagone contrasted the purpose of anti-avoidance provisions, which
are directed to cancelling tax benefits obtained through schemes which were entered into or carried out with the dominant purpose
of securing a tax benefit, against the purpose of transfer pricing provisions, which His Honour observed was to give effect to
the fiscal policy ensuring Australia’s domestic revenue base is not to be eroded by Australian parties making acquisitions from
related foreign parties at above arm’s length prices.[147] His Honour’s comments confirm that, at least as far as division 13 is
concerned, whether or not a taxpayer has a purpose of securing a tax benefit is irrelevant to the application of division 13. Similarly,
in Glencore, Justice Davies cited with approval Carpenter, noting that the arm’s length principle does not involve a consideration
of purpose or motive and warned that “it is essential in giving effect to the policy objectives of [division 13 and subdivision 815-A]
not to intrude into the analysis concepts more appropriately found in other provisions, such as Part IVA of the ITAA 36”.[148] Justice
.
Thawley in the Glencore Appeal also cited Carpenter as authority for the same proposition.[149]
In Carpenter, the Court also confirmed that once the taxpayer has satisfied the burden of proof to show that the amount paid was
arm’s length consideration, the figure determined in the Commissioner’s determination is displaced.[150]
Re Roche: Methodology
Re Roche dealt with the pricing of pharmaceuticals procured from related parties of the taxpayer in Switzerland and Singapore.
The case was heard in the AAT by Downes P in his then capacity as its President.
In discussing the limited evidence of comparable sales in relation to prescription pharmaceuticals, Downes P made a number of
important observations on the methodology to be applied to determine arm’s length consideration under division 13 of the ITAA 36:
there are arm’s length sales by Roche of some of the precise products which are under consideration, but the sales were
broadly made at the end of the period of patent protection to generic wholesalers. The question is, whether these sales are
comparable. Can they be made more comparable by adjustment? There are also arm’s length sales of a Roche product to
a subsidiary of a rival pharmaceutical company. These sales were early in the life of the drug and relate to a product which
needed to be established in the market. To that extent the sales are closer to many of the sales in question here, but it is
claimed that the drug in question is atypical. Problems of this kind may require the employment of other methods to arrive at
arm’s length values. However, retreats to other methods, while avoiding one problem, are prone to result in the substitution
of other problems, possibly more serious. In general terms, problems arising from comparables being atypical might be met
by looking at a greater number of potential comparables. This may even out the differences. The problem with this approach,
143. ATO, Independent Assurance of Settlements program, available at https://www.ato.gov.au/General/Dispute-or-object-to-an-ATO-decision/In-detail/Avoiding-and-

resolving-disputes/Settlement/Independent-Assurance-of-Settlements-program/ (accessed 12 July 2023).
144. AU: HCA, 31 July 2008, 33, WR Carpenter Pty Ltd v. Federal Commissioner of Taxation.
145. AU: HCA, 31 July 2008, 33, WR Carpenter Pty Ltd v. Federal Commissioner of Taxation at para. 31.
146. AU: HCA, 31 July 2008, 33, WR Carpenter Pty Ltd v. Federal Commissioner of Taxation, at para. 36.
147. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v Commissioner of Taxation, at para. 102.
149. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at para 272, per Thawley J.
150. AU: HCA, 31 July 2008, 33, WR Carpenter Pty Ltd v. Federal Commissioner of Taxation, at para. 36.

however, is that the very evenness leads to an average which may not be comparable at all. [Division 13] is concerned with
actual arm’s length consideration, not the averaging of a range.[151]
Later, in considering the evidence of the experts called by the parties, who had focused on gross margins, he observed:
They took an average profit margin for all years as that comparator ... While the approach may be reasonable for an
expert considering whether there is evidence of transfer pricing at other than arm’s length prices, I do not think that the
Commissioner or this Tribunal can ultimately act on that basis. This is because the task of both the Commissioner and the
Tribunal is to consider taxation assessments for separate years. The focus must be on the separate prices in each of the
years under consideration. It accordingly seems to me to be necessary to look at each year separately and to the gross profit
margin in each year.[152]
In forming his conclusions, the evidence of the experts was of assistance, but “not determinative”, as Downes P was required
to “arrive at [his] own decision”.[153] Downes P ultimately concluded that pricing that delivered a 40% gross profit margin was an
arm’s length price, albeit recognizing that parties “might negotiate about a higher price”.[154]
In commenting on the net profit approach proposed by the experts in relation to the taxpayer’s diagnostic division, Downes P
observed:
One of the problems of profit based methodology is that, when applied to transfer pricing, it inevitably attributes any loss
to the pricing. Where operating expenses are higher these may place some of the emphasis of the cause of the loss on the
wrong area. After all, it is certainly true that there are companies which make losses for reasons other than the prices for
which they acquire their stock. The Australian operations of multinational companies are not necessarily excluded from
this.[155]
Although he was not required to decide if there would be any difference in outcome depending on whether division 13 or the
“associated enterprises” article of the relevant tax treaties applied, Downes P observed that there are some significant differences
in the tests to be applied, namely:
- the tax treaties are concerned with “profits”, while division 13 focuses on “acquisitions”; and
- the tax treaties refer to “independent enterprises dealing wholly independently”, while division 13 talks of parties “dealing at
arm’s length”.[156]
He went on to say that:
there is a lot to be said for the proposition that the treaties, even as enacted as part of the law of Australia, do not go past
authorising legislation and do not confer power on the Commissioner to assess. They allocate taxing power between the
treaty parties rather than conferring any power to assess on the assessing body. On this basis Div 13 of Pt III of the ITAA 36
should be seen as the relevant legislative enactment pursuant to the power allocated.[157]
To a large extent this last point has now been rendered moot by the introduction of subdivisions 815-B to D, although as shown in
the Chevron decision (discussed below), it continues to be an issue of some importance to earlier tax years, which may still give
rise to assessments and disputes for some time.
SNF: Methodology and relevance of sustained losses

SNF [158] concerned the pricing of polyacrylamide supplied by a French company to its Australian subsidiary. The subsidiary had
been in a loss position for some 13 years. The taxpayer sought to apply a comparable uncontrolled price (CUP) methodology,
while the ATO relied on the evidence of a US transfer pricing expert to support the transactional net margin method (TNMM). The
taxpayer was successful at first instance, before Justice Middleton of the Federal Court. The Commissioner’s subsequent appeal
to the Full Federal Court was dismissed.
151. AU: AAT, 22 July 2008, 639, Re Roche Products Pty Ltd v. Commissioner of Taxation, at para. 20.
156. AU: AAT, 22 July 2008, 639, Re Roche Products Pty Ltd v. Commissioner of Taxation, at para. 16. By contrast, the Commissioner suggests in Taxation Ruling
(TR) 2011/1, Income tax: application of the transfer pricing provisions to business restructuring by multinational enterprises, at para. 10, that as both are
“based on the arm’s length principle ... there should be no fundamental inconsistency in the outcomes under the two sets of provisions”. See also Interim Martin
Committee Report, at para. 3.4.3. However, it was recognized that a functional analysis approach could be difficult under division 13 (House of Representatives,
Standing Committee on Finance and Public Administration, “Tax Payers or Tax Players?” (Canberra: AGPS, May 1989) at para. 8.2.9).
158. AU: FCA, 25 June 2010, 635, SNF (Australia) Pty Ltd v. Commissioner of Taxation; and AU: FCAFC, 1 June 2011, 74, Federal Commissioner of Taxation v. SNF
(Australia) Pty Ltd.

At first instance, Justice Middleton noted that division 13 of the ITAA 36 does not prescribe any particular pricing methodology
and the appropriate methodology is therefore a matter for the court to determine.[159] Further, His Honour indicated that the OECD
Guidelines are just that (i.e. merely guidelines) and he did not see a need to rely on them for the purposes of interpreting division
13.[160]
On appeal, the Full Court went further and held that the OECD Guidelines are not automatically a legitimate aid to the interpretation
of the tax treaties or domestic legislation.[161] In reaching this conclusion, the Full Court noted that recourse can only be had to the
OECD Guidelines where it can be shown that the states that are parties to the relevant tax treaty have adopted the practice of
applying the OECD Guidelines. Although no evidence had been led on this point in SNF, the Full Court left open the possibility that
the OECD Guidelines could be relied on in the future.[162]
The Court accepted the taxpayer’s evidence that the actual prices paid by the taxpayer were lower than the majority of prices
paid by unrelated purchasers in what were found to be comparable transactions, and the taxpayer thereby satisfied its burden
of proof.[163] The Full Court rejected the Commissioner’s submission that the comparable transactions should be limited to those
purchasers who shared all the same features of the taxpayer, including a similar history of losses. The Full Court held that this
would set the bar at an unattainable height for taxpayers in appeals.[164]
The Full Court held that where, as in this case, appropriate comparables are available, an analysis of these comparables is
preferable and there is no need to use the TNMM.[165] Having reached this conclusion, it was not necessary to address the
question of whether the TNMM was a valid method for determining an arm’s length price.
Relevantly, the Full Court found that the persistent losses made by the taxpayer were of no relevance to the question of whether
consideration was at arm’s length[166] and, in any event, the Full Court rejected the Commissioner’s submission that the taxpayer’s
losses were caused by the prices it paid to its supplier.[167] The Full Court accepted Justice Middleton’s findings that “the losses
were caused by a congeries of factors – unreasonably low sales per salesperson resulting in higher levels of commercial costs
expressed as a percentage of sales; competition in the Australian market; excessive stock levels; poor management – none of
which included the Commissioner’s contention that the losses had arisen from the transfer of ‘profits’ to the suppliers”.[168]
Although it was not relevant to the outcome of the case, and was not considered by the Full Court, Justice Middleton also observed
in the SNF Trial that he did see some force in the argument that there was a clear legislative intention that the Commissioner
may rely on either division 13 or the “associated enterprises” article of a tax treaty to amend assessments.[169] In other words, he
suggested that the tax treaties may be a “sword” for the ATO, as well as a “shield” for the taxpayer. The view that tax treaties can
be both a “sword” and a “shield” was later confirmed by the Full Federal Court in Satyam Computer Services Limited,[170] where
the Court expressly rejected the “generalized principle” that treaties could only ever apply to provide relief from taxation and that
such generalized principles prevent, in that case, article 23 of the Australia-India treaty from operating on its terms (with the effect
that the amounts in question in that case were deemed by the treaty to have an Australian source and thus taxable in Australia).[171]
Chevron: The need for the right experts addressing the right tests
Chevron [172] was the first transfer pricing case in Australia to look at related-party debt. In this case, a US-based subsidiary
(Chevron Texaco Funding Corp.) of the Chevron Australia Holdings Pty Ltd (CAHPL). had borrowed USD 2.5 billion in the US
commercial paper market at a rate of approximately 1.2% and on-lent the Australian dollar equivalent (approximately AUD 3.7
billion) to the Australian taxpayer under a 5-year loan agreement at a rate equal to “1-month AUD-LIBOR-BBA as determined with
respect to each Interest Period +4.14% per annum”,[173] being an interest rate of approximately 9% in the relevant period. The loan
agreement did not include any financial or operating covenants and (unlike the commercial paper) no guarantee was provided by
the ultimate parent company, Chevron Corporation. The Commissioner made determinations under division 13 of the ITAA 36 for
161. AU: FCAFC, 1 June 2011, 74, Federal Commissioner of Taxation v. SNF (Australia) Pty Ltd, at paras. 116 and 118.
162. AU: FCAFC, 1 June 2011, 74, Federal Commissioner of Taxation v. SNF (Australia) Pty Ltd, at para. 117.
168. AU: FCAFC, 1 June 2011, 74, Federal Commissioner of Taxation v. SNF (Australia) Pty Ltd, at paras. 6 and 7.
170. AU: FCAFC, 11 Oct. 2018, 172, Satyam Computer Services Limited v. Commissioner of Taxation.
171. AU: FCAFC, 11 Oct. 2018, 172, Satyam Computer Services Limited v. Commissioner of Taxation, at paras. 27-29.
172. AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No. 4).
173. AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No. 4), at para. 2.

the 2004 to 2008 tax years and, subsequently, under subdivision 815-A of the ITAA 97[174] for the 2006 to 2008 tax years, and
raised amended assessments for additional tax of around AUD 270 million, including penalties (at a rate of 25%) and interest. The
Commissioner’s assessments were based on an interest rate calculated by reference to Australian LIBOR plus 0.09%.[175]
The taxpayer failed to overturn the division 13 assessments as its evidence did not prove that the arm’s length consideration
assessed by the Commissioner was excessive.[176] In a broad sense, the taxpayer had sought to justify the rate of interest charged
on the basis that the loan was unsecured, there was no parental guarantee or operational/financial covenants and the taxpayer’s
credit rating was BB (or lower). Justice Robertson found that if the property (i.e. the loan funding) had been acquired under an
agreement between independent parties dealing at arm’s length, the borrower would have given security and operational and
financial covenants as part of the “consideration”, which would have resulted in a lower interest rate.[177] He stated:
Division 13 does not permit reasoning that reaches a non-arm’s length interest rate on the basis that the actual interest rate
is as high as it is because of the rating attributed to the borrower or borrowing, which rating relies on the absence of arm’s
length consideration given by the borrower.[178]
While Justice Robertson indicated that division 13 does not “require or authorise the creation of an agreement with terms different
from those of the actual agreement, other than the consideration”,[179] the word consideration is not “limited, in the case of a loan,
to the interest rate.”[180]
In so far as subdivision 815-A was concerned, Justice Robertson rejected the taxpayer’s arguments that the regime was
unconstitutional by reason of its retrospective application[181] or that the provision did not permit “a re-characterisation of the entire
transaction or a rewriting of the terms of the loan”.[182] He said that the focus of subdivision 815-A was different to division 13 and
required:
the assessment of an amount of profits which might have been expected to accrue but for the conditions identified by
reference to Art 9 [of the US/Australia Double Taxation Agreement] but which, by reason of those conditions, have not so
accrued. It follows, in my view, that the question of re-characterisation of the transaction in question or rewriting the terms of
the loan does not directly arise.[183]
Accordingly, it followed that the taxpayer had failed to show that the relevant assessments under subdivision 815-A were
excessive.[184]
Apart from his commentary on the technical operation of division 13 and subdivision 815-A, the other important aspect of Justice
Robertson’s decision was his analysis of the expert evidence presented by the taxpayer and the Commissioner. There were some
20 expert witnesses who filed around 60 expert reports and gave evidence over the course of a 5-week hearing. Most of this
evidence was rejected or considered of limited probative value on the basis that:
- the expert did not have sufficient and contemporary skills in assessing the rate of interest in relation to the exploration and
prospecting sector;[185]
- the expert addressed a question which differed from the question required to be addressed by the legislation;[186] or
- the evidence, particularly as to credit ratings, was not relevant to the analysis required.[187]
Other incidental aspects of the decision were Justice Robertson’s findings that:
- the associated enterprise articles in relevant tax treaties do not provide a separate taxing power;[188]
174. Subdiv. 815-A ITAA 97 was enacted on 8 Sept. 2012 with effect for tax years starting on or after 1 July 2004 (sec. 815-1 Income Tax (Transitional Provisions) Act
1997).
175. D. Preshaw, Transfer pricing and the Chevron case, paper presented to The Tax Institute 31st National Convention, Melbourne, p. 4 (2-4 Mar. 2016).
176. AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No. 4), at paras. 87 and 525.
185. For instance, the evidence of Mr Martin (AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No. 4), at para. 182).
186. For instance, the evidence of Mr Wasow (AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No. 4), at para. 241). At
para. 500, Justice Robertson goes so far as to say that he gave “no weight to opinions of transfer pricing economists where those appear not to be founded in the
statutory language which the Court must apply.”
187. For instance, the evidence of Ms Esposito (AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No. 4), at para. 255).
188. AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No. 4), at paras. 52 and 61.

