TP Ticker – December 2018
Australian Draft Approach to Centralized Operating Models
On 8 November, the Australian Tax Office (“ATO”) published an updated draft of their “Practical Compliance Guideline \ PCG 2017/1DC2 \ ATO compliance approach to transfer pricing issues related to centralised operating models”. These draft guidelines address transfer pricing for centralized activities, such as marketing, sales, and distribution which are provided from an overseas related party – as hubs – to Australian taxpayers. The framework does establish certain risk categories, from low risk or “green zone” to very high risk or “red zone”. As it is a risk assessment framework and not a safe harbor, even low risk setups can be subject to scrutiny and adjustments. Nevertheless, it foresees lower compliance requirements for low risk structures and in certain situations, such as existence of an advance pricing agreement or a recent review of the transfer prices by the ATO without finding, reliefs the taxpayer even from any need to conduct an assessment. While low risk setups are to enjoy lower compliance requirements, structures with a higher risk profile require further examination, especially the calculation of the approximate tax effect in Australia. The guidelines contain a considerable list of questions that the ATO would inquire when scrutinizing the transfer pricing for the hub, such as evidence of the value-added by the hub, substantiation of its making of key decisions, its financial capacity to bear the risk associated with its activities, and evidence of the regular review of the price setting mechanism. Overall, the practical guidelines are drafted very comprehensively and consider such aspects as procurement by the hub of products that are of supportive nature for the business of the Australian taxpayer (non-core products) and interaction with controlled-foreign-company legislation. The public is invited to provide comments on the draft by 21 December.
In our view the draft guidance is a good example of the efforts tax administrations in many developed countries undertake, to implement OECD BEPS-based measures countering profit shifting via transfer pricing. For practical purposes, not only related to hub-setups, are the lists of examination questions. While overall not specific to Australian circumstances, they may provide helpful guidance in developing audit-ready transfer pricing analyses and documentations.
The draft practical compliance guideline can be found on the website of the ATO here: https://www.ato.gov.au/law/view/document?docid=DPA/PCG20171DC2/NAT/ATO/00001