Related party debt financing – 2018 National Infrastructure Conference

Released in December 2017 by the Australian Taxation Office, Practical Compliance Guideline PCG 2017/4 (PCG) has caused considerable controversy.

Dealing with related party debt financing, this guideline details how the ATO will approach compliance issues where a cross-border related party has entered into a ‘financing arrangement’, be it inbound or outbound, or a related transaction or contract.

At May’s National Infrastructure Conference in Melbourne, Jillian Gardner (Macquarie), James Nickless (PwC) and Shahzeb Panhwar (ATO) will present the session, ‘Upstream gearing – a focus on infrastructure and trusts’, which will look in detail at the ATO’s approach to debt pricing and the PCG, and a number of related issues. 

James Nickless

Here, James tells us more about the issues facing taxpayers, and what else to expect from the session.

“The debt pricing topic is one of the more controversial areas in the tax landscape at present. With the Chevron decision seemingly at odds with traditional views of the arm's length principles adopted by a number of OECD member countries, significant debate and complexity has arisen for taxpayers to navigate. The ATO has provided taxpayers with an administrative framework to follow when looking to price related party debt. However, this is leaving many taxpayers with exposures around their historical pricing (and conflicts with original bid assumptions) – as well as issues in lender jurisdictions who expect a higher return. In our session, we will cover the ATO’s perspective of lending practices in the infrastructure sector as well as covering insights and experience of investors and advisers," James said.

“We are hoping to test some of the principles underlying the ATO’s Practical Compliance Guideline for related party debt, with a particular focus on the lending behaviors in the infrastructure space. A large focus will be on reconciling the 'parent cost of funds' approach enshrined in the ATO’s PCG with typical project finance and consortium structures where individual investors have different financial profiles (e.g. pension funds, corporates, strategic funds and private equity, sovereigns etc). We will also look at the overlay of the anti-hybrid rules and diverted profits tax as relevant to common investment structures used by the industry.”

James is a partner in PwC’s Global Tax team, focusing predominately on transfer pricing, after spending more than eight years on international tax and M&A. He has significant experience advising on cross-border funding structures from a transfer pricing and international tax perspective and has advised a variety of infrastructure investors in relation to their capital structures and cross-staple lease pricing. He has been involved with the ATO and Treasury consultation process in relation to guidance on related party debt arrangements, the diverted profits tax and anti-hybrid rules.

Jillian Gardner is a Division Director with Macquarie Group Limited, and has worked in the Macquarie Infrastructure and Real Assets team for the past 13 years. She has experience across the Asia-Pacific region as well as the Americas, having spent time working in Macquarie’s New York office. 

Shahzeb is an Assistant Commissioner in the Public Groups and International area of the ATO, and has responsibility for issues relating to related party financing and thin capitalisation. Previously, Shahzeb spent two years as a Director in the ATO’s International Structuring and Profit Shifting area.

Asked about some of the blind spots in this area of practice, James said, “There is much debate to be had around the arm’s length pricing of related party debt. While the ATO’s PCG approach may be most appropriate in certain situations, it does not cater for all circumstances. It is important for taxpayers to understand whether they have characteristics which would permit them to price debt outside the 'ATO’s Green Zone' and remain confident that they have a position for which sign-off from the ATO can be achieved.

“Our hope is that delegates will gain an insight into the ATO’s approach to debt pricing in the infrastructure space, which will assist with assumptions for bid models as well as in assessing potential exposures (from the perspective of the ATO) on existing investments.  We will also seek to provide insights into technical arguments and third party evidence of funding which may depart from a 'parent cost of funds' approach that may be useful for taxpayers looking to support positions when under review or audit by the ATO.”

The 2018 National Infrastructure Conference takes place on 17-18 May 2018 in Melbourne. This year’s program also covers outbound infrastructure investment, social PPPs, anti-avoidance issues, financing principles, valuations, a focus on economic infrastructure and trusts and much more.


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