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.
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).
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.
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:
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.
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.
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