Tax Institute raises concerns about ATO’s transfer pricing compliance approach

In a recent submission, the Tax Institute expressed concerns regarding the compliance burden outlined in the ATO’s draft practical compliance guide on inbound, cross-border related party financing arrangements (PCG 2025/D2).

“Feedback from our members indicates that as currently drafted, the draft PCG imposes a heavy compliance burden on taxpayers without sufficient regard for materiality or risk,” the submission read.

The fresh compliance guide came following legislative changes to thin capitalisation and transfer pricing rules in Australia, enacted as part of the authorities’ efforts to crack down on multinational profit shifting. In 2022–23, the ATO’s corporate tax transparency report revealed that a third of large multinationals operating in Australia did not pay any domestic tax.

Going forward, the ATO is set to apply sharper scrutiny to companies with cross-border financing arrangements, to ensure that transactions are conducted at arm’s length, as if they were between two non-related entities.

While it welcomed the draft PCG’s overall intent, the Tax Institute warned that the ATO’s compliance approach would be “burdensome” for firms, especially for those with low-risk arrangements.

For example, the PCG states that taxpayers would need to engage in ‘real bargaining’ and document all related negotiations and internal analyses when determining financing arrangements.

The Tax Institute said that the ATO’s position reflected “an apparent disconnect between ATO expectations and real-life commercial practices.”

It added that the draft PCG did not pay enough consideration to matters of materiality or risk and therefore placed excessive compliance burdens on low-risk taxpayers.

The draft PCG also appeared to mark a shift away from prior ATO positions on intra-group debt pricing, the Tax Institute said.

For instance, the guidance noted the relevance of a guarantor’s credit profile, but suggested that it was not indicative that the amount of a particular arrangement was ‘sized’ based on the debt capacity of the guarantor.

The Tax Institute added that the draft guidance contained a series of ambiguities, such as how the ATO would assess ‘green zone’ and ‘white zone’ criteria, and compliance expectations of ‘low-risk’ entities.

It also said the utility of the ‘green zone’ classification was limited as it disallowed debt deductions related to cross-border financing, although the PCG noted that low-risk entities would be subject to less ATO scrutiny than those with higher-risk structures.

The Tax Institute called on the Tax Office to clarify whether taxpayers in low-risk arrangements would also face the "burdensome" documentation approach outlined in the PCG.

“The draft PCG should clarify whether entities and arrangements that are not covered by the draft PCG, such as outbound lenders and financial institutions that do not rely upon the third-party debt test, as well as ‘White Zone’ and ‘Green Zone’ entities, are equally subject to the documentation approach outlined in the draft PCG or if the ATO has other expectations in those cases,” the submission read.