Australia’s transfer pricing rules are contained in subdivisions 815-B, 815-C, and 815-D of the Income Tax Assessment Act 1997 and related evidentiary matters in subdivision 284-E of the Tax Administration Act 1953. When relevant, the equivalent rules in Australia’s double tax agreements will generally apply to the extent of any inconsistency with the domestic rules.

Australia’s first attempt at transfer pricing rules were contained in the Income Tax Assessment Act 1936. These were vague rules designed to reallocate profits but were largely ineffectual. Modern rules based on the OECD guidelines were enacted in May 1981 as Division 13 of that Act. Those rules adopted the concepts of arm’s length consideration which would be payable/receivable by parties dealing with each other at arm’s length. Those rules were replaced in 2012 by Division 815 of the Income Tax Assessment Act 1997. Sub-division 815A was expressed to confirm that the transfer pricing rules contained in Australia’s tax treaties and incorporated into Australia’s domestic law would address treaty-related transfer pricing. The purpose of the rules was to limit taxable profits being shifted or misallocated offshore. Interestingly, these rules were made retrospective to 2004 to overcome perceived weaknesses in Division 13, even though subsequent cases suggest that perception was incorrect.

Division 815 was updated in 2013, and the transfer pricing rules are now contained in Subdivisions 815-B, 815-C and 815-D and related provisions in Subdivision 284-E of the Taxation Administration Act. Those amendments were made to improve the alignment between outcomes achieved for international arrangements involving Australia and another jurisdiction irrespective of whether the other country forms part of Australia’s tax treaty network.

Australia’s transfer pricing rules will apply if the conditions operating between entities differ from arm’s length conditions – having regard to a number of factors such as the assets, risks and functions of each entity – and that difference results in a tax benefit. Technical legal control is not required. Independent parties can act on a non-arm’s length basis in relation to a transaction, usually where they act on a similar basis in relation

The legislation does not prescribe one method to use. This is an acknowledgement that each case depends on its facts and circumstances. Because the legislation is based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (the “OECD Guidelines”), the models set out there and their applicability are the norm. In court, the favoured method is the comparable uncontrolled price method, but this is usually difficult in practice. The transactional net margin method is often used when comparables are difficult to find.

Transfer pricing methods that are not specified by law are allowed but the onus is on the taxpayer to demonstrate that the method is reliable. In practice, this is usually very difficult.

The methods and their hierarchy set out in the OECD Guidelines are normally used.

Ranges are common in evidence from experts, which reflects the subjectivity of some opinions. Courts usually prefer the midpoint of the appropriate range.

The transfer pricing provisions operate on an annual basis. At year end, a review should be conducted to determine if any adjustment is required.

In the 2024–25 Federal Budget, the government announced the discontinuation of previously announced rules to deny, from 1 July 2023, tax deductions for payments made by those with annual global group turnover exceeding AUD1 billion) relating to intangible assets connected with low corporate tax jurisdictions. In its place, the government announced new measures to penalise, from 1 July 2026, significant global entities that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply – this has not yet been legislated, and there does not appear to be draft legislation currently before Parliament.

Australia has rules on interest. These include limitations under onerous thin capitalisation rules and internal debt creation rules, and the more traditional transfer pricing rules (which can still apply over the top of those other limitations).

The government is considering how to implement Action 8 of the OECD’s Base Erosion and Profit Shifting (BEPS). The taxpayer always runs the risk of the Australian Taxation Office (ATO) using post-fact evidence if it is persuasive. The taxpayer should always document the basis for the price and related evidence at the time of the transaction. This follows from the rule that the taxpayer bears the onus of proof.

Cost sharing or contribution can be recognised but require adequate and reliable supporting evidence. In practice, the ATO has some internal guidance on certain types.

Voluntary disclosures of adjustments are permitted. They will lead to amended assessments if the taxpayer has supporting evidence and it is within the amendment period.

Consequential adjustments are permitted where fair and reasonable.

Australia has an extensive network of double tax agreements that include information sharing clauses. Australia is also a party to the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

The ATO regularly shares information with other countries’ revenue authorities and sometimes conduct joint investigations. Australia’s secrecy laws permit the ATO to share information under various treaties.

Australia will consider entering an APA which could be unilateral, bilateral or multilateral.

Australia’s competent authority (CA) administers the programme. The Commissioner of Taxation, who leads the ATO, or their delegate is the current CA.

In Australia, the same unit of the ATO administers both APAs and mutual agreement procedures (MAPs). It would be likely that an APA would be pursued before a MAP. Practically, a failure to reach a bilateral APA would likely result in an unsuccessful MAP request.

The ATO has a list of transactions and conditions which would qualify and those which would not. They can be found in PS LA 2015/4.

There is no strict time limit for filing an APA application. Usually, the years covered by an APA will commence from the time of request. There are “roll back” provisions to apply the APA to an earlier year but this is by agreement only and not guaranteed.

There is no user fee for seeking an APA.

Most APAs cover a period of three to five years.

An APA can be rolled back to prior years by agreement with the ATO depending on several factors including whether the APA was voluntarily requested in advance of any audit activity.