- the thin capitalization rules[189] are not an exclusive code regarding the appropriate amount of debt to be financed;[190]
- while division 13 requires that, in determining the arm’s length consideration, the hypothetical lender and borrower are to be
assumed to be independent of one another, the hypothetical independent parties should “have the characteristics relevant to
the pricing of the loan so as to enable the hypothesis to work”.[191] In this case, it meant that one had to price the loan on the
basis that the borrower was an oil and gas exploration and production subsidiary;
- credit ratings were not particularly relevant here, as His Honour accepted the argument of the taxpayer that “lending
institutions performed their own independent credit analyses when deciding whether to lend to a prospective borrower”;[192]
and
- while implicit parental support is a matter that should be taken into account, in this case His Honour did not consider that it
would make much difference to the interest rate in the absence of a binding guarantee.[193]
The taxpayer appealed the decision to the Full Federal Court which handed down its decision on 21 April 2017.[194]
The Full Court unanimously dismissed the taxpayer’s appeal. The primary judgment was written by Justice Pagone with whom
Justice Perram agreed. Chief Justice Allsop also handed down a written judgment, although His Honour made it clear that he
agreed with the reasoning of Justice Pagone.[195]
While the Full Court upheld the decision of Justice Robertson, it adopted a different approach in analysing the provisions.
In relation to division 13, the Full Court held that there were two key steps to applying division 13, namely:
- identifying the property in question which has been acquired under the international agreement; and
- identifying the consideration given for that property.[196]
The Full Court agreed with Justice Robertson at first instance that the property to which division 13 applied was the loan of the
AUD equivalent of USD 2.5 billion.[197] The property was not, as the taxpayer had described it, an unsecured loan on the terms set
out in the Credit Facility Agreement. This is because the absence of security, a guarantee or another charge is more aptly seen as
an absence of consideration or price paid for the right, privilege, benefit or facility rather than as a right, privilege, benefit or facility
(i.e. property) acquired.[198]
Once the property had been identified, the Full Court said that the relevant question which must be answered is what consideration
might reasonably be expected to have been given by the taxpayer in an arm’s length dealing for the acquisition of that property.[199]
The Full Court stated that this does not involve the construction of an abstract hypothetical agreement between independent
parties: rather, the exercise involves starting with the actual agreement entered into and adjusting it to what, based on the
evidence, would be reasonably expected had the agreement been unaffected by the lack of independence and the lack of arm’s
length dealing.[200]
Importantly, the Full Court noted that the independence hypothesis required by division 13 was only that the parties to the
international dealing be independent of each other, not independent of all others (i.e. a standalone company).[201] Accordingly, in
determining what a hypothetically independent borrower would have provided for the loan, it is necessary to approach the analysis
on the basis that the borrower:
- is independent of the lender, but not of the corporate group of which the borrower is a member;
189. Div. 820 ITAA 97. These provide a safe harbour debt to equity ratio of 1.5:1.
190. Div. 820 ITAA 97, at para. 592.
191. Div. 820 ITAA 97, at paras. 79-80.
192. Div. 820 ITAA 97, at para. 181.
193. Div. 820 ITAA 97, at paras. 605-606.
195. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at para. 1.
196. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 16-17 per Chief Justice Allsop and 112 per Justice
Pagone.
197. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at para. 35 per Chief Justice Allsop and 131 per Justice
Pagone.
198. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 37-39 per Chief Justice Allsop and 115-117 per
Justice Pagone.
199. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 40 per Chief Justice Allsop and 118 per Justice
Pagone.
200. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 4-5 per Chief Justice Allsop and 126 per Justice
Pagone.
201. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 43, 49, 65 per Chief Justice Allsop and 128-129 per
Justice Pagone.

- is a company in the position of the taxpayer, Chevron Australia Holdings Pty Ltd (CAHPL), i.e. an oil and gas exploration and
production subsidiary;
- is part of a group, the policy of which is to borrow externally at the lowest rate possible; and
- has a parent company that would usually provide a guarantee for external borrowings of its subsidiaries.[202]
On that basis, the Full Court found that the consideration that might reasonably be expected to be given by a hypothetical company
in CAHPL’s position would be an interest rate which takes into account the benefit of a parental guarantee (which would be a rate
much lower than the actual rate paid by CAHPL).[203]
The Full Court’s analysis emphasizes the importance of the evidence when hypothesizing what the consideration “might
reasonably have been expected” to have been had the dealing been between independent parties dealing at arm’s length.[204]
For example, the Full Court was able to conclude on the evidence that an independent hypothetical borrower in CAHPL’s
position would have been able to borrow at lower rates taking into account a parental guarantee. However, whilst the Full Court
acknowledged that the hypothetical independent borrower might be assumed to have paid a fee for the benefit of the parental
guarantee, it was held there was insufficient evidence to warrant such a conclusion in the present case.[205]
While the Full Court acknowledged the legislative differences between division 13 and subdivision 815-A, it appears to have
engaged in substantively the same analysis in applying subdivision 815-A as it did in applying division 13.
An interesting point to note about the Full Court’s approach in applying subdivision 815-A was its apparent willingness to engage
in a reconstruction of the actual transaction, notwithstanding the requirement to apply subdivision 815-A consistently with OECD
guidance. For example, Chief Justice Allsop quoted the OECD Guidelines at length, emphasizing that reconstruction is permissible
in exceptional circumstances, but proceeded in the next paragraph of his judgement to conclude that the analysis required is:
a flexible comparative analysis that gives weight, but not irredeemable inflexibility, to the form of the transaction… The form
of that transaction may, to a degree, be altered if it is necessary to do so to permit the transaction to be analysed through the
lens of mutually independent parties.[206]
The comments of the majority in the Glencore Appeal (discussed below) provide one possible avenue for reconciling these
comments.
The taxpayer ultimately discontinued its application for special leave to appeal to the High Court.[207] Accordingly, the Full Federal
Court decision stands.
Glencore
The first transfer pricing decision to be handed down in Australia after the Chevron Appeal was Glencore. Glencore is a decision of
the Federal Court, which was handed down on 3 September 2019. In this case, Justice Davies ruled in favour of the taxpayer and
held that the terms of a price sharing arrangement between an Australian mine operator and its Swiss parent/offshore marketing
hub were arm’s length.
Cobar Management Pty Ltd (CMPL) was a member of the taxpayer’s multiple entry tax consolidated group, which managed and
operated the CSA mine in New South Wales. CMPL sold 100% of the copper concentrate produced to its Swiss parent, Glencore
International AG (GIAG), under a series of mine’s lives offtake agreements. GIAG then sold the copper concentrate to third parties.
This case is concerned with the pricing of the copper concentrate sold by CMPL to GIAG in the 2007, 2008 and 2009 income
years.
There was no terminal market (e.g. like the London Metal Exchange) for copper concentrate (as opposed to copper) where it could
be traded at a precisely known price. Instead, copper concentrate contracts were individually negotiated and their terms varied
greatly, even if there was a well-established pricing framework for copper concentrate.
203. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 56-62 per Chief Justice Allsop and 130-132 per
Justice Pagone.
204. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 18, 42, 46-47, 62 per Chief Justice Allsop and 128 per
Justice Pagone.
205. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at paras. 60 per Chief Justice Allsop and 133 per Justice
Pagone.
206. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at para. 90 per Chief Justice Allsop.
207. Chevron abandons High Court appeal bid against ATO, Australian Financial Review (18 Aug. 2017), available at http://www.afr.com/news/policy/tax/chevron-
abandons-high-court-appeal-bid-against-ato-20170818-gxz52c (accessed 12 July 2023).

Until February 2007, CMPL sold its copper concentrate under “market-related” agreements. In February 2007, future copper
prices were uncertain and higher costs were associated with the mine, causing CMPL and GIAG to enter into a different form of
agreement, known in the copper concentrate industry as a “price sharing agreement”. Under the price sharing model, the copper
concentrate was priced using the official London Metal Exchange cash settlement price for copper averaged over a quotational
period as a reference point.
The Commissioner took issue with this move to a price sharing agreement (as well as certain other terms in the agreement):
an independent mine producer with CMPL’s characteristics would not have agreed to price sharing at all or to quotational
periods with back pricing optionality and, instead, might reasonably have been expected to have sold its production in the
relevant years under a life of mine agreement on market-related terms and limited quotational period optionality with no back
pricing.[208]
The Commissioner argued that the:
provisions introduced by the February 2007 Agreement were “simply integers in how the consideration receivable by CMPL
from GIAG ... was to be calculated”… The Commissioner argued that to resolve the statutory questions under Div 13 and
Subdiv 815-A, the Court must therefore determine what terms as to the price of the concentrate – which included freight,
TCRCs, price participation and quotational periods – might have been expected to have been agreed between independent
parties[209]
In contrast, the taxpayer submitted that the Commissioner’s approach “required the Court to engage in a speculative task of
re-imagining all of the terms of the contract to which independent parties might be expected to have agreed”.[210] The taxpayer
sought to distinguish its price sharing offtake agreements from the controlled loan agreement found in Chevron, submitting that the
relevant provisions in the price sharing offtake agreements were observable in arm’s length contracts.
Both the taxpayer and the Commissioner submitted that their respective cases were supported by the Full Federal Court’s decision
in the Chevron Appeal.
Justice Davies rejected the Commissioner’s case, agreeing with the taxpayer that the Commissioner’s approach “impermissibly
restructures the actual contract entered into by the parties into a contract of a different character.”[211] Her Honour noted that the
experts agreed that “a price sharing contract and a market-related contract are fundamentally different types of contracts”, and
therefore “the price sharing term was not simply an “integer” in the pricing of the copper concentrate”.
Relevantly, Justice Davies explicitly disagreed with the proposition that the decisions in Chevron and the Chevron Appeal provide
authority for the existence of some general reconstruction power:
The decisions in Chevron, both at first instance and on appeal, make it clear that the hypothetical should be based on the
form of the actual transaction entered into between the associated enterprises but on the assumption that the parties are
independent and dealing at arm’s length, in order to identify a reliable substitute arm’s length consideration for the actual
consideration given or received.[212]
Her Honour went on to observe that the 1995 OECD Transfer Pricing Guidelines, which were referred to by Chief Justice Allsop in
the Chevron Appeal, state that “in other than exceptional circumstances” the actual transaction should not be disregarded or other
transactions substituted. These Guidelines identify two exceptional circumstances where it may be appropriate and legitimate to
disregard the structure adopted by the taxpayer: (i) where the economic substance of the transaction differs from its form; and
(ii) where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction,
viewed in their totality, differ from those which would have been adopted by independent enterprises. Neither exception applied
in the present case. The economic substance of what the parties transacted did not differ from the legal rights and obligations
created by the agreements and there was no suggestion that the terms of the agreement were drafted with tax considerations in
mind. Further, Justice Davies accepted the evidence that price sharing agreements such as the one in question were commonly
seen in the commercial market between independent parties in the relevant years:
[T]he February 2007 Agreement was a form of agreement seen in the market between independent enterprises in the relevant
years and, as the experts agreed and as illustrated by the “comparable” contracts, the price sharing methodology adopted by
the parties under that Agreement was a recognised, legitimate and accepted way for copper concentrate to be priced and one
which other market participants, independent of each other and dealing at arm’s length, also adopted at the time in respect
of the supply of concentrate by a mine producer to a trader. No adjustment is required to the form of the Agreement to reflect
212. AU: HCA, 14 Aug. 2019, 26, Glencore International AG v. Commissioner of Taxation, at para. 314. See also paras. 40-47.

that transaction as one entered into between independent parties dealing at arm’s length in order to conduct the comparative
analysis and, contrary to the Commissioner’s submission, there is nothing in the structuring of the actual February 2007
Agreement that would “skew” the statutory inquiry or “be inconsistent with commercial reality”.[213]
Her Honour also stated that, in the event her analysis is incorrect, the evidence, which included other price sharing contracts
tendered into evidence by Glencore (which the Commissioner had argued were not directly comparable), still established that
independent parties in the position of CMPL and GIAG might have been expected to enter into a price sharing type of offtake
agreement[214] and that the pricing under the actual contract fell within the arm’s length range.[215]
In setting out her reasons, Justice Davies made a number of observations about the Commissioner’s case and how it was framed,
including:
- Both subdivision 815-A and division 13 require two distinct statutory questions to be answered.
The first is whether there has been a non-arm’s length dealing (under division 13) or whether there are conditions in place
which differ from the conditions which might be expected to be in place between arm’s length parties. This first question is
directed at the preconditions for permitting a transfer pricing adjustment.
The second is whether the actual consideration received is different from the arm’s length consideration (division 13) or
whether there is a causal relationship between the non-arm’s length conditions and the non-accrual of profits.
The Commissioner’s argument that the taxpayer’s onus of proof required it to establish that an independent mine producer
with CMPL’s characteristics would have entered into a price sharing offtake agreement, and that the evidence failed to show
CMPL would have sold its copper concentrate to GIAG on the same or similar terms had it been independent of GIAG,
incorrectly “elides” the two statutory questions.[216]
- Hindsight reasoning or analysis is not permissible – in this regard, two experts had opined that it was unreasonable for CMPL
to have adopted a price sharing offtake agreement with GIAG because CMPL would have made more profit had it not.[217]
Hindsight cannot be used to second-guess commercial judgements.[218]
- Neither division 13 nor subdivision 815-A directs an inquiry into the commercial prudence of the non-arm’s length contract or
transaction entered into.[219]
Justice Davies also reaffirmed that the inquiry in a transfer pricing case must be based on the probative evidence which, where
appropriate, will include the use of expert evidence to find a reliable substitute for the actual consideration. Her Honour made a
number of observations about the use of expert evidence:
The role of the expert is to provide independent assistance to the Court by providing an objective and impartial opinion on
matters within the specialist knowledge of the expert: s 79 of the Evidence Act 1995 (Cth) (Evidence Act). It is not the role of
the expert to be an advocate for the party calling them nor to express views or speculate on matters about which the expert
does not have specialist knowledge. An expert should make it clear when a matter falls outside his or her expertise. Experts
need to exercise particular caution to avoid making assertions of fact which have no foundation, otherwise they are seen to
be advocating a case rather than providing objective and impartial assistance. Unfounded or speculative reasoning may also
undermine or diminish the persuasiveness and cogency of the opinions expressed by the expert on matters on which she or
she [sic] is qualified to give an opinion, eroding confidence in the accuracy, reliability and objectivity of such opinions. In the
present case, each of the experts, obviously keen to supply the Court with reasoning supporting the position of the party on
whose behalf they gave evidence, strayed from time to time into becoming advocates for the party by proffering opinions and
making comments on matters which they were not qualified to give. Experts should be mindful of their role to assist the Court
and take care to comply with the Code of Conduct in expressing their views.[220]
The ATO appealed the decision in Glencore to the Full Federal Court. The appeal was heard by Justices Middleton, Steward and
Thawley in September 2020 and the decision was handed down on 6 November 2020.[221]
221. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd.

Justices Middleton and Steward delivered a joint judgment largely dismissing the appeal (the Commissioner succeeded only
in respect of a freight allowance issue in respect of the 2009 year based on the evidence). Justice Thawley wrote a separate
judgment but ultimately came to the same decision, albeit for slightly different reasons.
Even though the Full Federal Court dismissed the appeal, the Full Court disagreed with a number of the conclusions reached by
Justice Davies at first instance. Crucially, the majority found, contrary to Her Honour, that the Commissioner had not reconstructed
the actual contract entered into by the parties into a contract of a different character because the concepts of “consideration” in
division 13 and “conditions” in subdivision 815-A were broad enough to encompass a pricing formula or methodology. Justices
Middleton and Steward stated that:
… we are inclined to think the Commissioner did in fact apply Subdiv. 815-A and Div. 13 to the transaction actually undertaken
by C.M.P.L. and G.I.A.G. All he sought to change was the consideration payable for the copper concentrate in fact supplied.
Where parties to an agreement specify a price in dollar terms, or in the terms of another currency, Div. 13 gives the
Commissioner a clear power to substitute a different price which he considers to be the “arm’s length consideration.” Upon
making his determination under s. 136AD, that consideration is then “deemed” to be the relevant consideration received in
respect of a given supply. Where parties do not specify an actual price, but rather agree that the consideration payable is
to be determined by a formula or some other methodology, the Commissioner, in our view, is also permitted – in the sense
of having a legal capacity – to substitute a different formula or a different methodology which he considers will result in the
ascertainment of the arm’s length consideration.[222]
Justices Middleton and Steward went on to draw a distinction between terms of an agreement which “define the price payable
for the supply of goods or services” and other clauses, such as clauses which “may only indirectly bear upon price” (which was
acknowledged as being an “unsatisfactory” distinction).[223] Whether a term would fall within the former or latter category would
need to be determined on a case-by-case basis.[224] Justices Middleton and Steward held that each of division 13 and subdivision
815-A empowers the Commissioner to substitute terms which define the consideration paid but, as it was not necessary for
their Honours to do so, refrained from deciding whether the Commissioner would be empowered to ignore, reframe or substitute
the other types of clauses (including those which indirectly impact on price).[225] However, the majority did draw a distinction
between division 13 and subdivision 815-A on this point, remarking that the Commissioner’s power to substitute terms that only
indirectly impacted on price under division 13 “must be very seriously doubted” whilst simply stating that the power to do so under
subdivision 815-A was a “question for another day” (cf. the view of Justice Thawley discussed below).[226]
In light of the conclusion that there had been no reconstruction, the majority did not consider it necessary to consider the
application of the 1995 OECD Transfer Pricing Guidelines at length. However, the majority did observe that subdivision 815-A
only obliges the Court to determine whether an entity has got a transfer pricing benefit consistently with the 1995 OECD Transfer
Pricing Guidelines to the extent they are relevant and, given that certain principles in the Guidelines are expressed in “nebulous
terms”, they may not be of much real assistance to the task of applying subdivision 815-A (whilst hesitant to comment on the
language used, their Honours described the exceptions as being “very highly generalised and frustratingly opaque”).[227]
Justice Thawley’s observations on the 1995 OECD Transfer Pricing Guidelines were more extensive, expressly rejecting Justice
Davies’ reasoning at first instance that a departure from the actual transaction would only be permitted in the two exceptional
circumstances discussed in those Guidelines.[228] His Honour stated that the Guidelines were not a “sure way to understanding the
correct operation of Div 13” and observed that division 13 was introduced in 1982, well before the Guidelines.[229]
His Honour found that division 13 permits, and in some cases may even require a departure from the actual transaction.[230] If
this were not the case, related parties could dictate the consideration payable by including terms in their arrangements not found
between arm’s length parties.[231] However, Justice Thawley cautioned that this does not enable transactions to be arbitrarily
rewritten because the more terms that were substituted, the less likely the posited agreement would be probative of the arm’s
length consideration.[232]
As for subdivision 815-A, Justice Thawley held that “Subdiv 815-A must be applied according to its terms and one could not give
effect to the 1995 Guidelines if to do so would be inconsistent with the terms of the subdivision or would fail to allow its operation
222. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at para. 154.
225. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at paras. 155-156.
226. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at paras. 155-156.
229. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at paras. 275 to 277.

