Submission No. 134 Back to full list of submissions
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5 Myra Avenue

17 April 1999
The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place

The following comments are made on suggestions contained in Chapter 33 of the discussion paper for the Review of Business Taxes which examines possible improvements to the administration of the transfer pricing rules.

Paragraphs 33.43-44 support the application of transfer pricing rules under self assessment. This is a sensible measure. However, at paragraph 33.45 the question of detailed rules for the application of arm’s length methods is raised.

I submit that the codification of rules for the application of transfer pricing methodologies is not appropriate.

By way of explanation;

  • Transfer pricing is principally the application of a legal principle to unique facts and circumstances, generally with limited data as to what independent parties would do.
  • The internationally accepted methodologies usually have to be applied flexibly in order to obtain a result consistent with the arm’s length principle.
  • A strict definition of the methodologies would be unlikely to be capable of practicable application in most cases.
  • Detailed rules would be prescriptive. Australia would fall behind other countries because transfer pricing methods are constantly being refined and new approaches developed. There is a risk our law would gradually become dated. In time, this would lead to disputes over the selection of the appropriate method with other jurisdictions. Double taxation could result. Extra costs might be incurred because special attention would need to be given to unique Australian law, which might be inconsistent with international practice. Japan is in this situation now because its law does not recognize the TNMM approach, which is endorsed by the OECD.

I trust these comments are useful for your review.