Chapter 4

Australian Taxation Office rulings

4.1 This chapter will explore submitters' responses to Australian Taxation Office (ATO) rulings on treaty based transfer pricing rules with particular reference to:

testing the ATO rulings in court and the different appetites for risk amongst taxpayers;
the weight of the Commissioner's interpretation of the law; and
speeches by the Commissioner.

Testing ATO rulings in Court

4.2 Treasury have set out a number of rulings issued by the ATO which it argued demonstrate that the ATO 'has publicly maintained its position in respect of the treaty based transfer pricing rules for some time'.[1] These are set out in Appendix 3 to this report.

4.3 The Minerals Council of Australia (MCA) outlined that the onus is on the Commissioner to instigate court proceedings in order to have the ATO's position tested in court.[2] Ms Amanda Leckie, Tax Manager at GE, commented on this aspect in relation to the taxing power of treaties:

...we would have loved the opportunity to seek clarity, but we cannot seek clarity until the commissioner issues us with an assessment, which he has not done. We have no ability to raise this matter or pursue it through the courts until the ATO issues us with an assessment.[3]

Taxpayers' appetite for risk

4.4 There was much debate at the committee's hearing on rulings issued by the Commissioner, and the weight that taxpayers afford ATO rulings. The committee heard from a number of witnesses that taxpayers will approach the matter differently according to their appetite for risk.

4.5 Mr Damian Preshaw, a member of the Tax Institute's Transfer Pricing Committee, commented:

Taxpayers and their advisers would not ignore comments of the commissioner, the second commissioner and deputy commissioners which are directly on point. I acknowledge that. They do so at their peril. But acknowledging those comments does not mean that those comments are correct necessarily in law. It does not mean that those comments necessarily have fully fleshed out the various issues and considerations that might need to be addressed by taxpayers in determining what position they wish to take when lodging their tax returns and the extent to which in doing so they may be taking an aggressive position, a middle-of-the-road position or a very, very conservative position which may be consistent with tax office rulings. But even for those taxpayers who may take a perceived aggressive position it does not mean that that position is wrong in law. At the same time, it does not mean that the commissioner's view as expressed in taxation rulings is correct in law...

There is a risk element that they take into account having regard to all the information at their disposal—for example, tax office rulings around how the laws apply generally or specifically to particular types of dealings, OECD transfer pricing guidelines to the extent that they provide any assistance and are relevant, papers and articles that circulate within the transfer pricing community at least, and commissioners' speeches, as we are saying...

Not all taxpayers want to litigate, but some do. So that—as I think you are suggesting—tempers the approach that they want to take as taxpayers within the Australian community. That is absolutely right. They are all on a spectrum. They are not all the same.[4]

The weight of the Commissioner's interpretation

4.6 Submitters have argued that the Commissioner's view may not necessarily equate with Parliament's intention. GE, for example, argued that a public ruling by the Commissioner 'is merely an expression of the Commissioner's opinion' which can be found as incorrect in court.[5] PricewaterhouseCoopers (PwC) concurred with this argument and stated:

It is a matter for the Courts to decide how the existing law applies. If the Courts interpret the law in a manner that Parliament finds to be inconsistent with its intentions, then any changes should only be made on a prospective basis. There is evidence available (as outlined in the PwC Supplementary Submission) which indicates that the Courts do not agree with the view that Australia's tax treaties provide a separate taxing power to the Commissioner.[6]

4.7 The Institute of Chartered Accountants in Australia argued that taxpayers' should have the right to challenge the Commissioner's interpretation of the law, and that the retrospective nature of the bill removes this ability:

In the absence of judicial precedent, taxpayers were entitled to take a position that is contrary to the Commissioner's view of the operation of the arm's length provisions of the DTAs and expect to have the right to challenge any assessment to confirm the position taken. Any retrospective amendment will take away a taxpayer's ability to challenge to Commissioner's view of the law. We consider this a breach of the rule of law.[7]

4.8 Mr Chris Peadon, a barrister and member of the Law Council of Australia, argued it is Parliament's legislative intent that is important for interpretation of the law, and the Commissioner's opinion is of limited relevance:

