The Australian Taxation Office (ATO) has published for public comments Schedule 2 to Practical Compliance Guideline (PCG) 2017/4DC, which discusses the tax authority’s compliance approach to tax issues relating to cross-border, related-party financing arrangements and related transactions.
The new draft Schedule 2 – released on August 3, 2018 – sets out specific risk indicators for related-party derivative arrangements that are used to hedge or manage the economic exposure of a company or group of companies.
The guidance explains: “Where a derivative is used for commercially rational hedging purposes, that is, to manage an economic exposure for a company or group of companies, the derivative will normally be entered into with an unrelated third party (either directly or indirectly via one or more interposed related parties). Where the derivative is entered into with a related party, the ATO is likely to consider the arrangement as higher risk unless the terms and conditions of the related party derivative are backed out to the external market on mirror terms. The risk indicators set out in this draft Schedule have been developed with these matters in mind.”
Taxpayers can use the indicators to consider the risk of compliance activity in relation to the following issues that arise in relation to relate- party derivative arrangements: deductibility of payments, liability to withholding tax, the application of the transfer pricing rules in Division 815, and the application of Part IVA to schemes confined to such arrangements.
Schedule 2 would have effect from January 1, 2019, and would apply to existing and newly created related-party derivative arrangements.
Comments on the draft Schedule 2 must be received by August 31.