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Australia: Transfer pricing issues related to inbound distribution arrangements

Australia: Transfer pricing, inbound distribution

The Australian Taxation Office (ATO) posted a draft “practical compliance guideline” (PCG) that examines transfer pricing issues related to inbound distribution arrangements.

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The draft practical compliance guideline—PCG-2018/D8—outlines the ATO approach to transfer pricing outcomes associated with certain activities of inbound distributions including:

  • Distributing goods purchased from related foreign entities for resale 
  • Distributing digital products or services when the intellectual property in those products or services is owned by related foreign entities

These activities, along with any related activities involving the provision of ancillary services, are referred to in the draft PCG as “inbound distribution arrangements.” The draft PCG states that the ATO will use this as a framework for assessing the transfer pricing risk of inbound distribution arrangements, with the assessment to reflect a combination of quantitative and qualitative factors.

According to the draft PCG, if the ATO were to rate inbound distribution arrangements as having a low transfer pricing risk, the taxpayer could expect that the ATO would generally not apply compliance resources to review the transfer pricing outcomes of these arrangements. However, if the inbound distribution arrangements are not within the low transfer pricing risk category, a taxpayer could expect that the ATO would monitor, test, and verify the transfer pricing outcomes of the arrangements. The higher the risk rating, the more likely the ATO would be to review the arrangements as a matter of priority.

The draft PCG is limited to the transfer pricing risks associated with inbound distribution arrangements. It does not affect the ATO compliance approach to other tax issues that might arise in connection with inbound distribution arrangements (for example, the existence of withholding tax obligations or the application of the general anti-avoidance rule). If it is determined that the inbound distribution arrangements pose a risk under other tax provisions, the ATO would be expected to apply compliance resources to review the arrangements.

Having a low-risk rating under this draft PCG does not necessarily mean that the transfer pricing outcomes are correct or that the taxpayer has a reasonably arguable position. Equally, having a high-risk rating under this PCG does not necessarily mean that the inbound distribution arrangements fail to comply with Australia's transfer pricing rules. The ATO, having regard to particular circumstances, may accept that the transfer pricing outcomes are reasonable.

Taxpayers may use the framework set out in the PCG to: 

  • Assess the transfer pricing risk of inbound distribution arrangements
  • Understand the compliance approach likely to be adopted by the ATO, given the transfer pricing risk profile of the inbound distribution arrangements
  • Work with the ATO to mitigate the transfer pricing risk of inbound distribution arrangements and provide a level of confidence that the taxpayer has reduced the risk exposure
  • Understand the type of analysis used in the ATO assessment of the transfer pricing risk of inbound distribution arrangements

 

Read a November 2018 report [PDF 189 KB] prepared by the KPMG member firm in Australia

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