The Australian Taxation Office is aware that the economic downturn caused by the COVID-19 pandemic will affect some taxpayers’ profitability, and it will take supporting evidence into account in its transfer pricing enforcement activities.
According to a June 19 ATO statement, the agency will consider evidence of the COVID-19 crisis’s effects on individual companies in assessing their transfer pricing documentation. The ATO’s position will be based on the taxpayer’s function, assets, and risks; the economic circumstances and contractual arrangements; and evidence of COVID-19’s effects on specific product or service lines and overall business strategies, the statement says. It adds that taxpayers should document any changes in transfer pricing policy as they are made.
“The effects of COVID-19 on the Australian economy are not yet known or quantifiable and the impacts on specific industries and businesses will vary widely. We acknowledge that some businesses will be negatively affected by COVID-19, which may lead to a reduction in revenues, increased expenses, and changes to profit outcomes,” the statement says. “Emphasis will be placed on gathering evidence to support any changes to, or impacts on, the business as a result of COVID-19.”
The statement acknowledges that typical transactional net margin method benchmarking may not accurately reflect an arm's-length result under current economic conditions, noting that the ATO will focus on evidence of what the taxpayer’s revenue, costs, and profit would have been in the absence of the COVID-19 pandemic. Specific forms of evidence that may be relevant include a detailed analysis explaining the variance between projected and actual revenue and expenses, an explanation of the basis for any increased cost allocation or reduction in sales, and details regarding the effects of any government assistance relevant to the group’s Australian operations.
However, the statement says the ATO is not reviewing its 2019 practical compliance guideline on inbound distributors, which sets risk self-assessment categories based on fixed operating margin thresholds that vary by functional profile and industry.
The statement recognizes the potential effects of the COVID-19 crisis on advance pricing agreements that are either in place or under negotiation. If current economic conditions cause a breach in an existing APA’s critical assumptions or appear likely to do so, taxpayers should approach the ATO as soon as possible, according to the statement. In those cases, the agency will consider whether the APA should remain in place, be renegotiated for the period affected by the crisis, or be suspended or modified for a set period.
The ATO will still consider pending APA applications, but current conditions may prevent agreement for any taxpayers that have been severely affected, the statement says.
“If you're currently engaged with us in the APA process but don't have an agreed APA in place, we will continue to honor our commitment to work with you on your application,” the statement says. “If you are significantly affected by COVID-19, it may be difficult to progress the APA application without objective evidence of any impact experienced or high uncertainty around potential outcomes. In these cases, we'll discuss placing cases on hold or considering whether the APA process can be mutually ended.”
The ATO statement on the effects of COVID-19 on transfer pricing follows similar announcements by other agencies and organizations, including the IRS’s advance pricing and mutual agreement program. In early June, the OECD began a consultation with business groups requesting information regarding the issues of greatest concern to taxpayers and acknowledging the need for further guidance.