...I do not demean the Commissioner of Taxation by saying this: the Commissioner of Taxation's view of the law is no more important than mine. It is no more important than the punter on Manuka Oval in determining the primacy of parliament's intention. The real point is that it is your [Parliament's] intention that is important. It is your intention that we must divine by the words that you have put into the legislation.[8]

4.9 Mr Frank Drenth, Executive Director of the Corporate Tax Association of Australia, spoke at length on the issue. He highlighted the varying emphasis taxpayers place on court rulings when interpreting the law as issued by parliament:

What the commissioner thinks is always important to large corporates and their advisers because the way the commissioner thinks the law applies can have an impact on a particular issue so of course you want to know what the commissioner's view on a technical issue is. But that is all you need to know. It does not mean the commissioner is always right. The commissioner says lots of things about technical issues. Have a look at the commissioner's track record in the full Federal Court and the High Court over the last two years. He has been up dozens of times and has been on the wrong side of the decision well over half the time, especially before the High Court. Just because the commissioner says something and nobody pulls him up on it and he stomps his feet and says the treaties have a separate taxing power does not make it so...

This place [Parliament] makes the laws, the commissioner applies the laws and the courts interpret the law. Between the parliament and the courts is where the laws are determined. Beyond that, what PWC thinks, what the commissioner thinks is neither here nor there...

Under self-assessment, the commissioner has a say about what he feels the law means and people will take notice of that, but that should not tell anyone what the law actually means. The courts are the place for that. Are taxpayers negligent in ignoring what the commissioner said? Of course they are not. Taxpayers do not do that. They weigh up what the commissioner says and then they get their advice from senior counsel, from the big four advisers, and then they form a view about what sort of risk they want to take.[9]

4.10 PwC also highlighted that the Commissioner's view has been challenged in the courts. It provided an academic article, Tax Rulings: Opinion or Law? The Need for an Independent 'Rule-Maker', which cited a number of cases where the Commissioner's position had been found incorrect before the judiciary.[10]

4.11 While not directly related to the provisions of the bill before this committee, PwC drew attention to a matter in the Full Federal Court as an example of where the Commissioner was 'reprimanded' for applying the law contrary to court determinations.[11]

4.12 An extract from the additional comments by Stone J in Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd stated:

Considered decisions of a court declaring the meaning of a statute are not to be ignored by the executive as inter partes rulings binding only in the earlier lis. As Mahoney J (as his Honour then was) said in P & C Cantarella v Egg Marketing Board [1973] 2 NSWLR 366 at 383:

"The duty of the executive branch of government is to ascertain the law and obey it. If there is any difficulty in ascertaining what the law is, as applicable to the particular case, it is open to the executive to approach the court, or afford the citizen the opportunity of approaching the court, to clarify the matter. Where the matter is before the court it is the duty of the executive to assist the court to arrive at the proper and just result.[12]

4.13 Many arguments presented to the committee challenged the importance of the ATO's rulings for taxpayers applying self-assessment. An article by Moore Stephens, however, emphasised the importance of ATO rulings and guidance, albeit in the context of a discussion on the difficulties in applying ATO rulings:

Until very recently, Australia's transfer pricing landscape has been devoid of litigation as to the meaning of "arm's length"; accordingly, absent legal precedence, the ATO has issued numerous rulings and guidance on the topic. This guidance, historically, has been the primary reference point for taxpayers seeking to ensure that they conduct their international related party dealings in a manner consistent with the ATO view. The ATO view is important as, for the most part, taxpayers are very focussed upon the significant, non-deductible, penalties that may apply, (in excess of 50% of the tax avoided), when the ATO successfully prosecutes a transfer pricing adjustment.[13]

Speeches by the Commissioner

4.14 Some submitters have suggested that the Commissioner's view on treaty based transfer pricing rules has not always been certain and highlighted extracts from certain speeches delivered by the Commissioner and Deputy Commissioner.[14]

4.15 In an opening speech at the Corporate Tax Association Convention in Melbourne, Commissioner Michael D'Ascenzo stated:

We have long held the view that the treaties do provide a separate power to assess. This view has been questioned in some decisions. For example, in the Roche case, Downes J stated in obiter:

"In the result I do not need to decide the issue (of whether the treaties in question conferred a power to assess) although I note that there is a lot to be said for the proposition that the treaties, even as enacted as part of the law of Australia, do not go past authorising legislation and do not confer power on the Commissioner to assess."