according to its terms”.[233] Further, His Honour was of the view that the two situations specified in the Guidelines were not the only
situations which might be regarded as “exceptional”.[234]
Justice Thawley also went further than the majority regarding what terms were capable of substitution under division 13 and
subdivision 815-A. In Justice Thawley’s view, neither division 13 nor subdivision 815-A drew a distinction between terms which
“define price” and those which only indirectly impact upon it.[235] His Honour observed that “[m]ost terms of an agreement affect
price and many may properly be characterised as part of the consideration, whether or not the terms are found in a contractual
clause specifically directed at, or defining the price”.[236]
Ultimately, the Full Court’s departure from the first instance decision on the reconstruction issue was not determinative of this case.
The Full Court upheld her Honour’s alternative reasoning for finding for the taxpayer at first instance, being that the evidence still
established that independent parties in the position of CMPL and GIAG might have been expected to enter into a price sharing
type of offtake agreement and that the pricing under the actual contract fell within the arm’s length range.
Both the majority and Justice Thawley agreed that the Commissioner, in focussing on his submission that arm’s length parties
would not have altered their existing agreement, did not correctly frame the issue under division 13. The majority said:
[The Commissioner’s] case was built upon a comparison of the benefits conferred on C.M.P.L. by that contract as compared
with the reduced cash benefits which were expected to arise by reason of the amendments made in February 2007. Why, it
was asked, would a party in the position of C.M.P.L. have agreed to such a debilitating change of terms? It simply was not
what an independent party dealing at arm’s length with a buyer of copper concentrate would ever have agreed to.
With respect, we think the Commissioner has asked the wrong question. As a result, whether the C.M.P.L.-G.I.A.G.
agreement fell within that range of hypothetical contracts for the sale of copper concentrate which independent parties dealing
at arm’s length with each other might reasonably be expected to have entered into, did not feature in the Commissioner’s
analysis. Because the Commissioner was not asking the correct question, he submitted that there was no range of possible
outcomes for this particular mine, but just one outcome, namely retention of the pre-existing terms as they were just before
February 2007.[237]
When turning to an examination of the evidence on whether the consideration under the agreement was arm’s length, the majority
approached Justice Davies’ findings “with that degree of deference which is warranted by reason of the advantage her Honour
enjoyed in having the opportunity to consider, and reflect upon, the entirety of the rather large volume of evidence as it was
received at trial and to draw conclusions from that evidence, viewed as a whole”.[238] The Full Court held that Justice Davies had
not erred in preferring the evidence of the taxpayer’s expert over the evidence of the Commissioner’s expert. Accordingly, it was
satisfied that the taxpayer had discharged its onus of proof and the appeal should be dismissed.
On 10 December 2020, the ATO filed a “request for leave to appeal” to the High Court of Australia against the decision of the
Glencore Appeal. On 21 May 2021, the High Court of Australia refused the application for special leave.[239]
The ATO has since issued a Decision Impact Statement setting out its view on the decision.[240] In it, the ATO states that:
- it does not accept that the case operates to narrow the extent to which a comparable hypothesis is to be personalized and does
not set the standard for depersonalization;
- there is no inconsistency in the application of the arm’s length principle between the Full Federal Court in the Chevron Appeal and
the Glencore Appeal – the outcome in each case was reached based on the evidence before the Court;
- establishing the arm’s length conditions or consideration requires a careful examination of the totality of the evidence;
- it agrees with the Full Federal Court’s conclusion that the ATO did not impermissibly restructure or reconstruct the relevant
contract;
- it agrees with the observation of Justice Thawley that the terms which can be substituted under division 13 and subdivision 815-A
are not restricted to terms and conditions that define price; and
235. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at paras. 267 and 296-297.
237. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at paras. 165 to 166.
239. AU: HCA, 21 May 2021, 098, The Commissioner of Taxation of the Commonwealth of Australia v Glencore Investment Pty Ltd.
240. ATO, Decision impact statement, Commissioner of Taxation v. Glencore Investment Pty Ltd (28 Sept. 2021), available at https://www.ato.gov.au/law/view/
document?docid=LIT/ICD/NSD1636of2019/00001 (accessed 12 July 2023).

- there are differences in the language between subdivisions 815-A and 815-B which may be relevant to how the Chevron Appeal
and the Glencore Appeal apply to the interpretation of subdivision 815-B.
SingTel
SingTel [241] is a decision of Justice Moshinsky in the Federal Court which was handed down on 17 December 2021. In this case,
Justice Moshinsky ruled in favour of the Commissioner, finding that the taxpayer, Singapore Telecom Australia Investments Pty
Ltd (STAI), obtained a transfer pricing benefit under subdivision 815-A of the ITAA 97 in connection with interest paid under a
“Loan Note Issuance Agreement” (LNIA) entered into on 28 June 2002. As a consequence, the taxpayer was denied deductions
totalling approximately AUD 894 million over the years ending 31 March 2010-2013 (inclusive). His Honour also held that the
consideration for the loan notes was not at arm’s length for the purposes of division 13 of the ITAA 36, although the decision
focuses primarily on the application of subdivision 815-A as that was the focus of the parties. The taxpayer has appealed this
decision to the Full Federal Court and the appeal was heard in April 2023 with judgment reserved.
The issuer of the notes under the LNIA was STAI, an Australian incorporated and tax resident company, and the subscriber
Singtel Australia Investments Ltd (SAI), a British Virgin Island company and a Singapore tax resident. Both STAI and SAI are
wholly owned subsidiaries of Singapore Telecommunications Ltd (SingTel Ltd). The loan notes were issued in connection with
SingTel Ltd’s takeover of Cable & Wireless Optus Limited (the second largest telecommunications company in Australia), which
was renamed Singtel Optus Pty Ltd (SOPL).
In June 2002, SAI sold 100% of the shares in SOPL (which it had acquired earlier in 2001) to STAI for AUD 14.2 billion. The
consideration was satisfied by STAI, issuing to SAI:
- AUD 9 billion of ordinary shares, which together with another transaction, resulted in STAI becoming a wholly owned
subsidiary of SAI; and
- 10 loan notes totalling AUD 5.2 billion under the LNIA.
Each note was redeemable at any time, had a term of 10 years and an interest rate equal to the 1 year Bank Bill Swap Rate
(BBSW) plus 1% per annum. The applicable interest rate under the loan notes was the interest rate multiplied by 10/9 (being a
gross up for Australian interest withholding tax which is payable at a rate of 10%).
The LNIA was subsequently amended on:
- 31 December 2002 (the First Amendment);

- 31 March 2003 (the Second Amendment); and
- 31 December 2009 (the Third Amendment).
Each amendment was expressed as having retrospective effect from the date the LNIA was entered into.
Pursuant to the First Amendment, the LNIA was amended to provide that the maturity date of a loan note could not be later than 10
years following the date of issue less 1 day.
The Second Amendment amended the LNIA to make the accrual and payment of interest (including the interest that had
notionally accrued up to that point) contingent on STAI meeting certain benchmarks (either financial, such as cash flow and tax
payable benchmarks, or certain events, such as paying dividends or capital returns of a certain size, or STAI and its subsidiaries
collectively having a specified level of projected tax payable).[242] The Second Amendment also increased the applicable interest
rate by adding a premium of 4.552%. The premium was to compensate SAI for an expected interest-free period of 3.5 years
(during which time STAI would not be in a financial position to make interest payments on the loan), including the withholding tax
gross up.
The Third Amendment amended the interest rate specified in the LNIA by replacing the 1 year BBSW floating rate with a fixed rate
of 6.835%. This resulted in an applicable interest rate of 13.2575%, as shown by this calculation:
(6.835% + 1% margin) × 10/9 + the premium of 4.552%

The interest expense incurred by STAI under the LNIA (as amended by the First Amendment, Second Amendment and Third
Amendment) was approximately AUD 4.9 billion.
Justice Moshinsky’s analysis focused on two aspects of subdivision 815-A:
241. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation.
242. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, paras. 74 and 78.

- Whether there were conditions operating between the two enterprises in their commercial or financial relations which differed
from those which might be expected to operate between independent enterprises dealing wholly independently with each
other (the Conditions Issue); and
- but for those conditions, an amount of profits might have been expected to accrue to the entity; and by reason of those
conditions, the amount of profits did not so accrue (the Profits Issue).
The taxpayer’s case
STAI submitted that its financial position in June 2002 was that it was not expected to have sufficient cash flow to meet interest
payments on a AUD 5.2 billion borrowing or other expenditure in the short to medium term because SOPL had embarked on
a capital expenditure program. However, it was expected that SOPL’s, and therefore STAI’s, cash flow would improve in the
medium term such that it would be able to meet interest payments and other outgoings[243]. Accordingly, the terms of a borrowing
of AUD 5.2 billion had to allow for STAI’s inability to fund interest payments out of cash flow in the short to medium term. It was
said that the LNIA (as amended) allowed for this by providing a mechanism to effectively defer and capitalize interest (i.e. until the
benchmarks were met) for which SAI would be compensated by the premium.
It was common ground between the parties that a company in the position of STAI in June 2002 could have borrowed AUD 5.2
billion without a guarantee and that the most likely source of this debt would have been a new issue of debt on the US debt capital
markets (DCM) coupled with a USD:AUD cross currency interest rate swap (CCIRS) (on the basis that STAI would have had
an exposure to AUD denominated debt). STAI contended that the LNIA was economically equivalent to an arm’s length DCM
instrument with deferred and capitalized interest. Accordingly, it was said that both division 13 and subdivision 815-A required
a comparison between the amounts payable under the LNIA and the amounts payable under a hypothetical DCM transaction
(coupled with a CCIRS) which provided for the deferral and capitalization of interest (with payments being made on the dates they
were actually made by STAI) and a 10-year term.[244]
STAI’s DCM expert then proceeded to “price” such a fresh arm’s length US DCM bond issue (with a CCIRS) undertaken in June
2002 and concluded that the cost of borrowing under the LNIA (as amended) was less than what could be expected under an
arm’s length DCM transaction:[245]
(c) STAI’s primary case is that the actual cost of the borrowing to STAI under the LNIA was not greater (in fact, it was
significantly less) than the cost that a party in STAI’s position might be expected to have paid to an independent party acting
wholly independently so as to achieve the same cash flow advantages which STAI actually achieved. Specifically, the
effective credit spread of the LNIA (approximately 144 bps plus a withholding tax gross-up) is lower than the credit spread
that might reasonably be expected to have been agreed in an arm’s length DCM transaction between independent parties.[246]
Based on the calculations of STAI’s DCM expert, it was submitted that, had STAI borrowed under a US DCM transaction with
deferred and capitalized interest and a 10-year term, a credit spread of 400 bps “might be expected to apply” (based on a view
that STAI should be ascribed a BBB-/Baa3 credit rating).[247]
The Commissioner’s case

In contrast, the Commissioner argued that the hypothetical enquiry required by division 13 and subdivision 815-A involves a
reasonable prediction having regard to what would be “commercially rational” in the circumstances of the parties, which would
include the parties’ membership of a multinational group like the SingTel group).[248] The Commissioner then submitted:
(c) It is implausible that SingTel would have permitted STAI to incur $5.2 billion of debt on the terms of the LNIA, including
as amended, to an unrelated creditor. The alternative financing outlined by [STAI’s DCM expert], relied upon by STAI in
these proceedings, is also implausible. STAI had other, significantly more attractive “options realistically available” to it
(see the 2010 Guidelines, paragraphs 1.34-1.35, and the 1995 Guidelines, paragraphs 1.15-1.16), including the $5.2 billion
financing proposed by Mr Johnson and, if implicit credit support did not elevate STAI’s credit rating to the A-level (which the
Commissioner disputes), the provision of a parent guarantee by SingTel.
(d) The terms of the LNIA in its initial form and after each of the amendments included conditions in the commercial and
financial relations of SAI and STAI which depart fundamentally from arm’s length conditions. The DCM experts agree that no
instrument with these terms existed, or exists, in the market. The Second and Third Amendments inflated the interest rate well
243. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, para. 157.
244. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, para. 158(a), (b).
245. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, paras. 159-160.
246. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, para. 158(c). See also paras. 253-257 which set
out the process by which the expert determines that the actual interest paid under the LNIA is equivalent to a credit spread of 144 bps.
247. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, paras. 160, 249 and 252.
248. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, para. 162(a), (b).

over that which would be payable at arm’s length, having regard to the credit quality of STAI’s assets and that of the SingTel
group.
[…]
(f) Independent parties would never agree to such terms. For example, when STAI and SAI agreed the Second Amendment:
(i) STAI was exposing itself to the risk that the benchmarks would be met in the short term, in which case it would have
to pay the premium rate of interest for almost the whole of the loan, an excessive interest rate given the credit quality of
STAI’s assets and the SingTel group – and be at the mercy of when the lender decided to issue Variation Notices or demand
repayment. At arm’s length, it is impossible to conclude that STAI would have borrowed on such terms.
(ii) SAI was exposing itself to the risk that the benchmarks would not be met, in which case it would be making a 10-year loan
of $5.2 billion for zero return. At arm’s length, it is impossible to conclude that SAI would have lent on such terms.
(g) The Third Amendment raised the interest rate even further, to 13.2575%, a high cost borne by STAI but recouped by SAI,
the related lender. This was done at a time when the financial markets made such an amendment, had it been arm’s length,
most unsuitable.
In reliance on his DCM expert, the Commissioner submitted that an independent STAI would have entered into two financing
arrangements – the first being a short term 9-month bridging facility from an Australian bank which would be refinanced (at the
date of the Second Amendment) with a long-term USD bond (swapped into AUD) (neither of which featured deferred or capitalized
interest) and, second, an AUD 1.5 billion medium term revolving bank facility which would enable STAI to make scheduled interest
payments.[249] The Commissioner submitted that this counterfactual:
conforms more closely to the actual LNIA (in its various iterations) than the counterfactual of [STAI’s DCM expert], and gives
weight, although not “irredeemable inflexibility” to the actual transaction: see Chevron at [90].[250]
The interest rate payable under the Commissioner’s alternative financing arrangement was premised on STAI’s credit rating
being uplifted by 6-8 notches (i.e. to “A” level) on account of implicit parental support (and indirect support from the government
of Singapore). Alternatively, if implicit support did not sufficiently uplift STAI’s credit rating, SingTel would reasonably have been
expected to have provided a parental guarantee.
The Commissioner further contended that the actual transaction between SAI and STAI was to push down the shares in SOPL to
STAI and create new debt at the level of STAI, not to raise new funds for use or to refinance the debt raised by SingTel to acquire
SOPL:
The debt under the LNIA was vendor finance for the acquisition of shares; it was not in form or substance a loan of money, let
alone a bond raising or other borrowing in the financial markets.
The Federal Court’s view

Justice Moshinsky did not agree with STAI that the overall structure of the LNIA was consistent with a DCM bond issue because
its hypothetical of a DCM bond issue departed too far from the actual transaction and the characteristics of the parties which
included the fact that SAI and STAI were the vendor and purchaser (respectively) of shares:
The principal difficulty with STAI’s approach, in my respectful opinion, is that it departs too far from the actual transaction and
the characteristics of the parties to that transaction, and thus departs from the approach required under Subdiv 815-A. The
actual transaction involved a vendor and a purchaser of shares, and an issue of loan notes totalling approximately $5.2 billion
by way of partial consideration for the acquisition of the shares. It did not involve a DCM bond issue. Further, I consider there
to be significant differences between the terms of the LNIA and the terms of a typical DCM bond issue. A second difficulty with
STAI’s approach is that it involves the calculation (in hindsight) of the effective credit spread of the LNIA, and a comparison of
this credit spread with that of an STAI-issued DCM bond issue, rather than an approach which focuses on what independent
parties in the positions of SAI and STAI, dealing independently with each other, might be expected to have agreed in June
2002, and at the time of each relevant amendment to the LNIA.[251]
In relation to the “Conditions Issue”, Moshinsky J found that there were conditions operating between SAI and STAI in their
commercial or financial relations which differed from those which might be expected to operate between independent enterprises
dealing wholly independently with one another, including the terms of the Second Amendment:[252]
249. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, para 162(g).
250. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, para 165(h).

