Multinationals will need to consider the ATO’s profit markers in the context of any global transfer pricing policies and confirm the arm’s length nature of their distribution arrangements following the release of practical compliance guideline 2019/1.
The Australian Taxation Office (ATO) released PCG 2019/1 Transfer pricing issues related to inbound distribution arrangements (the PCG) on 13 March. The PCG represents the finalised version of draft Practical Compliance Guideline PCG 2018/D8 and takes immediate effect. It will apply to existing and new inbound distribution arrangements.
The PCG outlines the ATO’s approach to risk rating based on profit level and functional factors for Australian inbound distributors, and at what profit levels it may dedicate resources to investigate further their transfer pricing arrangements. The PCG provides a high, medium, and low risk coloured zoning classification based on the Earnings Before Interest and Tax (EBIT) margin achieved by the inbound distributor, with inbound distributors being divided into four key industry categories, being:
The Life Sciences industry is further divided into three sub-categories whilst the ICT industry is divided into two sub-categories. The sub-categories are driven by the functions / activities undertaken by the inbound distributor which the ATO considers ‘incrementally generate value’.
The ATO EBIT margins for each industry (which should be calculated on a 5-year weighted average basis) are summarised below, with ATO indicating that it will likely contact taxpayers that are considered to fall in the high or medium risk zones.