ATO consultation on PCG 2025/D2
The Tax Institute welcomes the opportunity to make a submission to the Australian Taxation Office (ATO) in relation to the draft PCG 2025/D2: Factors to consider when determining the amount of your inbound, cross-border related party financing arrangement - ATO compliance approach (draft PCG).
In the development of this submission, we have closely consulted with our National Large Business and International Technical Committee to prepare a considered response that represents the views of the broader membership of The Tax Institute.
The Tax Institute supports the publication of the draft PCG, which outlines the risk assessment framework the ATO will use to allocate compliance resources. The draft PCG clarifies the factors that contribute to determining the risk level of inbound, cross-border related party financing arrangements for Australian taxpayers in relation to their capital structure. However, we consider that the existing guidance can be improved and expanded in a number of areas. The ATO’s 2017 guidance, PCG 2017/4: ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions, is comprehensive, featuring a matrix of factors and weighting that provides greater clarity of the ATO’s compliance expectations. A similar approach would be useful in the case of the draft PCG.
Our key concerns regarding the draft PCG are outlined below.
- There is ambiguity regarding the interpretation of the 'AND' condition in the ‘Green Zone’ and ‘White Zone’ criteria.
- The practical utility of the ‘Green Zone’ is limited, especially for taxpayers opting for the third-party debt test, as it disallows debt deductions related to cross-border financing.
- The ‘White Zone’ requires an ATO review conducted on or after 1 January 2025, which may render ‘Green Zone’ instances rare as the thin capitalisation laws were enacted in April 2024.
- Taxpayers are expected to engage in 'real bargaining' with affiliates regarding financing arrangements, necessitating documentation of negotiations and internal analyses. This results in an apparent disconnect between ATO expectations and real-life commercial practices.
- The draft PCG notes the relevance of a guarantor's credit profile but suggests that it is not indicative that the amount of a particular financing arrangement is ‘sized’ based on the debt capacity of the guarantor. This appears to mark a shift away from previous ATO positions on intra-group debt pricing.
- The compliance requirement outlined in the draft PCG is burdensome. It does not attribute sufficient consideration to matters of materiality or risk, applying only to inbound, cross-border related party arrangements. This necessitates clarification regarding document requirements for entities not covered by the draft PCG, such as outbound lenders and certain financial institutions, that do not rely upon the third-party debt test. It should also clarify the compliance expectations of ‘White Zone’ and ‘Green Zone’ entities.
Our detailed response and recommendations to further improve the draft guidance are contained in Appendix A.