...In the most recent case on this issue Undershaft (No 1) Limited v Commissioner of Taxation (2009) FCA 41 (3 February 2009) [45], [46], Lindgren J cited, inter alia, Chong and reiterated that the double tax treaty does not give the contracting State a power to tax, or oblige it to tax but, rather, avoids the potential for double taxation by restricting one contracting State's taxing power.

However, in these cases the Administrative Appeals Tribunal and the Federal Court have focused on the International Agreements Act and have not had to fully consider the power to assess in accordance with the treaty provisions under the provisions of the Income Tax Assessment Act, and in particular the amendments made at the time of the introduction of Division 13 in 1982. These amendments provide for a separate source of power to amend an assessment in reliance upon the associated enterprises article. For example, refer to sections 170(9B) and (9C) and the accompanying explanatory memorandum at Clauses 19 and 21-23, and also to the associated amendments to the penalty provisions [ss226 (2B) - (2F)] and also the later enacted s225 (and refer also to the explanatory memorandum to the 1984 penalty provisions). We have also received recent legal advice which supports the view that the treaties as incorporated into the Income Assessment Act provides a separate taxing power.

However, in the light of comments by the Administrative Appeals Tribunal and the Federal Court, we have raised this issue with Treasury with a view to considering whether a law change is needed to remove any doubts about the intended policy or the current operation of the law.[15] (emphasis added by PwC)

4.16 In a speech to the Tax Institute's Victorian State Convention on 9 October 2008, the Deputy Commissioner (Large Business and International), Mr Jim Killaly commented:

The constitutional and legislative standing of the Associated Enterprises Articles in Australia's treaties is not free from doubt and it seems clear that the debate around this issue could possibly continue until finally determined by the Courts. For its part the Tax Office will continue to reflect on the issue.[16]

The use of extrinsic materials

4.17 Mr Chris Peadon of the Law Council of Australia highlighted sections 15AA to 15AB of the Acts Interpretation Act 1901 which were introduced to ensure that, as far as possible, legislation was given a purposive interpretation (considering the object of an Act). Section 15AB lists the extrinsic material that can be used in the interpretation of an Act (including treaties, explanatory memorandums and documents declared relevant by the Act being interpreted). Section 15AA of the Acts Interpretation Act 1901 states:

In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

4.18 In the context of these interpretive provisions, Mr Peadon suggested that it is unreasonable to expect taxpayers' advisers to consider the Commissioner's interpretation of Parliament's intention (as outlined in Treasury's submission and the EM to the bill) to form a view of what the law says:

It should not be necessary in advising anybody on these highly complex issues which, as we have heard, can involve hundreds of millions of dollars, to trawl through statements made even in parliament but much less by a public servant—and I am not being disparaging of the Commissioner of Taxation; he is a public servant—at meetings he may have attended with the Corporate Taxpayers Association, at a luncheon he went to in Perth four years ago. It would be impossible to advise a taxpayer on that basis.

The legislation should have primacy. This idea that one should look at the legislation, form a view about what it says in accordance with the normal interpretative principles that are laid down by parliament in the Acts Interpretation Act then go out and have a look at all this other material that is said to be out there and has been selectively quoted in the back of the Treasurer's submission; and then what I am being asked to do as an adviser is form a view as to whether I think that something a public servant has said should take primacy or change my view of what the law says. With respect, that is just hopeless tax policy implementation if it is to be the way that this is dealt with.[17]

Committee view

4.19 The committee acknowledges that ATO rulings provide an interpretation of the law that taxpayers may choose to heed or ignore at their own risk.

4.20 The committee considers the comments made by the Commissioner and Deputy Commissioner in speeches did not cast doubt upon the ATO's consistent interpretation on the taxation power of treaties. The speeches merely made a reflection on the 'doubt' surrounding debate on the issue of treaty taxing powers, and were not in themself a reflection of the ATO's position.

4.21 The committee adheres to the view that the ATO has long held a position that Australia's tax treaties do provide the Commissioner with a separate taxing power in alignment with Parliament's intention.

4.22 Parliament's intention will be discussed in the following chapter.

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