… I would not expect an independent party in the position of SAI to agree that the interest that had already accrued under
the LNIA, which was a substantial sum [approximately A$268m], should be treated as not having accrued. There does not
appear to be any commercial reason why an independent party in the position of SAI would agree to forfeit a sum of this size
in this context. The term therefore differs from what might be expected to operate between independent enterprises.
... I would not expect independent parties in the positions of SAI and STAI to agree to the terms regarding benchmarks and
the Premium. The effect of these terms was that the accrual and payment of interest were contingent on certain financial
benchmarks being met. Given that it was possible that these benchmarks would never be met, it is very difficult to see why an
independent enterprise in the position of SAI would agree to such terms. Further, the Premium was calculated to compensate
SAI for allowing what was estimated by SAI and STAI to be an interest-free period of approximately 3.5 years. If the financial
benchmarks were met earlier, STAI would pay the Premium over a longer period of time. If the financial benchmarks were
met later (or not at all), STAI would pay the Premium over a shorter period of time (or not at all). The terms thus exposed each
party to significant commercial risk. There does not appear to be any commercial rationale for these terms. It is very difficult to
see why independent enterprises would agree to such terms.[253]
However, Justice Moshinsky found that one condition which operated between SAI and STAI in their commercial or financial
relations which did not differ from that which might be expected to operate between independent enterprises operating wholly
independently was the interest rate specified in the LNIA prior to its amendment (1 year BBSW plus 1%), noting that “[t]he
Commissioner does not suggest that the interest rate in the original LNIA is other than an arm’s length consideration”.[254]
In relation to the Profits Issue, Justice Moshinsky held, based on Chevron and Glencore, that the party in the position of STAI in the
required hypothetical is a member of a multinational group like the SingTel group and that the hypothetical party in the position of
STAI is a holding company of an operating subsidiary like SOPL. In stating these propositions, His Honour expressly rejected any
suggestion that it was necessary for the hypothetical to address the precise ownership structure of the hypothetical parties:
If and to the extent that STAI submits that, because in reality SingTel’s ownership of STAI is through SAI, and because in the
hypothetical SAI and STAI are independent of each other, the party in the position of STAI should not be treated as part of a
group like the SingTel group (T760), I do not accept that submission. The overarching consideration is that the enterprises
in the hypothetical should generally have the characteristics and attributes of the actual enterprises. Giving effect to this
consideration requires the party in the position of STAI to be treated as a member of a group like the SingTel group. It is not
necessary for the purposes of the hypothetical to address the precise ownership structure whereby this is the case.[255]
However, in determining the profits which would have arisen, Justice Moshinsky adopted neither the Commissioner’s nor the
taxpayer’s analysis. Instead, His Honour held that:
[…] having regard to the facts and circumstances as described earlier in these reasons, a reliable hypothesis is that
independent parties in the positions of SAI and STAI (and SingTel) might have been expected to have agreed in June 2002
that: the interest rate applicable to the loan notes would be the 1 year BBSW plus 1%, with the resulting amount grossed-up
by 10/9 (that is, the same rate as was actually agreed in the original LNIA); interest under the loan notes could be deferred
and capitalised; and, there would be a parent guarantee from a company like SingTel of the obligations of the company in the
position of STAI. Further, having agreed to a transaction with these components in June 2002, a reliable hypothesis is that
independent parties in the positions of SAI and STAI would not have agreed to make the changes contained in the Second
Amendment. In particular, they would not have agreed to introduce the benchmark terms and add the Premium of 4.552%.
Further, having agreed to a transaction with the components described above in June 2002, a reliable hypothesis is that
independent parties in the positions of SAI and STAI would not have agreed to make the changes in the Third Amendment.
That is, they would not have agreed to change the component of the interest rate that was the 1 year BBSW to a fixed amount
of 6.835%. It follows that, in my view, in the hypothesis, the interest rate of the 1 year BBSW plus 1%, with the resulting
amount grossed-up by 10/9, would have (or might be expected to have) continued through the whole life of the LNIA.[256]
Accordingly, STAI had not demonstrated that the amended assessments issued by the Commissioner were excessive.
Implicit support, parental guarantees and guarantee fees

Justice Moshinsky preferred the evidence of STAI’s expert that implicit support could only justify a modest uplift of STAI’s credit
rating by 2 or 3 notches rather than the 6-8 notches submitted by the Commissioner’s experts. One of the reasons given by
253. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, paras. 311, 312.

Justice Moshinsky for preferring the taxpayer’s evidence in this regard was that the analysis of the Commissioner’s experts did not
consider, or fully consider whether SingTel would in fact be prepared to “stump up” voluntarily if STAI was in distress.[257]
Having preferred the evidence of STAI’s expert in relation to the credit ratings of the parties, there was a large difference between
the credit ratings of SingTel and STAI. This contributed to Justice Moshinsky reasoning that “the logic of the situation strongly
points to a parent guarantee provided”. SAI was providing a very large amount of “vendor finance” and it would be reasonable
to expect that a company in SAI’s position would require security. The size of the loan and difference in credit ratings between
SingTel Ltd and STAI means that if a parental guarantee was not provided, the interest payable would be much greater. A parent
company in the position of SingTel Ltd is likely to provide a guarantee rather than have its subsidiary pay a much greater amount
of interest.[258] Unlike in Chevron, no evidence was led that the SingTel group had a general policy of borrowing externally at lower
cost and providing parental guarantees to subsidiaries borrowing externally. However, the Federal Court stated that such evidence
was not essential.
However, whilst Justice Moshinsky found the relevant hypothesis would include the provision of a guarantee, His Honour rejected
the contention that a guarantee fee could be expected to be charged by the parent to the subsidiary.[259] Justice Moshinsky was of
the view that there did not appear to be any probative evidence that a guarantee fee might be expected to be charged, and in that
regard, SingTel Ltd did not charge a guarantee fee when it guaranteed the obligations of Optus Finance Pty Ltd (another one of its
subsidiaries) under its AUD 2 billion bank facility.
Asking the experts the right questions

In setting out the evidence of the experts, Justice Moshinsky noted that both the Commissioner and STAI had instructed their
respective experts to identify the conditions which operated between SAI and STAI “in respect of the LNIA”.[260] His Honour
appeared to be critical of this, noting that the questions asked did not conform to the statutory test under subdivision 815-A which
is concerned with the conditions which operated between the enterprises “in their commercial or financial relations” which Justice
Moshinsky remarked was a “broader enquiry”.[261]
His Honour’s comments highlight the importance of asking experts the “right” questions.
Themes from the cases

In some senses it is still early days in terms of clarifying the operation of Australia’s transfer pricing rules, given no substantive
case on any of the legislative regimes has reached the High Court.[262] By contrast, there have now been a number of High Court
decisions concerning Part IVA of the ITAA 36, the general anti-avoidance provision, which was introduced shortly before division
13 of the ITAA 36. Moreover, it remains to be seen what impact (if any) the cases to date on division 13 and subdivision 815-A will
have in relation to the interpretation of subdivisions 815-B to D of the ITAA 97.[263]
Nevertheless, some noteworthy themes emerge from the cases, as follows:
- although it seems obvious, the focus will be on the precise terms of the legislation, in particular, division 13 did not require the
taxpayer to have an intention to avoid tax (which is also the case for subdivisions 815-B to D). Nor did division 13 refer to the
arm’s length principle (although subdivisions 815-B to D now require consideration of the arm’s length conditions);[264]
- the courts and AAT will pay little (if any) attention to the rulings issued by the ATO on transfer pricing, and will not necessarily
be bound by the OECD Guidelines (although there is now a requirement for “consistency” with the OECD Guidelines in
subdivisions 815-B to D);[265]
- the hypothesis of independence between the parties required by division 13 and subdivision 815-A of the ITAA 97 (which
is also evident in subdivisions 815-B to D) requires only that the parties to the transaction or dealing be independent of
257. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, paras. 223-228.
261. AU: FCA, 17 Dec. 2021, 1597, Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation, paras. 234 and 268.
262. The only transfer pricing case to reach the High Court has been AU: HCA, 31 Jul. 2008, 33, WR Carpenter Pty Ltd v. Federal Commissioner of Taxation, but it
only dealt with a matter of procedure, namely the taxpayer’s entitlement to seek reasons for the determinations reached by the ATO (see sec. 3.3.).
263. In Chevron, Justice Robertson agreed with the submissions of the Commissioner that the machinery of subdiv. 815-B “was quite different from the determination
provisions which appeared in [subdivision] 815-A and [division 13]” (AU: FCA, 23 Oct. 2015, 1092, Chevron Australia Holdings Pty Ltd v. Commissioner of
Taxation (No. 4), at para. 597).
264. The “arm’s length principle” was, however, referred to in the Explanatory Memorandum to the Income Tax Assessment Amendment Bill 1982 which introduced
division 13, at 4.
265. Strictly, the requirement in subdivisions 815-B to D is for consistency with the “documents” prescribed in the ITAA 97 for this purpose, which includes the Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations (as approved by the OECD and last amended on 22 July 2010, and for income years
starting on or after 1 July 2017, as last amended on 19 May 2017). See sec. 815-135 ITAA 97.

each other. This means the characteristics of the actual parties to an international agreement or cross-border dealing will
be relevant to the characteristics of the hypothesized independent parties. Therefore, evidence of the actual behaviour and
characteristics of the parties is key to establishing the parameters of the hypothesized agreement or dealing;
- the courts and AAT will not abdicate their role to expert economists. Experts can expect their opinions to be subject to
detailed forensic scrutiny, and it will not be sufficient to draw broad conclusions from scant information or to attempt to justify
conclusions in relation to one industry based on information from another unrelated sector. Further, it is vital to ensure that the
experts have appropriate and specific expertise in relation to the relevant industry and taxpayer’s circumstances, and address
the questions posed by the legislation and not different questions;
- at least prior to the introduction of division 815, the courts and AAT were more open to applying direct transfer pricing
methodologies and had expressed a clear preference for the application of division 13 to adopt the CUP or resale price
method, and significant concern about the reliability and appropriateness of indirect methods, such as the TNMM, where
there is some evidence of broadly similar transactions. This stood in contrast to the preferred approach of at least some
taxpayers[266] and the ATO,[267] and the OECD moving away from a hierarchy of methods.[268] Division 815 now clearly permits
taxpayers to resort to indirect methodologies and requires that the most appropriate method be used;[269] and
- the burden of proof is on the taxpayer to demonstrate that the Commissioner’s assessment is excessive, which in a transfer
pricing context requires showing that the consideration contended for is (or is less than/greater than, depending on whether it
is a payment or receipt) the arm’s length consideration.
The introduction of subdivisions 815-B to D was, of course, intended to deal with a number of the issues that were left unresolved
by these cases and address the situation where the approach of the Courts is, in the government’s view, inconsistent with
Australia’s international obligations. For example, as noted above, the reforms provide that the relevant provisions must be
interpreted consistently with the relevant OECD Guidelines.[270]
In cases decided under division 13, the Courts had been reluctant to apply profit-based pricing methodologies. However, the new
provisions avoid references to transactions. For instance, subdivision 815-B requires a consideration of profits when determining
the arm’s length conditions and subdivision 815-C makes explicit reference to the attribution of profits. There is uncertainty as to
what evidence taxpayers will need to lead to negate a determination or assessment made by the Commissioner under subdivisions
815-A to 815-D. For instance, at least one commentator had suggested that, in relation to subdivision 815-A, taxpayers may
need to lead evidence to show that another method, and not a profit-based method, is the “most appropriate” for determining the
arm’s length price.[271] This is in contrast to SNF, where the taxpayer merely had to show that the CUP method was an accepted
methodology. Despite this, several commentators suggest that if a determination was made under subdivision 815-A in relation to
a factual scenario similar to SNF, the outcome would have been the same (i.e. a court would likely find that a CUP method would
be the most appropriate method).[272] It is worth noting that Justice Davies in Glencore found persuasive the contracts entered
into evidence by Glencore, which the Commissioner had argued were not “directly comparable”, both as evidencing the existence
of particular terms in the type of agreement being considered and that the price sharing percentage fell within the arm’s length
range.[273]
The Federal Court’s decision in SingTel similarly highlights the evidentiary issues faced by taxpayers and the Commissioner alike
in transfer pricing cases. The Court criticized each of the taxpayer and the Commissioner for asking their experts the “wrong”
question and neither party’s evidence was completely accepted. Instead, the Court in SingTel drew from the evidence of each of
the taxpayer and the Commissioner and the hypothesis upon which the case was decided diverged from both the hypotheses put
forward by the taxpayer’s and the Commissioner’s experts.
There is also some uncertainty relating to the requirement for courts to interpret the rules consistently with the relevant OECD
Guidelines. Justices Middleton and Steward in the Glencore Appeal observed that the OECD Guidelines were only a guide and
266. M. Markham, Transfer Pricing of Intangible Assets in the US, the OECD and Australia: Are Profit Split Methodologies the Way Forward?, UWSL Rev. 3 (2004); T.
Hayes, Is an overhaul of Australia’s transfer pricing laws on the cards?, Thomson Reuters Weekly Tax Bulletin 32 (23 July 2010); Deloitte, The Benchmark, (Aug.
2010); McCormack, at para. 2.3.5; and S. McFall, M. Simpson & L. McLeish, Transfer pricing reforms in Australia, 46 Taxation in Australia 8, p. 358 (Mar. 2012).
267. See e.g. J. Killaly, Transfer Pricing – Compliance Issues and Insights in the Context of Global Profit Allocation, presentation to Transnational Crime Conference,
p. 6 (9-10 Mar. 2000).
268. See generally OECD Guidelines 2010.
269. For example, see sec. 815-125(2), ITAA 97.
270. Sec. 815-135 ITAA 97.
271. I. Fullerton, The influence of transfer pricing ‘Higgs bosons’: about to be felt more strongly?, Thomson Reuters Weekly Tax Bulletin 37 (31 Aug. 2012).
272. I. Fullerton, The influence of transfer pricing ‘Higgs bosons’: about to be felt more strongly?, Thomson Reuters Weekly Tax Bulletin 37 (31 Aug. 2012); McFall,
Simpson & McLeish, pp. 357-358; M. Richmond, Treaty interpretation – Russell, IBM and SNF, paper presented at Federal Court/Law Council of Australia
Business Law Section Taxation Workshop (24 Aug. 2012).
273. AU: HCA, 14 Aug. 2019, 26, Glencore International AG v. Commissioner of Taxation, at paras. 343-344 and 348.

that the OECD Guidelines “may not be of much real assistance”.[274] In making this observation, their Honours referred specifically
to the fact that the requirement for consistency with the OECD Guidelines in subdivision 815-A is for consistency “to the extent they
are relevant”.[275] Subdivision 815-B contains a similar requirement for consistency with the OECD Guidelines in section 815-135
of the ITAA 1997. However, unlike for subdivision 815-A, section 815-135 makes no express reference to relevance. It is unclear
to what extent, if any, this would impact upon a Court’s approach to considering the relevance of the OECD Guidelines. However,
what is becoming increasingly clear is that, at least in the context of subdivision 815-A, the requirement for consistency with the
OECD Guidelines does not prevent a Court from adjusting the form of the actual transaction entered into, although it remains
uncertain where the boundary between permissible adjustments and impermissible reconstruction lies.
Subdivisions 815-B to D are in many ways similar to the transfer pricing rules in the United Kingdom (UK) contained in former
Schedule 28AA of the Income and Corporation Taxes Act 1988 (UK) and current Parts 4 and 5 of the Taxation (International and
Other Provisions) Act 2010 (UK), and UK cases on those provisions may assist in resolving the uncertainty around the role of
the OECD Guidelines. In DSG Retail Limited v. The Commissioners for Her Majesty’s Revenue and Customs,[276] the UK Special
Commissioners felt that, where Schedule 28AA applies, it requires the UK transfer pricing rules to be interpreted consistently
with the OECD Guidelines and that in determining an arm’s length price, “the approach of the OECD model is a useful aid which
we should apply in the absence of any other guidance as they are the best evidence of international thinking on the topic”.[277]
The Special Commissioners noted that the OECD Guidelines “stress the importance of looking for comparable transactions
as long as they are comparable, the need to strive to make adjustments to create comparability if at all possible, and that more
than one method may be considered”.[278] While recognizing that the OECD Guidelines “give a secondary role to other methods
where traditional transactions methods cannot be reliably applied alone or exceptionally cannot be applied at all”,[279] the Special
Commissioners ultimately relied on the profit split method, in the absence of suitable comparables.
Notwithstanding the reforms, the cases on division 13 may still provide assistance. For instance, the OECD Guidelines indicate a
preference for identifying comparable transactions to establish the arm’s length price, despite having moved away from a hierarchy
of methods.[280] Indeed, the Full Court in the SNF Appeal reasoned that the OECD Guidelines are not so rigid as to require the
use of near-identical comparable transactions when determining the arm’s length price under the CUP methodology.[281] Rather,
the Court observed that the OECD Guidelines recommend that reasonably accurate adjustments be made to eliminate material
differences in comparable transactions.[282] The requirement for flexibility in applying subdivision 815-A also featured in the
Chevron Appeal.[283]
3.4. Advantages and disadvantages

In Australia, litigation is not for the faint hearted; it is generally expensive,[284] and the outcomes can be very uncertain.
Taxpayers contemplating litigation with the Commissioner need to focus their attention on three main areas – facts, evidence and
advocacy.[285]
In transfer pricing litigation, the evidence that a taxpayer is able to present to prove the facts it is asserting is of particular
importance. Taxpayers contemplating litigation need to recognize that material that might satisfy the requirement to have
maintained supporting documentation from an administrative perspective may not satisfy their evidentiary burden of proof in court.
In terms of the forum, the AAT may be preferred by some taxpayers because of its ability to exercise the discretions available to
the Commissioner. On the other hand, the Federal Court is more likely to adopt a stricter approach to evidence that may favour
an appropriately prepared taxpayer and, in the context of subdivisions 815-B to D, there may no longer be the same advantage of
going to the AAT in terms of the exercise of the Commissioner’s discretions because of the self-assessment nature of the regime.
As with audits, good preparation and clarity around objectives remain the keys to success in litigation.
274. AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v Glencore Investment Pty Ltd, at para. 153, per Middleton and Steward JJ. See also AU: FCAFC, 6
Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at paras. 277 and 293, per Thawley J.
275. Sec. 815-820 ITAA 97; and AU: FCAFC, 6 Nov. 2020, 187, Commissioner of Taxation v. Glencore Investment Pty Ltd, at para. 153.
276. UK: FTT, 22 Apr. 2009, 31, DSG Retail Limited v. The Commissioners for Her Majesty’s Revenue and Custom.
277. UK: FTT, 22 Apr. 2009, 31, DSG Retail Limited v. The Commissioners for Her Majesty’s Revenue and Custom, at para. 77.
280. OECD Guidelines 2010, at para. 2.3, which provides that if CUP methodologies and other methodologies can be applied in an equally reliable way then the CUP
method is preferred.
283. AU: FCAFC, 241 Apr. 2017, 62, Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, at 90 per Chief Justice Allsop.
284. For instance, the Chevron case was heard over 5 weeks and involved some 20 expert witnesses (albeit that much of their evidence was rejected).
285. S. Grieve & B. Andriske, The winning recipe in tax litigation: what every taxpayer should know (9 Aug. 2012).

