Australia’s Transfer Pricing Scrutiny Calls for Litigation Prep

In a recent report, the Australian Taxation Office identified global profit shifting as a continuing major focus area and noted that around 70% of its current income tax audits “involve behavioural risks relating to international related party dealings and cross border investments and structures.”

The report acknowledges that public and multinational businesses have some of the highest levels of tax compliance of all taxpayers. But it also notes that because Australia is a net capital importer with a high tax rate, the country is susceptible to profit shifting—even by taxpayers that are otherwise highly compliant.

The report’s findings echo what taxpayers are experiencing in their interactions with the ATO—a new, mature, phase of transfer pricing disputes in Australia. The stakes are high and the disputes protracted. In this environment, an effective way to handle a dispute and reach a favorable outcome may require fresh thinking about the sequence in which you deploy your arguments and evidence.

ATO’s Focus

The ATO will continue to concentrate resources on the largest businesses under its purview, based on the report, with transfer pricing being “the most relevant event” attracting its attention.

The ATO’s focus on transfer pricing isn’t new. But it has evolved and matured over time, owing to experience, the granting of further and broader powers (such as the introduction of broader recharacterization powers in 2013 and the diverted profits tax in 2017), and the consideration of these laws by the courts.

The report notes that while issues of financing and marketing hub arrangements continue to be in focus, increasing resources are being applied to mischaracterization and supply chain risks, insurance and reinsurance, intangible migration, and royalty characterization.

The combination of the ATO’s broad powers and the inherently “gray” nature of some transfer pricing issues—particularly those involving recharacterization—gives the ATO greater scope to test the law’s boundaries and question the commercial reality or substance of certain commercial arrangements.

Because large corporates account for 65% of all company tax collected in Australia, adjustments to the tax positions of even a small number of these large corporates can result in a significant increase in revenue collected.

In practice, the ATO has more frequently applied the general anti-avoidance rules and transfer pricing rules to the same set of facts and circumstances. This increases the intensity and resourcing required for an ATO audit. Taxpayers, who bear the burden of proof, must not only satisfy the ATO of the arm’s-length conditions, but also must address questions as to purpose, economic substance, and other options that were available to them to achieve the same commercial outcome.

Litigation, Settlements, MAP

When the ATO is pursuing such significant numbers (as frequently happens in transfer pricing cases), it can make settling at 64% of the total assessed amount unpalatable for many taxpayers. Yet in 2024–25, this was the average, with total settlement variance for public and multinational business at around 36%. And this figure doesn’t account for transfer pricing settlements’ additional hidden cost of restructuring, repricing, or recharacterizing the arrangement for future years.

This settlement variance reflects the ATO’s work in recent years to increase the rigor and robustness of its settlements processes. A key consequence is that the ATO—in considering whether to settle (and for what amount) or press ahead with the case—requires a higher degree of assurance as to litigation risk than it did in the past.

Although only seven of the 18 cases settled with public and multinational groups in 2024–25 involved transfer pricing, the ATO acknowledges that “litigating these cases holds considerable risk, so settlement is sometimes a desirable resolution for both parties.”

To reach a favorable settlement, much work needs to be done to demonstrate, with cogent evidence, that the ATO’s litigation risk is significant. And while this approach has significant implications in terms of cost, resources, and stakeholder management within the global organization, the payoff is often an opportunity to reach a much better and earlier agreed resolution outcome.

What about the mutual agreement procedure? An important result of the ATO’s increasing use of anti-avoidance powers in transfer pricing audits is that MAP may not be available. If avoidance is on the table, the ATO doesn’t have to participate in MAP even though the underlying issues are captured by Article 9.

As such, many transfer pricing disputes don’t get to MAP, don’t benefit from the involvement of the other revenue authority, and can involve material double taxation risks.

Key Takeaways

Australia’s transfer pricing dispute landscape has matured because of increased powers, more experience, and the courts’ guidance in multiple transfer pricing cases. Yet the level of controversy isn’t abating—the ATO is increasing the resources it is applying to a broader range of arrangements.

Most importantly, after more than a decade of intensive transfer pricing activity, the ATO has reached a strategic view that it should continue scrutinizing large taxpayers’ cross-border arrangements given their inherent risks.

The increasing use of anti-avoidance provisions in transfer pricing disputes increases the stakes, prolongs the disputes, and introduces a potential reputational risk. It also means that MAP isn’t available as a path to resolution and that double taxation may be a real risk.

That said, transfer pricing disputes in Australia are much more often settled than litigated. The ATO is mindful of its litigation risk and the possibility of losing transfer pricing and anti-avoidance cases.

In this new phase, taxpayers must consider at what point they are willing to commit the resources to challenge the ATO’s position in a manner that addresses the ATO’s assurance standards. Taxpayers also should determine how they would assess litigation risk and prospects.

Answers will vary depending on numerous factors. But an overarching observation is that where the stakes are high, greater preparation for litigation often boosts the likelihood of non-litigious resolution by agreement.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Niv Tadmore is a partner at Jones Day in Melbourne focused on tax audits, tax disputes, and large-scale transactions.

Alexandra Fraser is of counsel at Jones Day in Melbourne focused on tax controversy and large Australian and multinational corporations.

Douglas Langdon is an associate at Jones Day in Melbourne focused on domestic and international tax disputes.

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