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Australia: Transfer pricing issues concerning centralised offshore non-core procurement hubs

Australia: Transfer pricing issues

The Australian Taxation Office (ATO) released an updated version of a “Practical Compliance Guideline” setting out a compliance approach to transfer pricing issues related to centralised operating models commonly referred to as “hubs.”

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The updated Practical Compliance Guideline (PCG) 2017/1 (11 October 2018) includes an additional schedule (Schedule 2) regarding offshore “on-core procurement hubs” that supply “indirect” or “non-core” goods or services to an Australian entity. Schedule 2 only applies when the procurement is in relation to non-core products—that is, goods and services that support the operations of business that are not converted into a finished item or resold. Examples include office equipment, advertising, travel management, and professional services.

There is a significant carve out in relation to goods/services required to perform the core operations of the business, for example:

  • Goods purchased for resale by a distributor
  • Production inputs or plant and equipment used by a manufacturer to produce goods
  • Heavy equipment used in mining operations

As a result, while Schedule 1 regarding sales and marketing hubs was relevant to a relatively significant number of taxpayers, it is expected that Schedule 2 will only be relevant for a much narrower group of taxpayers.  

Continued focus on hub arrangements

Certain changes apply to both sales and marketing hubs (Schedule 1) as well as non-core procurement hubs (Schedule 2) and illustrate the ATO’s continuing and evolving focus on hub arrangements. Hub arrangements that are currently outside the low-risk zone can transition to that zone by filing a voluntary disclosure with the ATO. However, the ATO has tightened up the requirements in the latest release of PCG 2017/1.

  • Previously companies were required to amend their past four income tax years, and in these circumstances, the Commissioner would exercise discretion to remit penalties and shortfall interest charges.
  • Now companies are required to amend all income years when the arrangements were in place, and the ATO will consider this as a strong factor in favour of exercising the Commissioner’s discretion to remit penalties and interest.

For those taxpayers affected by the guidance, the approach for non-core procurement hubs broadly aligns with that for sales and marketing hubs—assigning hub arrangements one of six different transfer pricing risk categories or “zones” (ranging from “white” for “ATO reviewed already” to “red” for “very high risk”) similar to what the ATO has used in other PCGs.

KPMG observation

Taxpayers that transact with offshore non-core procurement hubs need to consider their risk rating under the PCG.  When a taxpayer's arrangements are outside of the “green” (low risk) zone, their risk rating can be mitigated by having transfer pricing documentation that supports the hub's profit outcome as being consistent with comparable arm's length outcomes. Alternatively, the taxpayer may consider a voluntary disclosure that must be filed by 11 October 2019.

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