4. Mutual Agreement Procedure and Arbitration

Each of Australia’s tax treaties includes a mutual agreement procedure (MAP) article.[286] Although the specific terms may vary,
generally, the MAP article enables an Australian taxpayer to initiate the process of review where the taxpayer considers that the
actions of either (or both) treaty partner(s) have resulted or will result in (the risk being probable and not merely possible) double
taxation.[287]
In this regard, it is important to take into account the BEPS Action 14 Final Report: Making Dispute Resolution Mechanisms More
Effective. [288] The report discusses the obstacles that prevent countries from resolving treaty-related disputes under the MAP and
recommends measures to overcome such obstacles, including a set of minimum standards (the Action 14 minimum standard) to
ensure that treaty-related disputes are resolved in a timely, effective and efficient manner.
The Action 14 minimum standard requires members to carry out timely and complete reporting of MAP statistics [289] based on a
new MAP statistics reporting framework.
The following table illustrates the extent to which MAPs were engaged in Australia from 2006 to 2021 (being the most recent
period for which statistics are available):
MAP cases involving Australia 2006-2021

Year Number of new cases Inventory of cases at end of year
2006 9 16
2007 13 23
2008 8 22
2009 19 23
2010 21 27
2011 10 21
2012 10 21
2013 8 23
2014 10 18
2015 14 22
2016 22 42
2017 18 44
2018 18 31
2019 24 35
2020 41 51
2021 36 63
The agreed reporting framework now distinguishes between “attribution/allocation” (also called “transfer pricing” cases) and
“other” cases. The following table illustrates to which extent the total MAP caseload was comprised of transfer pricing cases from
2016 to 2021:
Year Number of new transfer pricing cases Inventory of transfer pricing cases at end of year
2016 12 27
2017 8 15
2018 6 19
2019 9 19
286. See e.g. art. 26 Australia–United Kingdom tax treaty as defined in sec. 3AAA Int AA.
287. ATO, Mutual Agreement Procedure – When you can request a MAP, available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/mutual-
agreement-procedure/?page=3#When_you_can_request_a_MAP (accessed 12 July 2023).
288. OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report (OECD 2015), Primary Sources IBFD.
289. For details, see http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm (accessed 12 July 2023). The 2021 MAP statistics for Australia are
available at https://www.oecd.org/tax/dispute/2021-map-statistics-australia.pdf (accessed 19 June 2023).

Year Number of new transfer pricing cases Inventory of transfer pricing cases at end of year
2020 13 27
2021 10 34
According to the MAP statistics submitted by Australia,[290] in 2021, the average time to close transfer pricing cases started from
1 January 2016 was 36.91 months.[291] For non-transfer pricing cases, the average was 7.5 months and the average across all
cases was 11.03 months. Thus, for transfer pricing cases started from 1 January 2016, Australia’s competent authority closed
MAP cases on average in excess of 24 months (which is the target average period of time for closing MAP cases received on or
after 1 January 2016 under the Action 14 minimum standard).
4.2. Mutual agreement procedure

4.2.1. Notification process and conditions to the request
The two-stage approach outlined in the OECD Commentary on article 25 of the OECD Model Tax Convention on Income and
on Capital (OECD Model) has been adopted in Australia. The first stage involves the taxpayer submitting their request to the
competent authority of the taxpayer’s country of residence or nationality (or depending on the wording of the MAP article, the
competent authority of either country). For Australia, this is the ATO’s APA/MAP program management unit. The competent
authority will then consider whether the MAP request is justified, and if so, whether the ATO can provide unilateral relief.[292]
The ATO will only accept an application for a MAP if the application is submitted on time and contains sufficient information for
the ATO to determine the case. The information requested by the ATO is set out on its website and includes all relevant facts
and documents to support those facts and an analysis of all the issues required to be resolved. The taxpayer must also make a
statement that the taxpayer will provide any other documentation or information requested by the competent authority. The ATO
cautions that a MAP request may be rejected if not all of the requested information is provided.[293]
The taxpayer will also need to demonstrate that the risk of taxation not in accordance with a tax treaty is probable, and not merely
possible.[294] Where the Commissioner determines that unilateral action is not a satisfactory solution, the second stage of a MAP
requires the ATO to negotiate with the competent authority of the relevant treaty partner and to use its best endeavours to resolve
the case.[295] However, the ATO may defer a MAP request if the matter is subject to administrative or judicial review.[296] If a
taxpayer is dissatisfied with the agreement reached under MAP, the competent authorities can finalize the MAP case without
implementing the agreement reached.[297] However, if an Australian Court or Tribunal decides an objection, the Australian
competent authority will abide by that decision and seek relief from the other competent authority.[298]
The competent authorities will seek to reach agreement through the exchange of position papers setting out their respective views
for the purposes of negotiation. They may also discuss the matter with each other directly. The ATO makes it clear that whilst a
taxpayer may initiate the MAP process, it is not permitted to attend MAP negotiations. However, if agreed to by both competent
authorities, a taxpayer may be asked to present arguments in support of its case to both jointly. If consent is not given, the ATO
has stated that the Australian competent authority will nevertheless provide the taxpayer with an opportunity to present its case to
the Australian competent authority.[299]
290. For more information, see the OECD, Mutual Agreement Procedure Statistics per jurisdiction for 2021 – Breakdown per reporting jurisdiction for Australia,
available at https://www.oecd.org/tax/dispute/2021-map-statistics-australia.pdf (accessed 19 June 2023).
291. OECD, Mutual Agreement Procedure Statistics per jurisdiction for 2021 – Breakdown per reporting jurisdiction for Australia, available https://www.oecd.org/tax/
dispute/2021-map-statistics-australia.pdf (accessed 19 June 2023).
292. ATO, Mutual Agreement Procedure – The MAP process, available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/mutual-agreement-
procedure/?page=1#The_MAP_process (accessed 12 July 2023).
293. ATO, Mutual Agreement Procedure – How you request a MAP, available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/mutual-
agreement-procedure/?page=1#Information_to_submit_with_your_request (accessed 19 June 2023).
294. ATO, Mutual Agreement Procedure – Conditions for requesting a MAP, available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/
mutual-agreement-procedure/?page=1#Conditions_for_requesting_a_MAP (accessed 12 July 2023).
295. ATO, Mutual Agreement Procedure – The MAP process, available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/mutual-agreement-
procedure/?page=1#Stage_2___Negotiating_with_the_CA (accessed 12 July 2023).
296. ATO, Mutual Agreement Procedure – Impact of domestic dispute resolution processes with the MAP process, available at https://www.ato.gov.au/business/
international-tax-for-business/in-detail/mutual-agreement-procedure/?page=1#Pursuing_Australian_domestic_remedies (accessed 19 June 2023).
international-tax-for-business/in-detail/mutual-agreement-procedure/?page=1#Objection_undecided_when_CAs_reach_agreement (accessed 12 July 2023).
international-tax-for-business/in-detail/mutual-agreement-procedure/?page=1#Court_or_tribunal_decisions (accessed 19 June 2023).
299. ATO, Mutual Agreement Procedure – How to Request a MAP, available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/mutual-
agreement-procedure/?page=1#You__the_taxpayer (accessed 19 June 2023).

In October 2016, the OECD launched the BEPS Action 14 peer review and monitoring process. This process is conducted by
the Tax Administration MAP Forum. The purpose of the peer review is to ensure the implementation of the minimum standard to
strengthen the effectiveness and efficiency of MAPs.
There are two stages to the peer review process. The first seeks to assess countries against agreed minimum standards according
to an agreed schedule of review. The second stage is directed at monitoring the follow up to any recommendations resulting from
the peer review at stage 1.[300]
The OECD has completed Stage 1 and Stage 2 monitoring for Australia. The Stage 2 peer monitoring report for Australia was
published on 15 April 2021.[301] It found that “almost all” of the deficiencies identified during the Stage 1 peer review process had
been addressed. The remaining deficiencies generally related to a number of Australia’s treaties not being consistent with the
minimum standard in Action 14. Australia has reported to the OECD that where the multilateral instrument (MLI) does not modify
a treaty to correct these deficiencies, it intends to update at least some of these to be compliant with Action 14 through bilateral
negotiations.
Other observations made in the Stage 2 peer monitoring report include:
- Australia did not provide any details regarding which of its treaty partners which are not implementing the MLI (and therefore
not brought in line with the Action 14 minimum standard) will be prioritized for bilateral treaty negotiations and whether all
such treaty partners are being considered for bilateral negotiations. It was recommended that Australia initiate negotiations
without further delay for such treaties; and
- Australia’s domestic “statute of limitations” (that is, the standard amendment period of either 2 or 4 years) means there is a
risk that a MAP agreement might not be capable of being implemented in cases where the relevant treaty does not contain
the equivalent of article 25(2) of the OECD Model Tax Convention or has not been modified by the MLI to incorporating
wording equivalent to article 25(2) into the treaty. However, the Stage 2 report notes that has not been a problem yet in
practice.
4.2.2. Time limits
Australian tax treaties generally adopt a 3-year time limit for initiating the MAP process, which commences from the time the
taxpayer is first notified of the actions giving rise to taxation that is not in accordance with the tax treaty.[302] In practice, this
notification time will usually be when the notice of assessment is issued by the ATO or an equivalent notice is issued by the tax
authorities in the treaty partner jurisdiction.[303]
As part of BEPS Action 14, countries (including Australia) have committed to resolve MAP cases within an average time of 24
months.[304] In this regard, the OECD reports that in 2021 the average time for Australia to close MAP cases which were started
after 1 January 2016 was 36.91 months for transfer pricing cases and 7.5 months for other cases.[305] For cases which were
started before 1 January 2016, the average time for Australia to close MAP cases in 2019 for attribution/allocation (i.e. transfer
pricing) cases was 57.26 months.[306] No MAP cases started before 1 January 2016 (of which Australia has 3 cases) were closed
during the 2021 calendar year.[307] It has, however, historically been recognized that “the time taken to reach agreement can be
frustratingly long and under the MAP there is no guarantee that a solution will be found”.[308]
300. See OECD, BEPS Action 14 peer review and monitoring, available at https://www.oecd.org/tax/beps/beps-actions/action14/ (accessed 12 July 2023).
301. The report is available at https://www.oecd.org/tax/beps/making-dispute-resolution-more-effective-map-peer-review-report-australia-stage-2-da7fc990-en.htm
(accessed 12 July 2023).
302. As part of the BEPS Action 14 minimum standard, countries have made a general commitment that taxpayers should be able to present MAP requests within 3
years from the first notification of the action resulting in taxation.
303. Note that para. 21 of the Commentary on Article 25 of the OECD Model (2017) states that the time of first notification should be interpreted in the way
most favourable to the taxpayer. See also https://www.ato.gov.au/business/international-tax-for-business/in-detail/mutual-agreement-procedure/?
page=1#Time_limit_for_requesting_a_MAP (accessed 19 June 2023).
304. See Recommendation 1.3 of the OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report (OECD 2015),
Primary Sources IBFD. See also https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Mutual-agreement-procedure/?
page=1#Timeframes_for_resolving_a_MAP_case (accessed 12 July 2023).
305. OECD, Mutual Agreement Procedure Statistics per jurisdiction for 2021 – Breakdown per reporting jurisdiction for Australia, available at https://www.oecd.org/tax/
dispute/2021-map-statistics-australia.pdf (accessed 19 Jun 2023).
306. OECD, Mutual Agreement Procedure Statistics per jurisdiction for 2019 – Breakdown per reporting jurisdiction for Australia, available at http://www.oecd.org/tax/
dispute/2019-map-statistics-australia.pdf (accessed 12 July 2023).
307. OECD, Mutual Agreement Procedure Statistics per jurisdiction for 2020 – Breakdown per reporting jurisdiction for Australia available at https://www.oecd.org/tax/
dispute/2021-map-statistics-australia.pdf (accessed 19 June 2023).
308. J. Owens, Should the Arm’s Length Principle Retire?, 12 Intl. Transfer Pricing J. 3, p. 100 (2005), Journal Articles & Opinion Pieces IBFD. See also H.
Hamaekers, Arm’s Length – How Long?, 8 Intl. Transfer Pricing J. 2, p. 36 (2001), Journal Articles & Opinion Pieces IBFD.

Further, because MAPs are not necessarily well defined and involve multiple parties, there is potential for taxpayers to incur
significant costs in gathering materials and responding to requests, as well as fees paid to external advisors for assistance in
attempting to manage the process.
4.2.3. Penalties and interest

The Commissioner may unilaterally determine the amount of a taxpayer’s taxable income or losses for a year of income to be of
such amount as may be appropriate to: (i) prevent double taxation of the profits by the treaty partner; and (ii) be in accordance with
the agreement.[309] The Commissioner may amend an assessment at any time to give effect to the determination.[310]
Note that penalties and interest are specifically excluded from the definition of “tax” in Australia’s tax treaties and so are not eligible
for double tax relief under the MAP procedures.[311]
4.3. Arbitration
4.3.1. Arbitration articles in Australia’s tax treaties
The Australia-New Zealand tax treaty, the Australia-Switzerland tax treaty and the revised Australia-Germany tax treaty are the
only Australian tax treaties to include an arbitration provision in the MAP article.[312]
Arbitration under the revised Australia-Germany tax treaty is available for unresolved MAP issues concerning (i) withholding tax
on income derived on or after 1 January 2017, and (ii) income tax on income derived on or after 1 July 2017, when the Australia-
Germany tax treaty came into force in respect of withholding tax and income tax respectively. Under the arbitration clause in the
Australia-Germany tax treaty, if the competent authorities of each country are unable to reach agreement, the taxpayer may refer
the matter to arbitration once 2 years have elapsed from the time that the case was first presented by one competent authority to
another (i.e. essentially after MAP has failed).
Arbitration under the Australia-Switzerland tax treaty is available for unresolved MAP issues concerning (i) withholding tax on
income derived on or after 1 January 2015, and (ii) income tax on income derived on or after 1 July 2015, when the Australia-
Switzerland tax treaty came into force in respect of withholding tax and income tax respectively. Under the Australia-Switzerland
tax treaty, the taxpayer can only refer the case to arbitration after 3 years have elapsed.
The arbitration provision in the Australia-New Zealand tax treaty is limited to unresolved issues of fact and issues which the
government of Australia and the government of New Zealand agree, in an Exchange of Notes, shall be covered.[313] However, the
arbitration provision has now been modified to provide for mandatory binding arbitration by the MLI.
For any of Australia’s tax treaties where the arbitration process is not set out in the MLI (i.e. the Switzerland and Germany treaties),
the details of the arbitration process are to be set out in a bilaterally concluded memorandum of understanding. On 15 September
2020, the Australian and Swiss competent authorities signed such a memorandum of understanding which outlines the procedural
and operational details of the MAP arbitration process.[314]
Following arbitration, the competent authorities are required to reflect the arbitration decision in the agreement that is put to the
taxpayer in respect of its case.[315]
The explanatory memorandum to the bill which introduced the arbitration clause into the Australia–New Zealand tax treaty states
that the amendment will “provide greater certainty for taxpayers in their tax affairs”.[316]
309. Sec. 24 Int AA.

310. Sec. 170(11) ITAA 36.
311. ATO, Mutual Agreement Procedure - Penalties, interest and debt recovery under MAP, available at https://www.ato.gov.au/Business/International-tax-for-
business/In-detail/Mutual-agreement-procedure/?page=1#Penalties__interest_and_debt_recovery_under_MAP (accessed 12 July 2023).
312. Int AA, New Zealand Convention, art. 25, effective from 1 July 2010; Int AA, Swiss Convention, art. 24; Int AA, German Convention, art. 25. The ATO maintains a
table of Australia’s tax treaties that include an arbitration provision at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Mutual-agreement-
procedure/?page=1#Arbitration (accessed 12 July 2023).
313. Art. 25(7) Int AA, New Zealand Convention.
314. See the Memorandum of Understanding on the Mode of Application of the Arbitration Process between the competent authorities of Australia and the Swiss
Confederation, entered into on 15 Sept. 2020, available at https://www.ato.gov.au/law/view/document?docid=MOU/Switzerland (accessed 12 July 2023).
315. See art. 25(6) and (7) Int AA, New Zealand Convention; and the Memorandum of Understanding on the Mode of Application of the Arbitration Process between
the competent authorities of Australia and the Swiss Confederation, entered into on 15 Sept. 2020, at para. 11.1, available at https://www.ato.gov.au/law/view/
document?docid=MOU/Switzerland (accessed 12 July 2023).
316. Explanatory Memorandum to International Tax Agreements Amendment Bill (No. 2) 2009, para. 5.11.

