Pichhadze Presents Guide To Transfer Pricing: Lessons From Australia And New Zealand At Boston University

Amir Pichhadze (Deakin Law School) presented Guide to Drafting and Interpreting Transfer Pricing Legislation: Lessons From Australia and New Zealand at Boston University yesterday as part of its Graduate Tax Program Speaker Series:

Countries around the world are undertaking legislative reforms in response to the OECD’s BEPS action plans. In his current research, part of which will be presented at the Boston University Law School’s Graduate Tax Program Lecture Series, Dr. Amir Pichhadze distills lessons from the legislative reform agenda which is currently undertaken by the New Zealand government and based on recent Australian case law.

As Pichhadze recently explained at the 30^th Annual Australasian Tax Teachers Association, OECD member countries, as well as many non-member countries, have chosen to follow the OECD’s transfer pricing guidelines — an internationally coordinated relational (soft law) agreement on how to apply domestic transfer pricing laws.

Pichhadze also explained that, in order to achieve the shared objectives of this coordinated approach, it is necessary for participating countries to adopt a mechanism of self-enforcement (self-regulation) of their relational agreement, otherwise there is risk of defection (from the internationally coordinated approach) by domestic courts; as exemplified by the Australian and Canadian courts’ refusal to consider the guidelines in their analysis (unless they chose to do so) so long as there was no statutory obligation to do so. Pichhadze exemplified this risk by the courts’ analysis in: Commissioner of Taxation v. SNF (Aust) Pty Ltd., VID 731 of 2010, 2011 FCAFC 7; Canada v. GlaxoSmithKline Inc., 2012 SCC 52. He pointed out that self-enforcement could and should be achieved through a requirement, by statute, of seeking to achieve consistency with the OECD’s guidelines; as exemplified by the Australian and UK legislations. To demonstrate the effectiveness of this mechanism of self-enforcement, he referred to the courts’ analysis in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation, where the Federal Court of Australia took into account the OECD’s guidelines as is now required by the Australian legislation. Pichhadze now proceeds to point out that this legislative approach was recently adopted by the legislative reforms in New Zealand, and suggests that it should likewise be adopted by Canada (and other countries if and as necessary) where post-BEPS legislative reforms are being considered and are necessary. He suggests that this legislative requirement should be established through a principles-based approach to legislative drafting.

Yet, as Pichhadze also points out, while a general principle is necessary to convey a legislature’s intention regarding the role of the OECD’s guidelines in domestic law, detailed recommendations could nonetheless be applied only if doing so is consistent with domestic law. As was acknowledged by Her Majesty’s Revenue and Customs (“HMRC”) in the UK, while the legislative requirement to apply the statute in a way that best achieves consistency with the OECD guidelines a principle for interpreting the legislation,” it “does not permit the OECD Transfer Pricing Guidelines to override the legislation.” Pichhadze identifies that some OECD recommendations may need to be addressed specifically and consistently by the legislature, otherwise the courts may not have the legislative authority to apply the recommendations. For example, the OECD recommends authorizing the reconstruction or non-recognition of the actual controlled transaction if the transaction fails a commercial rationality test. As Pichhadze recently  pointed out in the New Zealand Journal of Taxation Law and Policy, such powers risk interfering with fundamental private contract law principles, such as the freedom of contract. The interpretative principles of legality and consistency of expression require that such abrogation would need to be conveyed clearly and consistently, otherwise the domestic legislation would need to be interpreted as not having intended to authorize such abrogation. Consequently, courts would not be authorized to apply such a commercial rationality test. By referring to the court’s analysis in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation, Pichhadze identifies the risk of courts adopting this test without clear statutory authority. Pichhadze therefore alerts that legislative reforms of transfer pricing legislation should take into account these principles of ‘legality’ and ‘consistency of expression’, and should clearly and consistently convey their intentions as need be. He exemplifies this approach through New Zealand’s proposed redrafting of its legislation, which is expected to explicitly require the application of a commercial rationality test for this purpose.