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.”
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:
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.
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.
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.
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.
© 2020 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.