It should be noted that a decision reached through arbitration does not bind the Commissioner in respect of future cases. This is
because the Commissioner must administer the tax laws as enacted and cannot be prevented from exercising the powers and
discretions available to him under the tax laws.[317]
4.3.2. Australia’s tax treaties and the MLI

Australia is also a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and
Profit Shifting (the MLI). Australia ratified the MLI on 26 September 2018.[318] On 24 August 2018, the Treasury Laws Amendment
(OECD Multilateral Instrument) Act 2018 received royal assent and became law, giving the MLI the force of law in Australia. The
MLI entered into force in Australia on 1 January 2019.
The positions agreed to by Australia include the adoption of articles 18-26 (the arbitration articles), subject to the following
conditions:
- disputes which have been the subject of a decision by a court or administrative tribunal will not be eligible for arbitration, or
will cause an existing arbitration process to terminate;
- breaches of confidentiality by taxpayers or their advisors will terminate the arbitration process; and
- disputes involving the application of Australia’s general anti-avoidance rules (i.e. Part IVA) are excluded from the scope of
arbitration.[319]
Australia’s treaty partners which have also chosen to apply the arbitration articles currently include, but are not limited to, France,
Japan, New Zealand, Singapore and the United Kingdom.[320] Based on known MLI positions, the ATO expects 17 of Australia’s
tax treaties to eventually be modified by the MLI to provide for mandatory binding arbitration.[321] Whether arbitration under the MLI
will be available for MAP issues presented prior to the MLI arbitration provisions taking affect will depend on the positions taken by
each jurisdiction.[322]
The MLI contemplates that details of how the MLI arbitration articles will be applied are to be mutually agreed between the relevant
competent authorities (that is, Australia and the relevant treaty partner).[323] Australia entered into such a competent authority
agreement with Belgium[324] on 3 March 2021 and the United Kingdom[325] on 21 May 2021.
Australia has selected final offer (i.e. “baseball”) arbitration as its preferred or default method for arbitration.[326] This allows each
jurisdiction to submit a proposed resolution and position paper for the issue in dispute to the independent arbitration panel.[327] The
panel then selects one of the proposed resolutions as the resolution for the case.
However, notwithstanding Australia’s adoption of the final offer arbitration process, where Australia’s treaty partner (for example,
Japan or Malta) has adopted the “independent opinion” arbitration process, that process will be applied instead of the final offer
process. Under an “independent opinion” process, the arbitration panel will hand down a final arbitration decision having regard
317. AU: HCA, 5 Nov. 1951, 84, Federal Commissioner of Taxation v Wade [1; AU: FCA, 22 May 1992, 313, AGC (Investments) Ltd v. Commissioner of Taxation; AU:
FCAFC, 24 Oct. 2013, 119, Macquarie Bank Limited v. Commissioner of Taxation, para. 11 (per Justice Middleton, Justice Pagone, and Justice Davies).
318. Australia – Status of List of Reservations and Notifications upon Deposit of the Instrument of Ratification, Acceptance or Approval, available at http://
www.oecd.org/tax/treaties/beps-mli-position-australia-instrument-deposit.pdf (accessed 12 July 2023).
319. Department of Treasury, Australian Government, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting,
available at https://treasury.gov.au/tax-treaties/multilateral-instrument (accessed 12 July 2023). See also http://www.oecd.org/tax/treaties/beps-mli-position-
australia.pdf (accessed 12 July 2023) and Australia - Status of List of Reservations and Notifications upon Deposit of the Instrument of Ratification, Acceptance
or Approval, available at http://www.oecd.org/tax/treaties/beps-mli-position-australia-instrument-deposit.pdf (accessed 12 July 2023).
320. For details on which other counties have chosen to apply the arbitration provisions of the Multilateral Convention, see the OECD’s MLI Matching Database –
Matrix of Options and Reservations, available at https://www.oecd.org/tax/treaties/mli-database-matrix-options-and-reservations.htm (accessed 12 July 2023);
and ATO, Mutual Agreement Procedure – Arbitration in Australia’s Tax Treaties, available at https://www.ato.gov.au/Business/International-tax-for-business/In-
detail/Mutual-agreement-procedure/?page=1#Arbitration (accessed 19 June 2023).
321. ATO, Mutual Agreement Procedure – The MLI and arbitration, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Mutual-
agreement-procedure/?page=1#Arbitration (accessed 19 June 2023).
322. ATO, Mutual Agreement Procedure – MAP cases presented before arbitration provisions take effect, available at https://www.ato.gov.au/Business/International-
tax-for-business/In-detail/Mutual-agreement-procedure/?page=1#MAP_cases_presented_before_arbitration_provisions_take_effect (accessed 12 July 2023).
323. OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (7 June 2017), Treaties & Models IBFD,
art. 19(10).
324. Available at http://ato.gov.au/law/view/document?DocID=MOU/Belgium&PiT=99991231235958, (accessed 12 July 2023).
325. Available at https://www.ato.gov.au/law/view/document?DocID=MOU/UK&PiT=99991231235958, (accessed 12 July 2023).
326. OECD, Australia – MLI Arbitration Profile as of 28-06-2022, available at http://www.oecd.org/tax/treaties/beps-mli-arbitration-profile-australia.pdf (accessed 12
July 2023).
327. ATO, Mutual Agreement Procedure – Arbitration Process, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Mutual-
agreement-procedure/?page=1#Arbitration_process (accessed 12 July 2023).

to the position papers submitted by each jurisdiction, the applicable provisions of the relevant treaty and the domestic law of each
jurisdiction.[328]
5. Advance Pricing Agreements

Australian taxpayers can seek three types of advance pricing agreements (APAs): unilateral, bilateral and multilateral. Unilateral
APAs are negotiated between the Australian taxpayer and the ATO under the Commissioner’s general power to administer
the Australian income tax law.[329] Bilateral and multilateral APAs are negotiated between the ATO and the tax authority of one
(bilateral) or more (multilateral) foreign jurisdictions at the application of the taxpayer under the MAP article in the applicable tax
treaty (see section 4.2.).
Australia has a relatively mature APA program, which was established in 1991.[330] Over the years, the ATO has demonstrated a
high level of commitment to the program and has a strong history of concluding APAs.
The following table presents the number of unilateral and bilateral/multilateral APAs completed each fiscal year until 2021/2022
and the number of active APAs at the end of the relevant year:[331]
Figure 4: Unilateral and bilateral/multilateral APAs completed per fiscal year
Year Multilateral Bilateral Unilateral Total Active APAs
2011/12 – 22 32 54 156
2012/13 – 26 10 36 166
2013/14 – 14 21 35 175
2014/15 – 19 12 31 148
2015/16 – 22 19 41 131
2016/17 – 6 10 16 114
2017/2018 1 12 11 24 110
2018/2019 - 14 17 31 116
2019/20 - 12 15 27 117
2020/21 - 7 6 13 101
2021/22 1 16 8 25 89
As can be seen, the number of active APAs has been declining considerably since 2013/14.
In 2015, the ATO issued a practice statement, Practice Statement Law Administration (PS LA) 2015/4, which provides guidance
on the approach that the ATO will take into determining eligibility to participate in the APA program. This includes a triage review
from a whole of ATO perspective.[332]
In January 2022, the ATO announced that, whilst it remained committed to its APA program, it would undertake a review of the
program in 2022.[333] The ATO published its Findings Report in relation to the review in June 2023. The report summarizes various
aspects of the feedback on the APA program which the ATO received during the consultation process and makes eight sets of
recommendations which broadly relate to:
(1) refocusing the scope of the APA program. This is intended to ensure that the program efficiently delivers prospective transfer
pricing certainty and assurance and improve the APA experience;
328. ATO, Mutual Agreement Procedure – Arbitration process, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Mutual-agreement-

procedure/?page=1#Arbitration_process (accessed 12 July 2023).
329. Sec. 1-7 ITAA 97.
330. PricewaterhouseCoopers Legal, ATO Review of Advance Pricing Arrangements Program, p. 9 (May 2008) (PwC Review).
331. ATO, Advance Pricing Arrangements – APA and MAP statistics, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Advance-
pricing-arrangements/?page=13#APA_and_MAP_statistics (accessed 12 July 2023).
332. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (23 July 2015), available at https://www.ato.gov.au/law/view/
document?Docid=PSR/PS20154/NAT/ATO/00001 (accessed 12 July 2023).
333. See ATO, We are reviewing the advance pricing arrangement program, available at https://www.ato.gov.au/Business/Business-bulletins-newsroom/International/
We-are-reviewing-the-advance-pricing-arrangement-program/ (accessed 12 July 2023).
392A. See ATO, Findings report APA program review (QC72947) available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Findings-
report-APA-program-review/ (accessed on 5 July 2023).

(2) setting out clearer APA program entry criteria (which was consistently requested by those consulted by the ATO) by
extending the guidance in PSLA 2015/4. These recommendations are intended to improve taxpayers’ experiences and
ensure the ATO’s resources are focussed on cases which best align with the scope of the APA program;
(3) better defining collateral issues, which the ATO anticipates will allow for a more coherent response to collateral issue
resolution and an increased understanding of collateral issues within the ATO and the broader market;
(4) outlining how to address collateral issues, intended to set a clear pathway for progressing through each of the APA stages
where a collateral issue is identified;
(5) resolving collateral issues, intended to introduce a uniform process with established and mutually agreed timeframes for
resolving collateral issues;
(6) clarifying the principles for when an APA will be exited from the program;
(7) setting out the mutual obligations for both the ATO and applicants whilst in the APA program; and
(8) delivering governance improvements in relation to the APA program.392A
5.2. Advance pricing agreement process

5.2.1. Governmental agencies involved
In the case of unilateral APAs, the process is managed by the ATO, without the involvement of any other government agencies
pursuant to the Commissioner’s power of general administration.[334] In the case of bilateral or multilateral APAs, the ATO
negotiates with the relevant foreign tax authority or authorities to reach agreement pursuant to the MAP article of the relevant
treaty.[335]
5.2.2. Domestic regulations; bilateral or multilateral

There are no domestic regulations or legislation on APAs. However, the ATO has published a Practice Statement Law
Administration on the topic.[336] While Practice Statements are not legally binding,[337] they are useful as they provide information
on the ATO’s policy and approach. In respect of bilateral or multilateral agreements, the process may be modified by any specific
terms of the applicable tax treaty.
5.2.3. Coverage
The ATO will usually prefer an APA to deal with all or most of a taxpayer’s international related-party dealings.[338] However, the
scope of the transactions covered by an APA is the subject of negotiation.
Where collateral (non-transfer pricing) issues arise during the APA process (for example the operation of Australia’s general anti-
avoidance rules), the ATO will seek to resolve such issues in a separate but parallel process.[339]
5.2.4. Process
Seeking (and obtaining) an APA is a voluntary[340] and cooperative process. It is open to any party to withdraw at any stage during
the process, although there may be practical implications of doing so.[341] Accordingly, the process for obtaining an APA needs to
be approached differently to other interactions with the ATO (particularly a tax audit, although it should be acknowledged that the
level of questioning and requests for information from the ATO may at times seem audit-like).[342]
334. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), para. 20A. The Commissioner’s power of general
administration is contained in secs. 1-7 ITAA 97.
335. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 20B.
336. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021).
337. ATO, Practice Statement Law Administration (PS LA) 1998/1, Law Administration Practice Statements (17 Apr. 2018).
338. If the covered dealings only represent a small portion, in terms of value, of the taxpayer’s overall cross-border dealings, this may lead to rejection of an APA (ATO,
Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 7A).
339. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 13A-13F.
340. Although foreign businesses looking to invest in Australia may find that where the Treasurer considers the proposed investment poses a risk to Australia’s tax
revenues, entering into good faith negotiations with the ATO for an APA may be imposed as a tax condition of their Foreign Investment Review Board approval –
Foreign Investment Review Board, Guidance Note 12 – Tax Conditions, last updated 9 July 2021.
341. The ATO may subsequently use the factual information disclosed during the APA process (ATO, Practice Statement Law Administration (PS LA) 2015/4,
Advance Pricing Arrangements (30 Sept. 2021), at para. 11W).
342. See some of the concerns noted by the ATO at Comparison between audit and advance pricing arrangement features,
available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/advance-pricing-arrangements/?

The broad process for applying for, negotiating and obtaining an APA is set out in Practice Statement Law Administration (PS LA)
2015/4 and involves three main stages: early engagement, APA application and monitoring compliance. Within each stage, there is
a series of steps which are illustrated in the Attachment to PS LA 2015/4, replicated below:
page=4#Comparison_between_audit_and_advance_pricing_arrangement_features (accessed 12 July 2023). The ATO disagrees with the view that an APA is
another form of audit and on this website has set out its view on the key differences between an audit and an APA.

Figure 5: APA process

Each stage is outlined below.
Stage 1: Early engagement

The early engagement stage is initiated when a taxpayer provides a completed early engagement form containing the APA request
to the ATO’s APA/MAP Program Management Unit (PMU) and the PMU allocates the matter to an Engagement & Assurance
team in the PG&I division (APA team).[343] The APA request is then subject to a triage process within the ATO designed to assist
the PMU to determine whether an APA request can and should proceed further.[344]
If the PMU decides that the APA request should not proceed beyond the triage stage, the taxpayer can request an internal review
of that decision.[345]
If the PMU allows the APA request to proceed further, the next step involves “preliminary discussions” involving one or more
meetings between the ATO and the taxpayer. The purpose of the preliminary discussions is to identify the scope of the proposed
APA and any other collateral issues and agree the approach for their resolution.[346] It is important for the taxpayer to provide the
ATO with the broad business context of the transactions that are proposed to be subject to the APA. In particular, the ATO will
want to be comfortable that, among other things, there is alignment between the economic activity and outcomes in Australia and
that the transactions are “commercial” (or, in other words, not tax driven).[347] Here, it is often helpful to be able to have relevant
people from the taxpayer’s business explain the transactions and provide the business context.
Practice Statement Law Administration (PS LA) 2015/4 sets out the key issues that the ATO expects to cover in the preliminary
discussions.[348] These matters include addressing the scope and type of the APA (e.g. a unilateral, bilateral or multilateral APA).
Interestingly, included among the December 2020 updates to PS LA 2015/4 was the omission of a reference to addressing
timeframes during the preliminary discussions between the ATO and taxpayers.
Taxpayers will need to obtain the ATO’s agreement on these matters before proceeding, as well as ascertaining the areas of
key concern to the ATO. In particular, taxpayers should identify any other tax issues – aside from transfer pricing – that the ATO
may be concerned with, and put forward a strategy for dealing with these issues without impacting the progress of the APA (e.g.
through a parallel process).
At the end of the preliminary discussions, the ATO will convene an APA request review workshop to assist the APA team leader
to make a decision on whether the taxpayer is to be invited to lodge a formal APA application.[349] A matter will proceed where the
APA team leader determines it should and a competent authority, acting in their capacity as senior ATO officer, agrees.[350]
If it is decided that the APA request should not proceed to submission of a formal application, the taxpayer will be invited to make
further representations before their APA request is rejected.[351] Where the taxpayer is subsequently not invited to submit an APA
application, the APA team must give written reasons and notify the taxpayer that they can seek internal review of that decision.[352]
Stage 2: APA application

The formal application will only be lodged once the ATO has provided the taxpayer with an invitation to lodge a formal APA
application. The formal application will, at a minimum, include details of:
- the transactions to be covered by the APA;

- the taxpayer’s transfer pricing analysis;
- the structures and allocation of functions within different parts of the taxpayer’s global group; and
- the critical assumptions proposed.[353]
To the extent possible, the taxpayer should seek the ATO’s endorsement of the matters to be included in the formal application
prior to lodgement.
343. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 10C.
344. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 10F.
345. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at paras. 10M and 11AE.
346. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para.10N.
347. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 7A.
348. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 10P.
349. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 10Q.
350. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 10W-10Y. If the competent authority
disagrees, the matter is referred to the head of the PMU for determination.
351. ATO, Practice Statement Law Administration (PS LA 2015/4), Advance Pricing Arrangements (30 Sept. 2021), at para. 10Z.
352. ATO, Practice Statement Law Administration (PS LA 2015/4), Advance Pricing Arrangements (30 Sept. 2021), at para. 10AA.
353. ATO, Practice Statement Law Administration (PS LA 2015/4), Advance Pricing Arrangements (30 Sept. 2021), at para. 11E.

