Executive summary

The Australian Taxation Office (ATO) practical compliance guide (PCG 2017/4) outlining its compliance approach for inbound and outbound cross-border related party financing arrangements (PCG) is a major document with far-reaching impact (identified to impact potentially 3000 groups).¹ It has been significantly revised since the initial draft release and consultations with EY and other industry and professional stakeholders. Notwithstanding this, the PCG is an ATO risk assessment framework tool only and does not necessarily reflect the law.

The PCG applies effective from 1 July 2017 to all related-party financing arrangements on issue from that date.

The key takeaways from the revised PCG and underlying ATO approach are:

• "Generally, the ATO expects the pricing of related-party financing should align with the commercial incentive of achieving the lowest possible "all-in cost" (interest plus guarantee fees, swap costs etc.) to the borrower"
• The cost of financing should align with the cost that could be achieved on an arm's-length basis by the parent of the global group to which the borrower and lender both belong
• The changed scoring system has simplified the interpretation and calculation of a taxpayer's PCG score but has made it easier for taxpayers to be rated "very high risk"
• Related-party financing documentation and expected reporting requirements apply in addition to the current transfer pricing documentation obligations

Businesses with cross-border related party financing will need to identify their risk profiles under the PCG and identify any actions required, in line with their tax governance and other requirements, in respect of current and future arrangements, and in respect of prior years' positions of current arrangements.

For a detailed discussion of this Alert, please download the PDF version.

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ENDNOTES

¹ See EY Global Tax Alert, Australian Tax Office releases further guidance regarding Cross-Border Related Party Financing and the Diverted Profit Tax, dated 19 December 2017.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Sydney

• Sean Monahan
  sean.monahan@au.ey.com
• Anthony Seve
  anthony.seve@au.ey.com
• Paul Balkus
  paul.balkus@au.ey.com

Ernst & Young (Australia), Perth

• Andrew Nelson
  andrew.nelson@au.ey.com

Ernst & Young LLP, Australian Tax Desk, New York

• David Burns
  david.burns1@ey.com

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ATTACHMENT

PDF version of this Tax Alert