International transfer pricing, essentially the pricing of intercompany transactions between international associated enterprises and the determination of the amount of income to be allocated to each party, is one of the most important international tax issues facing a multinational enterprise (MNE) in the 21st century. A corollary of the significant increase in global trade, especially via international inter-affiliate transactions, has been a rise in government concerns with the loss of potential tax revenue. Many tax authorities around the world are now aware of the necessity of safeguarding their tax base through stringent transfer pricing documentation rules and concomitant penalties for failure to comply with these rules, and Australia has proved to be no exception.
The Ernst & Young 2003 Global Transfer Pricing Survey , conducted biannually since 1997, confirmed trends identified in earlier surveys. Among these were the fact that transfer pricing is the major international tax issue facing MNEs and tax administrations alike, and the fact that the compliance aspects of transfer pricing outweigh other aspects in importance. Although MNEs have witnessed an era of economic uncertainty and a decline in the pace of expansion following the events of September 11, 2001, inter-affiliate trade has continued to maintain its significant role in the international economy. At the same time, revenue authorities around the world have been stepping up their efforts to scrutinise transfer pricing transactions. There has been an increase in audits as well as more aggressive legislative enforcement efforts, including increasingly burdensome transfer pricing documentation requirements and the imposition of onerous penalties for non-compliance with these requirements. In the US, for example, it has been said that:
In effect, Congress has transferred the burden of conducting a transfer pricing audit to taxpayers, has required that inter-company transfers be supported with complete documentation and has backed up these Regulations with heavy penalties.
Closer to home, Michael Carmody, the Commissioner of Taxation, has commented that:
Transfer pricing has been an area of Tax Office focus for some time and with globalisation and the significant increase in related party cross border transactions this will continue. Since 1999 we have undertaken more than 400 transfer pricing risk reviews and completed nearly 100 audits resulting in $615m additional tax and penalties being raised.
Australia was in fact one of the first of the world's major economies to introduce effective transfer pricing rules. In the past, MNEs in Australia merely set their transfer prices. Now they face onerous documentation rules, harsh penalties, and an increased risk of audit. Where the Australian Taxation Office (ATO) does not agree with an MNE's transfer pricing policy, as is increasingly the case, this can lead to lengthy and expensive disputes. The Australian Tax Office is becoming internationally renowned for being "among the most aggressive in pursuing transfer pricing audits."
The Commissioner has further commented that in relation to the ATO's 2004-05 Program, the plan is to use just over 50 per cent of its budget on compliance, with around two-thirds of this amount being directed at 'active compliance' , in other words on risk identification and resulting reviews, audits, investigations and prosecutions. The number of staff engaged in active compliance in 2004 is up by 600 over the previous year. The aggressive review and enforcement of transfer pricing documentation regulations forms part of this focus on taxpayer compliance, and is clearly on the rise in Australia.