As critical assumptions set the parameters for the operation of the APA, taxpayers should be careful to stipulate these clearly,
and explicitly address the consequences if they are not satisfied. The nature of the critical assumptions will depend on the
circumstances and objectives of the taxpayer, but can include such things as foreign exchange rates or transaction volumes
remaining within a particular range. The ATO will usually also require a critical assumption as to the representations made to it by
the taxpayer about the operation of the business.
Following receipt of the APA application, the ATO analyses and evaluates the material provided by the taxpayer and may seek
clarification of certain details from the taxpayer.[354] In practice, this should largely be a verification exercise, as the taxpayer should
have obtained ATO endorsement of its general approach prior to lodging the application. However, in some cases, the ATO may
request additional information in relation to either or both of the Australian and offshore businesses or undertake interviews with the
personnel of the taxpayer or tested party.[355]
The ATO will then undertake an internal “QA panel” to review the initial ATO position, provide negotiation parameters and review
progress of collateral issues.[356] Following the QA panel, the ATO will engage in negotiation which involves a discussion between
the taxpayer and the ATO.
For bilateral and multilateral APAs, this step involves negotiation between the ATO and the tax authorities in the other relevant
jurisdictions. The taxpayer is not entitled to be directly involved in this process.[357] However, the taxpayer should seek to be kept
informed of the progress of the negotiations and any issues that emerge. Once the APA is agreed between the tax authorities, a
letter of confirmation is sent to the taxpayer.
Assuming agreement is reached, the information that the ATO expects to be included in the APA is set out at paragraph 11X of
Practice Statement Law Administration (PS LA) 2015/4 and includes:
- the terms of the APA;

- the cross-border dealings covered;
- the agreed transfer pricing methodology; and
- the critical assumptions.[358]
If no agreement can be reached on a unilateral APA, the ATO will withdraw from negotiations and finalize the APA request.[359]
For bilateral and multilateral APAs, the taxpayer and its relevant related party are not technically parties to the concluded bilateral/
multilateral APA.[360] Rather, a number of separate arrangements are entered into between:
- the Australian taxpayer and the ATO;

- the ATO and the foreign tax authorities (being the bilateral/multilateral APA); and
- the related party and its jurisdiction’s relevant tax authority.
The taxpayer should ensure that its arrangement with the ATO is on precisely the same terms as the bilateral or multilateral APA to
avoid confusion.
If agreement cannot be reached on the terms of a bilateral or multilateral APA, the competent authorities involved may request
review by senior official(s) of the respective tax authorities.[361]
Stage 3: Monitoring compliance

Once an APA has been agreed and implemented, the taxpayer is required to lodge an annual compliance report (ACR) with
the ATO confirming the taxpayer’s continued compliance with the APA.[362] The content and timing of the ACR will be defined in
the APA, with the timing usually linked to the lodgement of the taxpayer’s Australian income tax return. While an APA does not
preclude the ATO from undertaking a risk review or audit of a taxpayer, the ATO will not generally undertake “active compliance”
354. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at paras. 11D-11J.
355. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 11H.
356. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 11K-11M.
357. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at paras. 11Q-11R.
358. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at paras. 11X-11Y.
359. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 11V.
360. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 2A.
361. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 11U.
362. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at paras. 12A-12B.

in relation to cross-border dealings covered by an APA unless the ATO believes the taxpayer has omitted or provided incorrect
information that is material and relevant.[363]
The attachment to Practice Statement Law Administration (PS LA) 2015/4 provides an indication of what must be included in the
ACR, which includes matters such as the actual results for the year, information to demonstrate compliance with the terms of the
APA and statements and supporting documents to demonstrate that the critical assumptions are still applicable.[364]
5.2.5. Fees
There are no fees payable by a taxpayer in applying for or entering into an APA.
5.2.6. Timing for filing requests for advance pricing agreements

An APA may be initiated by a taxpayer at any time, including before or during an audit, or may come about as a result of an audit.
5.2.7. Timeline for unilateral advance pricing agreement

The average number of months taken for unilateral APAs to be completed is set out in the table below:
APA 2017-18 2018-19 2019-20 2020-21 2021-22
Unilateral 27.79 23.27 28.92 32.92 29.41
5.2.8. Timeline for bilateral and multilateral advance pricing agreements

The average number of months taken for bilateral and multilateral APAs to be completed is set out in the table below:
APA 2017-18 2018-19 2019-20 2020-21 2021-22
Bilateral 35.50 31.67 36.85 50.26 23.55
Multilateral 61.60 61.60 - - 93.43
The increase in time taken for bilateral APAs to be completed to 50.26 months for the 2020/21 year was due to the fact that a
number of the cases finalized in that year had been placed on hold pending completion of other compliance work which, in the
context of the small number of cases finalized in that year, increased average completion times.[365]
5.2.9. Critical assumptions

An APA will be based on certain critical assumptions. Where circumstances relevant to the APA change and these critical
assumptions cease to apply, the ATO may seek to revise, modify, suspend or cancel the APA.[366]
In light of the impacts of significant worldwide events (e.g. COVID-19), taxpayers should review the terms of their APAs to assess
whether any critical assumptions are no longer valid, both in the short term and the longer term where those events are driving
structural changes to their business.
The ATO has encouraged taxpayers to engage proactively with the ATO where one or more critical assumptions are or are likely
to be no longer valid. Possible consequences of the critical assumptions no longer being valid, flagged by the ATO, include: (i)
“business as usual”, (ii) renegotiation of the APA over the impacted period, or (iii) suspension or modification of the APA for a set
period.[367]
5.2.10. Withdrawals
Either party may withdraw from the APA process at any stage. While there are no formal consequences which flow from
withdrawal, taxpayers should be aware that withdrawal may trigger an ATO audit where the ATO considers that there are
unresolved tax issues.[368]
363. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at paras. 16A-16B.
364. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (23 July 2015).
365. ATO, ATO and MAP statistics, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Advance-pricing-arrangements/?
anchor=APA_and_MAC_statistics (accessed 12 July 2023).
366. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 12D.
367. ATO, COVID-19 economic impacts on transfer pricing arrangements - Breaching an APA due to COVID-19, available at https://www.ato.gov.au/
Business/International-tax-for-business/In-detail/Transfer-pricing/COVID-19-economic-impacts-on-transfer-pricing-arrangements/?
page=1#Breaching_an_APA_due_to_COVID_19___160_ (accessed 12 July 2023).
368. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 11W.

In a bilateral or multilateral APA context, withdrawal from the APA process could also lead to double taxation, particularly where
there are issues which remain unresolved between the revenue authorities.
5.2.11. Agreement with taxpayer

As discussed in section 5.2.4., taxpayers will be provided with written confirmation of any agreement that is reached. This will be
in the form of a written document which sets out the terms of the APA or, in the case of bilateral and multilateral APAs, a letter of
confirmation from the ATO.
5.2.12. Revocation, revision and renewal

Any rights to revoke, review or renew the APA will be determined by the terms of the particular APA and the agreement reached
between the ATO and the taxpayer.
While renewals go through the same process as an initial APA request, the process may be streamlined where there are no
material changes to the relevant dealings and proposed terms of the APA.[369]
5.2.13. Annual compliance reporting

The ACR obligations of taxpayers are discussed at section 5.2.4.
5.2.14. Public disclosure of advance pricing agreements

There is no public disclosure of APAs by the ATO.
5.3. Practical experience with advance pricing agreements and advance tax
rulings
Taxpayers’ experiences with APAs have, to date, been mixed. In fact, one of the key criticisms of the ATO’s APA programme
in the past is that it has produced inconsistent results.[370] There was some concern that the ATO had become more reluctant
to enter into APAs and was refusing to renew expiring APAs.[371] In Practice Statement Law Administration (PS LA) 2015/4, the
ATO makes it clear that in deciding to enter an APA, it will place “explicit emphasis on assuring Australia’s tax base … to ensure
corporate profits are reflective of the true economic contribution made by the Australian based enterprise”.[372] This may explain the
downward trend in the number of APAs in operation.[373]
5.4. Advance pricing agreement in times of economic downturn

For taxpayers, there may be concern that an APA entered into before an economic downturn could become inappropriate because
it does not reflect changes in market conditions. Similarly, severe unexpected economic shocks, such as those brought about by
COVID-19, could also make the terms of an APA inappropriate or limit a business’ options for responding to that shock.
In addition, taxpayers that are considering, or are in the process of, entering into an APA will need to factor in the impact of
any future downturn on the selection of appropriate methodologies and benchmarking data, and be conscious that any critical
assumptions underlying the APA will remain in place for the duration of the APA (usually 3 to 5 years) and therefore need to
withstand any future changes in market conditions and prices.[374]
5.5. Special advance pricing agreements

In order to minimize costs, the ATO developed a simplified approach to transfer pricing for small and medium-sized
businesses.[375] However, this no longer forms part of the revised practice statement on APAs.[376] That said, small businesses
369. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at paras. 17A-17C.
370. PricewaterhouseCoopers Legal, ATO Review of Advance Pricing Arrangements Program, p. 2 (May 2008) (PwC Review).
371. A. Ting, Tax transparency trend forces companies to face reality, The Conversation (10 Feb. 2015).
372. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 3B.
373. ATO, Advance Pricing Arrangements, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Advance-pricing-arrangements/?
anchor=APA_and_MAC_statistics (accessed 12 July 2023). The ATO announced that it is undertaking a review of the program in 2022: see ATO, We are
reviewing the advance pricing arrangement program, available at https://www.ato.gov.au/Business/Business-bulletins-newsroom/International/We-are-reviewing-
the-advance-pricing-arrangement-program/ (accessed 12 July 2023).
374. ATO, Advance Pricing Arrangements – Breach of Critical Assumptions, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/
Advance-pricing-arrangements/?page=11#Breach_of_critical_assumptions (accessed 12 July 2023).
375. Practice Statement Law Administration (PS LA) 2011/1 (withdrawn), at chs. 3 and 4.
376. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021).

may benefit from the ATO applying flexibility to the APA process[377] or from the simplified transfer pricing record-keeping
obligations.[378]
5.6. Advantages and disadvantages

The main advantage of an APA is that it provides the taxpayer with a level of certainty in relation to the pricing of its international
dealings with related parties, subject to certain “critical assumptions”. Although an APA will not provide a taxpayer with a blanket
exemption from audit, the ATO will not generally seek to re-evaluate the agreed transfer pricing methodology where an APA is in
place. Interestingly, in the context of the retrospective introduction of subdivision 815-A, the ATO confirmed that it would not apply
that subdivision to disturb pricing where an APA was in place.[379]
The potential additional advantage a taxpayer may receive from entering into an APA with the ATO is that covered transactions
will generally be considered low risk from a DPT perspective. In a speech delivered by then Deputy Commissioner Mark Konza in
August 2018, Mr Konza stated:
While there are important differences between the application of the DPT and the transfer pricing rules, given some of the
similarities and the amount of work involved in preparing an APA, our engagement strategy sets out that: for new APAs,
covered transactions will generally be considered low risk from a DPT perspective for the period of the APA. In addition to
this, you can also request that a DPT clause is inserted into the APA which constitutes written assurance that we will not seek
to issue a DPT assessment in relation to the covered transactions for the income years covered by the APA.[380]
APAs are primarily designed to achieve certainty in relation to future transactions. However, they can also be used to achieve
certainty as to the pricing of past transactions (often referred to as a rollback) or as a mechanism for resolving transfer pricing
443A
issues that arise in the context of an audit. An additional potential benefit of an APA is the reduced compliance cost relative to
completing transfer pricing documentation on an annual basis or dealing with an audit.
The main disadvantages of an APA are the upfront time and cost required to complete it. On average, in the year that ended on
30 June 2022, unilateral APAs took 29.41 months to complete from the time of formal lodgement.[381] Further, there is a significant
amount of work involved in the early engagement phase. This means that an APA will not necessarily be appropriate for all transfer
pricing issues.
Bilateral and multilateral APAs typically take longer to complete than unilateral APAs (see section 5.2.8.).[382] They also involve
the added cost of dealing with tax authorities in multiple jurisdictions and the potential for protracted disagreement between them.
However, once concluded, a bilateral (or multilateral) APA provides the taxpayer with a higher level of certainty as to its pricing
outcomes.
APAs can be a valuable tool to achieve an increased level of certainty as to the pricing of related-party transactions, reduce long-
term compliance costs and assist in the resolution of a dispute with the ATO. However, APAs are not necessarily suitable in all
cases, and taxpayers need to weigh the benefits outlined above against the time and cost involved in obtaining an APA.
Factors to consider include:
- the value of the relevant related-party transaction;

- the nature of the related-party transaction and, in particular, whether it is likely to attract a high level of ATO scrutiny in any
event, such as a business restructure or where there are “non-vanilla” features which the ATO could take issue with; and
- the extent to which the pricing outcome is sensitive to external events. Although changes in external events can be built
into a critical assumption, it is undesirable to be forced to renegotiate an APA before it expires, as this undermines any cost
efficiency.
377. ATO, Practice Statement Law Administration (PS LA) 2015/4, Advance Pricing Arrangements (30 Sept. 2021), at para. 11AH.
378. Practice Statement Law Administration (PS LA) 2014/3.
379. The Senate Economics Legislation Committee, Report – Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 [Provisions], para. 3.14 (14 Aug.
2012).
380. Deputy Commissioner Mark Konza, PSM, Opening address to the Tax Institute's 2018 National Transfer Pricing Conference (Sydney, 8 Aug. 2018), The future of
transfer pricing: an Australian perspective.
443A.In the context of resolving an audit with the ATO, taxpayers may also be able to obtain forward looking certainty through settlement arrangements with the
ATO that mimic the effect of a unilateral APA.
381. ATO, Advance Pricing Arrangements, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Advance-pricing-arrangements/?
382. ATO, ATO and MAP statistics, available at https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Advance-pricing-arrangements/?

As with most things, preparation is the key to obtaining an APA on the terms sought. Taxpayers need to be clear in what they are
seeking from the APA, and proactive in keeping the process moving.
6. Recommendations
There are a number of factors that will influence the recommended approach to be adopted by any given taxpayer when
confronting transfer pricing issues in an Australian context.
First, there is the taxpayer’s size. Transfer pricing issues are complex, and therefore costly to manage. Larger taxpayers that are
well resourced are more likely to have the personnel, and the ability to fund the external assistance, required to deal with transfer
pricing in an appropriate manner and defend positions with which the ATO may disagree. In this regard, in recent times, many
large companies have been recruiting transfer pricing specialists into their in-house tax teams. By contrast, small to medium-sized
taxpayers may seek to take advantage of the simplification measures or otherwise reduce the risk of a dispute with the ATO by
following the ATO’s guidance and seeking to make themselves as small a target as possible.
Second, there is the issue of the taxpayer’s desired relationship with the ATO. Some taxpayers are attracted to certainty. For these
taxpayers, the use of a bilateral APA may well be desirable even though it is likely to be time consuming and more costly in the
short term (see section 5.2.). Other taxpayers might subscribe to the theory that it is better to beg for forgiveness, than to seek
permission.[383]
Third, it will be necessary for taxpayers that do not participate in the APA programme to take a view on the appropriate
methodology to be applied to determine the arm’s length consideration for a transaction. Unless and until the required transfer
pricing documentation is mandated by legislation, these taxpayers will need to determine how much time and money they are
willing to invest in assembling the material necessary to document and support their position.[384] While attempts have been made
to mitigate the potential for economic double taxation through the inclusion of the MAP article in all of Australia’s tax treaties, this
has its own costs and difficulties (see section 4.1) and will not always be the hoped-for panacea. That said, the move to incorporate
arbitration processes into the MAP (see section 4.3) and the support for arbitration as part of the OECD response to BEPS Action
14 on dispute resolution leaves some hope on the horizon that disputes between nations can be resolved within a realistic time
frame.
The difficulties confronting taxpayers here are unlikely to be unique to Australia, and to a large extent reflect the somewhat artificial
division of a corporation’s “life” into discrete tax periods, as well as the increasing globalization of business which transcends
the borders of nation states. A former senior ATO officer once suggested that the uncertainty involved “an opportunity to the well
advised”,[385] but the reality is that the vast majority of taxpayers take little joy in protracted disputes with the ATO. Further, in the
current environment, there can be reputational issues for multinationals that are seen to be too aggressive in their approach to
tax.[386]
7. Case Study
The Weight Resources group is a multinational group resident in Wonderland, a low-tax jurisdiction. The group is in the business of
developing, manufacturing and distributing weight-loss supplement products. One of their products is a weight-loss pill registered
under the trademark “Less is More”. It is the crème de la crème of weight-loss supplement products, and has proven to be one of
the group’s best sellers. It contains a secret active ingredient, known as “Minimynox”.
Facts:
The parent company of Weight Resources group (resident in Wonderland) discovered Minimynox (the active ingredient) at its
research facilities. It also developed the Less is More product in its commercial form there, obtained the necessary patents,
conducted all trials, invented the technology for the manufacture of the active ingredient, was the first to launch the product outside
Wonderland and has developed the worldwide marketing strategy.
383. This appears to be a saying coined by Rear Admiral Grace Murray Hopper. See E. Dickason, Remembering Grace Murray Hopper: A Legend in Her Own Time,
Chips, Department of the Navy information technology magazine, available at http://www.doncio.navy.mil/chips/ArticleDetails.aspx?id=2389 (accessed 12 July
2023).
384. As previously noted, even subdiv. 815-B does not mandate transfer pricing documentation, although the potential for a higher penalty will need to be considered.
385. J. Killaly, Transfer Pricing – Compliance Issues and Insights in the Context of Global Profit Allocation, presentation to Transnational Crime Conference, p. 8 (9-10
Mar. 2000).
386. For example, see B. Hall, Google’s tiny tax bill in Australia alarms Turnbull, The Australian (26 May 2012); H. Low & D. Ramli, Turnbull: Boost Google’s tax, The
Australian Financial Review (15 July 2013); N. Khadem, ATO’s Andrew Mills supports naming and shaming Australia’s top companies, The Australian Financial
Review (10 Sept. 2014); T. McIlroy, Multinational tax crackdown popular with voters, The Australian Financial Review (3 Apr. 2019); N Khadem, Labor and
Coalition ramp up pressure on multinational tax avoidance ahead of election, Australian Broadcasting Corporation (5 Apr. 2022); and B. Butler in The Guardian,
PwC told client it could cut Australian tax by $70m, court documents in privilege fight show (6 June 2022).

