The Australian Taxation Office (ATO) on 19 February 2020 issued final guidance concerning transfer pricing issues of non-resident owned mobile offshore drilling units.
The guidance—PCG 2020/1, Transfer pricing issues related to projects involving the use in Australian waters of non-resident owned mobile offshore drilling units—finalises rules that generally follow the draft version (PCG 2019/D5) released in September 2019, and primarily affects Australian taxpayers that lease a vessel (a mobile offshore drilling unit (MODU)) from a non-resident related party under a bareboat-charter arrangement for drilling and drilling-related activities (e.g., pipe-laying and heavy-lift vessels) in Australian waters.
The key amendments in the final guidance (from the draft version of the PCG) include:
Question 7 of the Reportable Tax Position (RTP) schedule currently requires disclosure of whether the taxpayer has entered into any arrangement or variation of an arrangement described in Taxpayer Alert TA2016/4; however, the instructions state that Question 7 will be updated to seek disclosure of the self-assessed PCG risk rating once the PCG has been finalised. Tax professionals expect that the RTP instructions will soon be updated to require disclosure of taxpayers’ self-assessed risk rating under PCG 2020/1.
Key elements of PCG 2020/1
$ = Australian dollar
The implications of being in the different coloured zones broadly align to previous PCGs issued by the ATO as follows:
If an arrangement is in the white zone, the ATO has already reviewed the transaction and agreed to the transfer pricing outcomes (post issuance of PCG 2020/1), or agreed to an advance pricing agreement (APA). If an arrangement is in the white zone, it will generally not be subject to further ATO review.
To qualify for the green zone and be considered “low risk,” the profitability of the Australian operations compared to the total contract revenue of the Australian operations must be 10.5% or greater for the relevant income year. In determining the profitability of the Australian operations, taxpayers will need to consider the entirety of the drilling and associated activities of the operator in Australia which may mean combining the financial results of more than one entity. This may be a challenging exercise for some taxpayers. An arrangement in the green zone will generally not be subject to ATO review or audit.
Outside the green zone
Arrangements outside the green zone are more likely to be reviewed by the ATO as matter of priority. The ATO has also outlined in the PCG the extensive information that it will most likely request in a review or audit context, which includes a significant level of detail from the vessel owner. Taxpayers with red zone arrangements may want to determine that they have robust transfer pricing documentation in place to support the arm’s length nature of the arrangements.
Transitioning to the green zone
The ATO will consider remitting shortfall penalties to nil and shortfall interest charge to the base rate if certain pre-conditions are met (for a period of 12 months after publication of the PCG). In order to be eligible for this concession, taxpayers are required to make a voluntary disclosure in relation to historic, current, and prospective income years when the arrangements are in place and adjust to reflect an appropriate transfer pricing outcome.
The provision of guidance from the ATO in relation to this issue is long awaited and therefore will be welcomed on one level. Nevertheless, the ATO has maintained the high benchmark required to qualify for the low-risk green zone in the final version of the PCG, particularly given the economic conditions affecting the oil and gas industry in recent years. It therefore remains to be seen how many taxpayers will find themselves in the green zone under the proposed arrangements. Taxpayers engaged in leasing arrangements covered by the PCG need to consider their leasing arrangements in light of the finalised guidance. When an arrangement is outside of the green (low risk) zone, taxpayers will want to determine that they have robust transfer pricing documentation in place that supports an alternative outcome as being consistent with comparable arm's length outcomes, or they may consider a voluntary disclosure.
For more information, contact a KPMG tax professional in Australia:
Michael Fortmann | +61 8 9263 7444 | firstname.lastname@example.org
Nick Warth | +61 8 9263 7731 | email@example.com
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