Transfer pricing adjustments attract significant penalties: up to 200% of the tax shortfall. Remission (partial or otherwise) is available if adequate documentation of adoption of a reasonable methodology, with supporting material, is provided. Failure to keep records and documentation specifically required by the transfer pricing rules will result in no remission.

Australia has adopted transfer pricing documentation rules based on the structure contemplated by the OECD Guidelines – ie, a master file, a local file and a country-by-country report – as the basis for its legislated documentary requirements.

Australia’s transfer pricing rules align closely with the OECD Guidelines.

Australia still uses the arm’s length principle as the basis of transfer pricing.

Australia’s transfer pricing laws have been directly affected by the OECD project of which Australia is a keen supporter.

Australia has adopted most of the Pillar One recommendations.

It would be unusual to allow one entity to guarantee another’s return. This would require evidence that it was normal industry practice (eg, some insurance groups) or specific justification by reference to the facts and circumstances.

Australia’s transfer pricing rules are model almost entirely on the OECD model.

Safe harbour rules in the transfer pricing context would generally have to be negotiated with the ATO.

There are no specific rules on this topic.

A notable rule is that the ATO generally opposes the payment of a market priced guarantee fee to a parent.

Australia has aligned with the rules in Chapter X of the OECD Guidelines by adopting the most recently revised version of that guidance (January 2022).

If a transfer pricing adjustment is made in respect of dutiable goods, it is likely that a corresponding adjustment would be made to the value for customs. Retrospective adjustments to customs values are not automatic.

A taxpayer dissatisfied with the ATO’s final decision on a transfer pricing adjustment has the right to appeal. The appeal could go the Administrative Review Tribunal, but almost invariably would go to the Federal Court which is a court of general jurisdiction. If the matter goes to the Tribunal, an appeal only lies on errors of law – the findings of fact are generally fixed. If the matter goes to the Federal Court, there is the right of appeal to a Full Court of the Federal Court. An appeal to the Full Court can be way of a rehearing subject to limitations that no further evidence is permitted without leave. An appeal from the Full Court is only available to Australia’s highest appellate court, the High Court, by special leave.

There are now three significant recent cases on transfer pricing (see 14.2 Significant Court Rulings). Unfortunately, the analyses in those cases are somewhat at odds with each other. Accordingly, the development of judicial principles is yet to be settled and may not be until the High Court hears a transfer pricing case.

There are three recent Full Court of the Federal Court decisions on transfer pricing.

Chevron v Commissioner of Taxation

This case involved an intercompany cross-border loan arising out of an internal restructure. The Court held that it is permissible under the transfer pricing rules for the Commissioner to reconstruct a term of the loan if independent parties would not have agreed to a loan on the actual terms. In that case the Court found that the Australian subsidiary was by it owns projections expected to be unable to service the interest on the loan for some years (without dividends from a special purpose borrowing subsidiary) and concluded that an independent lender would have insisted on a parent guarantee. The case was not appealed further by the taxpayer.

Commissioner of Taxation v Glencore

This case involved a transfer pricing adjustment to a commodities contract. The Court held that reconstruction of the pricing provisions would be permitted if independent parties would not have agreed to them. Glencore won because it produced sufficient evidence to prove that independent parties would agree to such terms. The Court decided that making more profits in Australia should not come at the expense of appropriate market-based commercial prudence. The Commissioner was unsuccessful in seeking special leave to appeal to the High Court.

Singtel v Commissioner of Taxation

This was a case involving intercompany debt between an overseas parent and Australian subsidiary. The loan was subject to variations over several years, including interest deferral provisions. Although the dispute related to a period that stretched from 2009 to 2013 and involved earlier iterations of Australia’s transfer pricing rules, the principles discussed are likely to be relevant to the current rules. The Court held that the Commissioner was permitted under the transfer pricing rules to reconstruct those provisions of the loan to which independent lenders would not have agreed. Singtel was unsuccessful in seeking special leave to appeal to the High Court.

The thread running through these cases is that the Commissioner is entitled to add, delete or vary a term of an agreement to achieve a reliable counterfactual which can be priced. The challenge is to restrict the changes to the actual agreement so that the counterfactual is commercially realistic in all the circumstances. These circumstances include risk appetites, which can vary considerably between companies within the same industry. This is sometimes referred to as depersonalising the actual contract. The current Commissioner does not appear in his (Court) Decision Impact Statement to agree with this analysis.

Australia has no general restrictions on the remittance of outbound payments. Payers have an obligation to withhold tax at the scheduled rate from interest, dividends and royalties and a failure to withhold renders the payer liable. The Commissioner does have the power to garnishee monies if tax is owed by the recipient.

See 15.1 Restrictions on Outbound Payments Relating to Uncontrolled Transactions.

Australia will only enforce rules regarding other countries’ legal restrictions on foreign payments if this is covered by a bilateral agreement.

Australia annually publishes the number of APAs issued and transfer pricing audits and the total tax involved. No further details are made public.

The ATO uses information about comparables that may not be generally known as a basis for its acceptance or refusal of a taxpayer’s position. Because taxpayers bear the onus of proving on the balance of probabilities that the Commissioner’s adjustment is not correctand that the taxpayer’s own position is correct, the Commissioner will generally not need to divulge any comparable if they do not or cannot do so.