LocalCo is a company resident in the case study country, and a distributor of Less is More. It purchases the product in market-
ready form directly from its parent company. There is a licence agreement between LocalCo and its parent company, under which
LocalCo pays the parent a royalty (7% of sales) for the exclusive distribution rights in the case study country.
LocalCo took the lead in acquiring approval of regulatory authorities for bringing Less is More to the local market. It also
implemented the marketing strategies established by the parent company and introduced the product on the local market by
conducting on-site sales activities using its sales staff. The customer base includes first-tier (upper-end market) shops, private
clinics and wellness centres. Regulatory approval was obtained in 2013, and LocalCo began selling the product in 2014.
Profits for LocalCo are as follows (all figures in millions):
2013 2014 2015 2016 2017 2018
Sales 0 150 220 270 310 360
COGS 0 100 150 175 205 240
Gross profits 0 50 70 95 105 120
Gross profits (as a percentage of sales) N/A 33.3% 31.8% 35.2% 33.9% 33.3%
Operating expenses 25 50 60 70 71 77
Royalty expense 0 13.3 15.4 18.9 21.7 25.2
Net profits – 25 – 13.3 – 5.4 6.1 12.3 17.8
Net profits (as a percentage of sales) N/A – 8.9% – 2.5% 2.3% 4% 5%
Questions and answers[387]

Where Wonderland has a tax treaty with Australia
1. Based on the above facts, looking back, what action could LocalCo have taken to address the transfer pricing risks when it first
established operations and/or began to distribute “Less is More” through LocalCo (documentation, APA, etc.)? What would be the
relative advantages or disadvantages?
Taxation Ruling (TR) 2014/8 provides the ATO’s views on the documentation required by section 284-255 of Schedule 1 of the
TAA 1953.[388] In particular, LocalCo will need to ensure that the documentation is prepared before lodgement of their tax return,
and that it is readily and fully accessible by the Australian taxpayer (i.e. it will not be sufficient that the documentation is prepared
and held by the Weight Resources Group). Also, the documentation needs to contain all the necessary information to allow the
ATO to identify the arm’s length conditions and any variance to the actual conditions.
In addition, given the ATO’s current focus on profit shifting, in order to minimize the risk of a transfer pricing audit, LocalCo would
need to consider whether:
- the degree and quality of contemporaneous documentation deliver an appropriate (low) risk rating (see section 2.3.3.). Having
the right documentation in place from the start could avoid an audit. The preparation of robust documentation will, in most
instances, be cheaper and easier than entering into an APA; or
- to seek to enter into an APA. The APA may be either unilateral (between the ATO and LocalCo) or (where there is a treaty in
place between Wonderland and Australia) bilateral (see section 5.1.).
This decision may be a trade-off between certainty and the upfront cost and time of the process (see section 5.6.).
In weighing this trade-off, LocalCo should have regard to Practical Compliance Guideline (PCG) 2019/1. This practical compliance
guideline outlines the ATO’s approach to assessing the transfer pricing risk of inbound distribution arrangements[389] and the
ATO’s compliance approach based on the arrangement’s assessed risk weighting. The ATO will generally not allocate any
compliance resources to inbound distribution arrangements which are assessed as having a low risk weighting and the ATO will
be open to entering into APA discussions. In contrast, an arrangement which is assessed as having a high risk rating is more likely
387. Readers should note that the discussion of the case study below is based on the Australian transfer pricing rules applicable for tax years commencing on or after
1 July 2013.
388. ATO, Taxation Ruling (TR) 2014/8, available at https://www.ato.gov.au/law/view/document?DocID=TXR/TR20148/NAT/ATO/00001 (accessed 12 July 2023).
389. LocalCo will likely be categorized as a “Life Sciences” inbound distributor for the purposes of applying the practical compliance guideline
– see ATO, Practical Compliance Guideline (PCG) 2019/1, at paras. 15-26, available at https://www.ato.gov.au/law/view/document?

to be subject to compliance activity, with reviews prioritized for taxpayers which consistently suffer losses[390] (on the basis that
such arrangements pose a very high transfer pricing risk).
Broadly, PCG 2019/1 categorizes an inbound distribution arrangement by comparing the functions undertaken by the distributor
against categories of functions identified by the ATO as functions which incrementally generate value. Once a distribution
arrangement has been categorized, the distributor’s 5 year weighted average EBIT margin is compared against the ATO’s
benchmarked range (i.e. “profit markers”) for that category.
Having regard to the activities undertaken by LocalCo in the distribution of Less is More, LocalCo would likely be categorized as
a “Category 2” Life Science sector distributor as LocalCo both distributes the product and took the lead on obtaining regulatory
approval.[391] A Category 2 Life Science distributor with an average EBIT margin of less than 5.5% will be rated as having a “high”
risk. Assuming LocalCo’s net profit as a percentage of sales is a reasonable proxy for its EBIT margin, LocalCo would clearly
fall within the high risk zone given it has never realized a net profit of more than 5%. This means LocalCo is likely to find itself the
subject of review by the ATO. This, with the benefit of hindsight, militates in favour of LocalCo applying for an APA from when it
first established operations / began distributing Less is More.
2. Which transfer pricing method is likely to be most acceptable to the tax authorities based on the above facts, and why? What
factors are critical in making this judgment?
While subdivisions 815-B to D of the ITAA 97 do not prescribe a particular transfer pricing method, they do make specific
reference to profit in the determination of whether an entity received a “transfer pricing benefit”. Consideration of the overall
commercial outcome or profitability of the dealings between the entities is also required. Given this, it would appear that there
is a greater ability to use profit based methods than under the previous regime in division 13 of the ITAA 36. However, given
the requirement to interpret subdivisions 815-B to D consistently with OECD guidance, arguably the focus should remain on
transactions.
In light of this, the potential methods that could be applied are:
- CUP method. This method will be appropriate where reliable, independent comparables are available from internal or external
sources. In this case, it is not clear that there is a global market for the product. As LocalCo is the first to sell this product
in Australia, it may be difficult to identify comparables from external sources. However, appropriate comparables may be
available from internal sources if the Weight Resources Group sells its products to independent third parties (as was the case
in Re Roche and SNF; see section 3.3.);
- resale price method. The resale price method is likely to be appropriate in similar circumstances to the CUP method, but
where the comparables are not exactly the same (e.g. where the product sold is the same or similar but is marketed under a
different brand); and
- profit-based method. Subject to the discussion of the concerns raised in the cases on division 13 (see section 3.3.), it may
be appropriate to use a profit-based method in this case because the product in question “is unique or contains out-of-the-
ordinary intangibles”.[392] The most likely option would be the TNMM. The ATO considers the TNMM to be useful in valuing
profit attributable to intangibles, in particular in situations involving the licensing of intellectual property. In practice, the TNMM
is by far the most commonly applied pricing method. However, the ATO has also warned that care is needed where (as in this
case) one party owns a manufacturing intangible and the other has developed a marketing intangible. In such cases, the ATO
considers that the return on the intangibles needs to be allocated between the different intangible assets that are used.[393]
For completeness, whilst the ATO applies the TNMM for the purposes of its risk assessment under PCG 2019/1, the ATO
stresses this does not mean the ATO views the TNMM as the most appropriate method to be applied to inbound distributors.[394]
3. Could LocalCo apply for an APA in Australia? If so, which facts would be taken into consideration and which requirements and
documentation should be met/provided?
LocalCo could apply to the ATO for an APA. However, as set out at question 1, LocalCo’s distribution arrangements will likely be
categorized as having a “high” transfer pricing risk. Therefore, LocalCo will not be eligible to request a pre-qualified unilateral APA
process with the ATO, although it may still seek to enter into early engagement APA discussions.
390. ATO, Practical Compliance Guideline (PCG) 2019/1, at para. 32. The ATO has stated reviews will be prioritized for inbound distributors with an overall loss
position in the current and previous 2 income years.
391. ATO, Practical Compliance Guideline (PCG) 2019/1, at para. 76.
392. ATO, Taxation Ruling (TR) 97/20, Income Tax: Arm’s length transfer pricing methodologies for international dealings, at para. 3.52 (5 Nov. 1997), available at
https://www.ato.gov.au/law/view/document?LocID=%22TXR%2FTR9720%2FNAT%2FATO%22&PiT=99991231235958 (accessed 12 July 2023).
393. ATO, Taxation Ruling (TR) 97/20, Income Tax: Arm’s length transfer pricing methodologies for international dealings, at paras. 3.83-3.87 (5 Nov. 1997).
394. ATO, Practical Compliance Guideline (PCG) 2019/1, at para. 36, available at https://www.ato.gov.au/law/view/document?DocID=COG/PCG20191/NAT/
ATO/00001 (accessed 12 July 2023).

LocalCo should note that, as it has a high risk weighting, unless LocalCo expects its margins to improve, the ATO has cautioned
that concluding an APA is likely to be difficult. Further, if LocalCo intends to rely on the TNMM, the ATO and LocalCo will likely be
entering into APA discussions with “significantly divergent views on appropriate outcomes”.[395]
That said, given the likelihood of compliance action, seeking to enter into an APA could assist to mitigate LocalCo’s exposures to
adjustment, as well as provide an opportunity for LocalCo to defend its pricing outside of an audit context.
4. If the tax authorities were to look at LocalCo’s transfer pricing, what would be the process?
The process for the ATO in looking into LocalCo’s transfer pricing would be:
- a risk review focused on examination of the quality of the taxpayer’s documentation and the commerciality of its profit
outcome;
- audit of the taxpayer, in which the ATO compares its view of the arm’s length condition with the view taken by the taxpayer;
- the issue of an ATO position paper (with the opportunity for the taxpayer to respond and apply for limited internal review); and
- if agreement cannot be reached, the issue of an assessment (see section 2.3.3.).
Any dispute would then be dealt with in accordance with the usual dispute resolution process; the taxpayer could object to the
assessment and, if not allowed by the ATO, seek review of the decision by the AAT or appeal to the Federal Court (see section
3.2.).
5. What would be the areas of concern for the Australian tax authorities?
The ATO will be focused on determining whether the 7% royalty adequately reflects the role of the Australian subsidiary and its
contribution to the profit generated by the sale of the “Less is More” product. The ATO’s concerns will likely focus on the:
- initial losses;
- average return over the period in question;
- location of the related party, in a low-tax jurisdiction; and
- adequacy of the taxpayer’s documentation.
Although Wonderland developed the worldwide marketing strategy which LocalCo implemented in Australia, the ATO may also
examine the level of marketing activities undertaken by LocalCo to assess whether its marketing activities in Australia contribute
to the development or enhancement of the “Less is More” trademark and brand, and if so, whether those functions are properly
recognized and remunerated.[396]
Under subdivisions 815-B to D, it is no longer sufficient to determine the pricing of the transaction in place. As indicated in TR
2014/6, the ATO is of the view that subdivisions 815-B to D allow for reconstruction or recharacterization of conditions in the
“exceptional circumstances” contemplated by the OECD Guidelines. Further, the approach of the Full Federal Court in the
Glencore Appeal (see section 3.3.) that the conditions applying to a commercial or financial arrangement would include a “pricing
formula” which could thus be the subject of substitution without the presence of any “exceptional circumstances” may well find
favour in the application of subdivisions 815-B to D. It is also clear from the recent Court decisions on the operation of subdivision
815-A that the Court will not shy away from forming its own views on what the arm’s length conditions to a transaction might be and
how those conditions differ from the actual conditions. Accordingly, LocalCo should be mindful that the Commissioner (or indeed a
Court) may seek to reconstruct transactions to fit with his (or its) assessment of the commercial realities and so should be prepared
to defend why LocalCo considers the actual conditions to be at arm’s length or why any differences between the actual conditions
and the arm’s length conditions do not result in LocalCo obtaining a relevant Australian tax benefit.
6. Is it likely that the Australian tax authorities would make a primary adjustment? If so, why and based on what factors? What
other actions might they take?
In Australia, the likelihood of the Commissioner making a primary adjustment depends largely on the evidence that LocalCo is
able to present to the ATO and whether, based on that evidence, the ATO considers that the transactions provide a “commercially
395. ATO, Practical Compliance Guideline (PCG) 2019/1, at para. 57.

396. Noting that the ATO has flagged in TA 2020/1 its concern regarding whether the functions performed, assets used and risks assumed by Australian entities in
connection with the DEMPE of intangible assets are properly recognized and remunerated for Australian transfer pricing purposes.

realistic result”. However, given the divergence between LocalCo’s profit margin and the ATO guidelines in PCG 2019/1, it may be
difficult to convince the ATO that the transactions do in fact provide a “commercially realistic result”.[397]
In the event that an adjustment results in an increase in the amount of tax due, a statutory penalty of between 10% and 50% (plus
interest)[398] may also be imposed. However, penalties can be as low as 2% if LocalCo makes voluntary disclosure before they are
informed of the audit (see section 2.3.9.).
Subdivisions 815-B to D explicitly link transfer pricing documentation requirements with penalties.[399] LocalCo would not
be regarded as having a “reasonably arguable position” if it does not have contemporaneous documentation to support its
calculations of taxable income based on arm’s length conditions. Without a reasonably arguable position, LocalCo would be liable
for a base penalty of 25% or 50% applied to the transfer pricing adjustment amount.
7. If a primary adjustment is made by the local tax authorities, what options would realistically be available for LocalCo if (a) it
does not agree with the adjustment or (b) it does agree with the adjustment but does not wish to be subject to double taxation?
If LocalCo does not agree with the adjustment, it could object against the assessment and, if this is not allowed by the ATO, seek
review of the adjustment by the AAT or appeal the ATO’s decision to the Federal Court (see section 3.2.).
If LocalCo does in fact agree with the adjustment but does not wish to be subject to double taxation, then, where a treaty exists,
LocalCo could seek to engage the MAP, which may be more successful if the treaty provides for arbitration or arbitration is
otherwise available under the OECD MLI (see section 4.3.).
Where Wonderland has no tax treaty with Australia

Subdivisions 815-B to D apply to dealings with foreign parties, whether or not a treaty is in place.
One consequence of there being no treaty between Australia and Wonderland would be that there is no agreed MAP procedure
(and therefore, no procedure for entering into a bilateral or multilateral APA, although a unilateral APA is still available).
Whether an EU country or not

In practice, it should make no real difference whether Wonderland is an EU country.

398. Assuming that the global revenue of the Weight Resources group is less than AUD 1 billion.
399. Sec. 284-160, sch. 1 TAA 1953.

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Australia - Transfer Pricing & Dispute Resolution - Country Tax Guides (Last Reviewed: 31 May 2023)

Transfer Pricing & Dispute Resolution

IBFD Tax Technical Editor

1.2. Overview of local dispute procedure

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1.2.1. Availability of international procedures and relief from double taxation

1.2.2. Tax authorities

1.2.2.2. Other relevant players

1.2.2.3. Programmes to ensure consistent application of TP policies and penalties

1.2.2.4. Downward TP adjustments procedure

5. ATO, Organisational Chart, available at https://www.ato.gov.au/uploadedFiles/Content/CR/downloads/n75148_ATO_organisational_structure.pdf (accessed 20

Exported / Printed on 22 Nov. 2023 by Maria.L.Rojas@ar.ey.com.

1.2.2.5. Contact information

1.2.2.6. Comment on proﬁle and aggressiveness

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2.2. Primary current controversies

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- inadequate information to support transfer pricing positions; and

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2.3. Audit process and milestones

2.3.2. Joint audits

2.3.3. Audit timeline

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General information gathering

- has signiﬁcant levels of international dealings with related parties;

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Figure 1: Risk of a transfer pricing audit

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Figure 2: ATO transfer pricing review and audit process

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2.3.4. Rights and obligations of taxpayers

2.3.5. Rights and obligations of tax authorities

2.3.6. Information used in tax audits

2.3.7. Conﬁdentiality of information

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2.3.8. Right of access to information

2.3.10. Access to foreign-based information

- by relying on the exchange of information article in the applicable tax treaty;[90]

83. The consultation paper is available at https://treasury.gov.au/consultation/oecd-proposals-for-mandatory-disclosure-of-tax-information/ (accessed 20 July 2023).

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2.3.11. Burden of proof

2.3.12. Statute of limitations

2.3.13. Information requests

2.3.14. Solicitor-client privilege

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2.4. Recommendations for taxpayers during a tax audit

- adopt a professional approach;

3. Appeals and Litigation

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3.2. Appeals and litigation process

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- the relative strength of the competing positions;

- there is a contentious point of law requiring clariﬁcation;

- the ATO’s pre-settlement position is greater than AUD 50 million;

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3.3. Notable court decisions

143. ATO, Independent Assurance of Settlements program, available at https://www.ato.gov.au/General/Dispute-or-object-to-an-ATO-decision/In-detail/Avoiding-and-

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SNF: Methodology and relevance of sustained losses