Australia scrutinizing offshore procurement hub structures for tax avoidance

The Australian Taxation Office (ATO) on December 10 said it is reviewing arrangements where an Australian resident multinational establishes a controlled foreign corporation (CFC) as a offshore procurement hub, and the CFC receives services from a related offshore CFC.

The ATO said that in such structures, the procurement hub often has few employees or assets and does not substantially transform the goods it buys for the Australian entity. Usually both CFCs operate in low-tax jurisdictions, the service hub’s fees are based on the procurement hub’s sales or profit, and there is little commercial justification for splitting the procurement function between two entities.

The ATO said it is concerned that, by bifurcating the procurement function, the structures avoid CFC rules on tainted income. The ATO also said it has concerns about substance and pricing under the transfer pricing rules, and said that the arrangements could run afoul of the general anti-avoidance rules.

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