ATO’s New Transfer Pricing Guidelines on Marketing, Sales, and Distribution Hubs, What Actions Should I Take Now?
On January 2016, the ATO released new compliance approach to transfer pricing issues related to centralised operating models (hubs) involving procurement, marketing, sales, and distribution functions.
This Practical Compliance Guideline (“PCG”) 2017/1 comes into effect from 1 January 2017 and will apply to existing and newly created hubs.
Key considerations of PCG 2017/1
- The guidelines provide the ATO’s possible approach when assessing the transfer pricing risk profile of a hub. It also intends to make the assessment tool available to taxpayers and allow them to perform a self-assessment and establish whether the hub is in a low or high-risk position.
- The self-assessment risk tool allows taxpayers to work with the ATO to mitigate transfer pricing risk and reduce the risk exposure related to the hub. It helps to understand the type of analysis and evidence the ATO would require when testing the pricing of transactions related to the hub.
- The guidelines outline a series of questions that taxpayers are expected to address in the TP documentation about the hub. These questions seek to address the following critical areas of a transfer pricing analysis (1) Commerciality of the hub (2) Functions of the hub (3) Risks assumed by the Hub (4) Arm’s length nature of the pricing arrangement.
- The guidelines also emphasis the importance of preparing transfer pricing documentation to support the pricing of a related party transaction involving an offshore hub as a tool to reduce potential transfer pricing risks.
- The guidelines include Schedule 1 which outlines the risk assessment framework for offshore marketing hubs only. However, it is expected that the ATO will release more schedules for other type of hubs.
About the risk ratings
The risk rating includes six different levels of risks, starting with a white zone being the lowest risk zone to a red zone being the highest risk zone. There are some factors taken into consideration in each zone including pricing indicators, possible tax at risk and the quality of transfer pricing documentation.
The ATO will prioritize hubs falling under the high-risk zone while it will not generally apply compliance resources to assess the transfer pricing outcome of hubs falling under the low-risk zone.
The guidelines provide a suggested five-step process for taxpayers to assess the level of risks and whether the hub falls inside or outside the low-risk rate (also known as green zone).
What actions should I take now?
If you have an offshore marketing hub, it is recommended to perform a self-assessment to understand the risk rating of the hub. For this purpose, taxpayers should follow the five-step process of the risks assessment tool outlined in PCG 2017/1.
White or green zone rating (no risk or low risk zones)
If your hub is in the white zone, you are not expected to perform a risk self-assessment. A hub is in the white zone if:
- An APA or a settlement agreement is in place with the ATO or;
- Within the last two years, the ATO has reviewed the hub or has assessed it with low-risk rating, or there was a court decision.
If based on your facts and circumstances, your hub is rated in the green zone; you are in the lower priority zone for the ATO. Keeping transfer pricing documentation is still recommended in order to be prepared for any transfer pricing risk review.
Rating outside the green zone (moderate to very high risk zones)
If based on your facts and circumstances, your hub is rated outside the green zone, you are likely to be reviewed by the ATO. Therefore, it will be critical preparing transfer pricing documentation to support the pricing of the related party transaction with the offshore hub.
It is recommended to discuss within the organisation the tax exposure and whether there are any actions that can be implemented for the hub to be moved within the green zone.
Contact Transfer Pricing Solutions
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