Consultation on the ATO’s practical guide for offshore marketing hub arrangements is kicking off in August. The guide may also assist taxpayers with offshore intellectual property (IP) hubs. Here is what you need to know if you market Australian produced goods offshore or have centralised your IP offshore.
Do you have an offshore marketing or IP hub?
You could be considered to have an “offshore marketing hub” if you pay a related offshore party for any of the following services:
- sales, for example, contract negotiation, administration and management;
- marketing, for example, customer relations;
- logistics, for example, shipping and delivery.
You could be considered to have an “offshore IP hub” if you pay a related offshore party for the use of IP, particularly if that IP was originally developed in Australia.
Australian taxpayers are required to self-assess any transfer pricing benefit obtained from offshore marketing and IP hub arrangements.
Does your hub lack economic substance?
The ATO has already flagged concerns with the substance of offshore hub arrangements. According to the ATO:
- offshore hub arrangements could lack economic substance, or could differ in substance from their legal form; and
- transfer prices may not reflect the actual functions performed, assets used and risks assumed by the related party offshore.
Taxpayers should consider re-characterisation risk if independent entities would not enter into comparable arrangements.
Commissioner of Taxation Chris Jordan, appearing before the Senate Economics References Committee on corporate tax avoidance, said taxpayers may not be doing as much as they say they are in the hub jurisdictions. It is about testing “the amount of profit that is left [in the foreign jurisdiction] for the function performed”.
Taxpayers can do a high level sanity check of their arrangements by comparing measures like profit per employee and return on assets across their worldwide operations. Taxpayers should also consider how much value is created for their business in the hub jurisdiction.
Consultation on ATO’s practical guide
The ATO is proposing to publish a practical guide for taxpayers with offshore marketing hub arrangements, including “risk flags” to consider in assessing your level of compliance risk. Taxpayers with IP hubs should also consider participating as many of the relevant issues will overlap.
Consultation on the guide is kicking off in August.
Taxpayers interested in participating can contact the ATO directly at email@example.com. Alternatively, please contact our tax team for further information on how you can contribute to the process.
Not just transfer pricing
ATO inquiries into offshore hubs are not limited to transfer pricing. According to the ATO, other provisions, “including the capital gains tax, controlled foreign companies and the general anti-avoidance provisions, may also be relevant”.
It is also important for taxpayers to present consistent information to State and Commonwealth revenue authorities. An audit by a State revenue authority may flag a potential ATO audit (or vice versa). For example, the WA royalty regime allows the royalty value to be determined having regard to “true or fair value”. Any submissions made on true or fair value must be consistent with the arm’s length values self-assessed for transfer pricing purposes.
In addition, with the proposed introduction of master and local transfer pricing files and country-by-country reporting with effect from 1 January 2016, it is now more important than ever to also present consistent information to revenue authorities worldwide.
Will your arrangement withstand ATO scrutiny?
Taxpayers with existing marketing or IP hub arrangements can benefit from a legal “stress test” of their transfer pricing documentation. We can ensure that your transfer pricing position is evidentially robust and help you to better understand your transfer pricing risk profile. Our experience in some of the most challenging transfer pricing litigation, advanced pricing arrangements (APAs) and mutual agreement procedure (MAP) applications gives us a unique insight into defending your transfer pricing position.
Taxpayers contemplating new offshore arrangements can benefit from advice on the best transfer pricing options available to them. We can assess whether your case is suitable for an APA or a MAP application and advocate on your behalf. We can also tailor transfer pricing documentation to your specific needs. Our transfer pricing documentation incorporates court quality reports from experts with the best qualifications for your case. We have built up expert contacts with specialist skills in virtually every industry, so you can be confident that the report you get will stand up to examination.