The Australian taxation office (ATO) on January 16 released important guidance setting out the ATO’s approach to transfer pricing issues related to marketing, sales and distribution, and other hubs.
The aim of the guidance, Practical Compliance Guideline 2017/1, is to help companies manage the compliance risk and therefore the compliance costs associated with hubs. It follows an August 9, 2016, consultation on the topic and will apply from July 1 to existing and newly created hubs.
The guideline offers taxpayers a tool to self-assess the compliance risk of their Australian transfer pricing outcomes in accordance with the ATO’s risk framework, as it reveals the approach, the type of analysis, and evidence that the ATO will likely adopt in these cases.
The self-assessment risk framework is not mandatory. However, if a taxpayer implements it with a self-assessment of the risk rating, the ATO’s tax compliance activity will be tailored to suit the risk rating adopted by the taxpayer, as long as the ATO agrees with the rating.
The guideline assumes that hubs usually have commercial and economic substance. However, if a hub arrangement does not have a commercial rationale such that independent entities would not have entered into a similar arrangement or would have entered into the arrangement on different commercial or financial terms, the guideline will have no application to the taxpayer.
The hub risk framework is made up of six risk zones. It starts from the “white zone,” where self-assessment of risk rating is unnecessary, such as a case where an advance pricing agreement in place. The remaining zones range from the “green zone,” where there is low Australian transfer pricing risk, to the “red zone,” which involves hub arrangements that are very high risk.
The risk rating is determined based on several factors, including pricing indicators, potential tax at risk, and the quality of the taxpayer’s transfer pricing documentation. If the taxpayer has multiple hubs, the ATO may take into account the total combined tax impact of the hubs when prioritising compliance resources.
The guideline states that, typically, the higher the risk rating the more detailed and comprehensive the taxpayer’s transfer pricing documentation and supporting evidence should be.
Moreover, it explains how to reduce the risk rating. Taxpayers outside the green zone can decrease their rating through constructive cooperation with the ATO and thus gain greater confidence regarding the Australian transfer pricing outcomes their hubs.
Finally, the guideline provides assistance and guidance for preparing a transfer pricing analysis in cases where a hub is subject to ATO review.
This guidance is designed to help taxpayers understand the types of ATO enquiries and potential areas of concern so these concerns can be addressed prior to dealing with the ATO. For this purpose, the guidance provides a series of framing questions which are indicative of the issues that the ATO will consider when reviewing a hub.
The guideline concludes with a schedule on offshore marketing hubs to be used to set out the ATO risk assessment framework for offshore marketing hub arrangements. The guideline stresses that this schedule cannot be relied upon for other types of hubs.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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