On 16 January 2017, the Australian Taxation Office (“ATO”) released the initial Practical Compliance Guide (PCG) 2017/11 (“Guideline”) that sets out the ATO’s compliance approach to transfer pricing issues related to centralised operating models (known as "hubs") involving procurement, marketing, sales and distribution functions.
Specifically, the Guideline provides a self-assessment risk framework that allows taxpayers to assess their transfer pricing outcomes concerning their offshore hubs. Currently (as at the time of posting), the Guideline contains two Schedules which set out the specific risk indicators relevant to only:
Is PCG 2017/1 applicable to other types of offshore hubs?
Although the specific risk indicators cannot be used to risk assess other types of hubs, the general indicators and principles of the hub risk framework still applies to ALL types of offshore hubs. In addition, part B of the Guideline provides guidance to assist taxpayers with their transfer pricing analysis if their risk rating is outside the green zone. Nonetheless, the ATO intends to release additional schedules over time and a draft involving offshore shipping service hub has been issued for public comment on 8 November 2018.
When does PCG 2017/1 take effect?
The Guideline will be effective from 1 January 2017 and applies to both existing and newly created hubs. Schedule 1 and Schedule 2 have effect for income tax years starting on or after 1 January 2017 and 1 January 2018, respectively.
Do taxpayers need to inform the ATO their hub’s risk rating?
Taxpayers do not need the ATO input or sign off on the risk rating. However, when asked by the ATO, taxpayers need to inform the ATO if they have self-assessed their hub’s rating and if so, what the risk rating is. However, bear in mind that taxpayers are required to disclose details in Q28b of the International Dealings Schedule ("IDS") if any of the final schedules within PCG 2017/1 applies to their offshore dealings.
Hubs refer to commonly centralised activities which include marketing, sales, distribution, procurement, etc. and may take a wide range of legal forms. Offshore marketing hubs and offshore non-procurement hubs are specifically defined as below:
It is important to note that the Guideline is premised on the basis that the hub has commercial and economic substance.
Summary of Risk Assessment Framework
Source: PCG 2017/1, 11 October 2018
Source: PCG 2017/1, 11 October 2018
Settlement between BHP Billiton and ATO
In November 2018, BHP announced that it has settled a transfer pricing dispute amounting to A$529 million with the ATO. The dispute centred on the amount of Australian tax payable through the sale of BHP Australia’s commodities to its marketing hub in Singapore. The commodities (e.g. iron ore, coal) dug up in Australia are firstly sold to BHP’s own business in Singapore and then subsequently resold at a high mark-up to third party customers.
Singapore has a low corporate tax rate at 17% and is part of the specified countries in the IDS. In addition, the Singapore government has granted BHP incentives for its marketing activities which enabled BHP to legally reduce its tax payable to near-zero. Therefore, the ATO claimed that BHP is essentially avoiding tax by channelling part of its profits generated from the sale of Australian commodities through Singapore. As part of the settlement, BHP will pay a total of approximately A$529 million (A$328 million already paid) in additional taxes for the income years 2003 to 2018.
Following that, from July 2019, BHP Australia will increase its ownership of the marketing hub in Singapore from 58% to 100%. This will result in all profits made in Singapore in relation to the Australian assets owned by BHP Australia to be fully subject to Australian tax. This arrangement satisfies the full CFC attribution which places BHP’s marketing hub arrangements in Singapore within the green “low risk” zone.
Taxpayers who have offshore hubs arrangements should self-assess using the PCG 2017/1, re-evaluate their offshore hubs arrangements and
document in their transfer pricing documentation to ensure their risk rating is appropriately justified.
1 Updated on 17 March 2017 and 11 October 2018.
2 Non-core products are goods and services that supports the operations of a business which are not converted into a finished item or resold.
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Contributed by our Consultant Samuel Tay
Samuel was attached to two international accounting firms prior to joining Transfer Pricing Solutions Asia. He has prepared transfer pricing documentation for clients from the Asia Pacific region (e.g. Malaysia, Singapore and Australia).
His expertise includes handling transfer pricing engagements and conducting benchmarking studies for companies from various industries such as oil and gas, shipping, chemical, wood, jewellery and the electronics industry.
In his spare time, Samuel enjoys reading and playing sports.
Thec Covid-19 pandemic has triggered the most severe recession and is causing enormous damage to the world economy. The economic downturn will impact a group’s transfer prices, analysis and documentation, more so with the BEPS Action Plans in place and the high level of transfer pricing scrutiny across the globe.
JobKeeper forms part of taxable income in the tax return. Makes sense, it is a subsidy against wages, so I am sure there are no surprises there, but how do you assess the arm’s length financial outcomes of the entity for transfer pricing purposes?
The ATO expect that Australian entities will retain the benefit of the JobKeeper payment they receive. So how do you treat the JobKeeper payments for transfer pricing purposes?