Updated: Sep 4, 2022
The draft Practical Compliance Guide PCG 2017/D4 (PCG) was released in 2017 to outline ATO’s risk assessment framework for related party financing arrangements with effect from 1 July 2017 and will apply to existing and newly created financing arrangements.
The PCG framework was released after the Chevron case. It is estimated that inbound loans to Australian taxpayers exceeded AUD 400 billion, and the ATO since has extended the focus even on small variations in debt pricing can have significant aggregated impacts on the tax revenues. The PCG sets out the ATO's view on compliance risks of cross-border related party financing and encourages companies to self assess within the framework. If companies want to mitigate actual or perceived risks as part of their tax governance processes, they will be encouraged to discuss the issue with the ATO although this is not mandatory for most taxpayers. The ATO will require companies to complete tax positions to provide information regarding their risk assessment conclusions.
It should be noted that the risk rating exercise is a separate exercise to determining whether a transfer pricing benefit has been obtained. The PCG however does not constitute a safe harbour. The framework adopts a similar approach to the recent PCG 2017/1 which deals with “marketing hubs”. A series of risk "zones," ranging from white to red apply to both outbound and inbound loans. The framework considers various factors and allocates a score against the answer for each factor (for each loan). The cumulative score for each loan will determine the risk zone.
For arrangements in higher risk zones, high quality transfer pricing documentation will also have to be in place to support the arm’s length nature of the arrangements.
If you have cross-border related party financing, do not get caught out on the increased audit reviews being conducted by the ATO. Contact us to know more.