This Practice Statement, released on Wed 17.12.2014, considers the administration of transfer pricing penalties for income years commencing on or after 29 June 2013. It explains:
(i) when an entity will be liable for a transfer pricing penalty;
(ii) how the entity’s transfer pricing penalty is assessed, and
(iii) how the Commissioner’s discretion in relation to remission should be exercised.
The Practice Statement is as part of a package dealing with transfer pricing documentation and should be read in conjunction with Taxation Ruling TR 2014/8.
Subsection 284-145(2B) of Subdiv 284-C of Sch 1 to the TAA imposes administrative penalties on an entity that gets a benefit under a scheme within Div 815 of the ITAA 1997. Subdivision 284-C is part of the uniform administrative penalty regime that applies to entities for failing to satisfy their obligations under the taxation laws.
The ATO says the administration of Subdiv 284-C scheme penalties involves 3 main steps:
Step 1 – Determine whether the entity is liable for a penalty
Step 2 – Assess the amount of the penalty:
(a) determine the scheme shortfall amount; and
(b) determine the base penalty amount (“BPA”); and
(c) increase or reduce the BPA or both (for aggravating or mitigating circumstances); and
(d) decide whether to remit all or part of the penalty.
Step 3 – Notify the entity of the liability to pay the penalty.
The Practice Statement provides guidance on these 3 steps in the order they occur in the administrative process. The ATO says the steps must be completed in the order specified above. A decision about remission of penalty will normally be made in the course of assessing the amount of any penalty as both are part of Step 2. However, a decision about remission of penalty can also be made after an entity has been notified of its liability to pay the penalty.
DATE OF EFFECT: Applies for income years commencing on or after 29 June 2013.
[LTN 244, 17/12/14]
Extracts from Schedule 1 to the TAA
284-145 Liability to penalty
…
(2A) You are also liable to an administrative penalty if:
(a) you would, apart from a determination under section 815-30 of the Income Tax Assessment Act 1997 (also the adjustment provision ), get a * scheme benefit from a * scheme; and
(b) subparagraph (1)(b)(i) is not satisfied for the scheme [viz: had the sole or dominant purpose of obtaining that scheme benefit].
(2B) You are also liable to an administrative penalty if:
(a) to give effect to Subdivision 815-B or 815-C of the Income Tax Assessment Act 1997 (also the adjustment provision ) in relation to a * scheme, the Commissioner:
(i) amends your assessment for an income year; or
(ii) serves you with one or more notices under subsection 128C(7) of the Income Tax Assessment Act 1936 in respect of income that is taken because of the application of the adjustment provision to have been derived in the income year; and
(b) as a result, you are liable to pay an additional amount of income tax or * withholding tax (as the case requires).
Note: Subdivisions 815-B and 815-C of the Income Tax Assessment Act 1997 apply the arm’s length principle (about transfer pricing) to entities and permanent establishments respectively.
[FJM note: under s284-160, the penalty for entering into a transfer pricing ‘scheme’ is 25% of the shortfall in tax arising as a result of the scheme, or 10% if it was reasonably arguable that the scheme was effective. These penalties step up to 50% and 25% if the taxpayer had the sole or dominant purpose of obtaining the transfer pricing benefit.]
…
284-250 Undocumented transfer pricing treatment not reasonably arguable
This Division has effect in relation to an entity as if a matter was not * reasonably arguable if:
(a) the matter is a particular way of applying (including not applying) Subdivision 815-B or 815-C of the Income Tax Assessment Act 1997 to a matter (or identical matters); and
(b) the entity does not have records that meet the requirements in this Subdivision for the application of the Subdivision mentioned in paragraph (a) [viz: Subdivision 815-B or 815-C] to that matter (or those matters) in that way.
Note: For the Commissioner‘s power to remit an administrative penalty imposed by this Part, see section 298-20.
284-255 Documentation requirements
(1) Records kept by an entity meet the requirements in this Subdivision for the application (or non-application) of Subdivision 815-B or 815-C of the Income Tax Assessment Act 1997 to a matter (or identical matters) in a particular way if the records:
(a) are prepared before the time by which the entity lodges its * income tax return for the income year relevant to the matter (or matters); and
(b) are in English, or readily accessible and convertible into English; and
(c) explain the particular way in which the Subdivision applies (or does not apply) to the matter (or matters); and
(d) explain why the application of the Subdivision to the matter (or matters) in that way best achieves the consistency mentioned in section 815-135 or 815-235 of that Act (as the case requires) (about guidance material).