Inbound distributors: new ATO guideline on transfer pricing risk framework
On 13 March 2019, the Australian Taxation Office (ATO) released a Practical Compliance Guideline PCG 2019/1 (Guideline) on its approach to identifying potential transfer pricing issues for existing and new inbound distribution arrangements involving multi-national entities (MNEs). The Guideline sets out the ATO’s framework for this compliance activity and provides useful guidance on the ATO’s perception of the risk associated with particular industries including the life sciences, information and communications technology, motor vehicle and general distributors industries.
Pursuant to the Guideline, the ATO will consider an entity to be an ‘inbound distributor’ if its business predominantly involves the distribution of goods purchased from related foreign entities for resale, or the distribution of digital products or services where the intellectual property in those products or services is owned by related foreign entities.
All MNEs required to file a Reportable Tax Position schedule — currently all entities with an Australian turnover in excess of $250,000,000 (who are likely to have been notified already by the ATO) — will need to self-assess their risk rating. However, the risk framework in the Guideline will not apply if a distributor currently has an Advance Pricing Agreement, settlement agreement with the ATO or another exception applies.
The framework contains separate schedules setting out the quantitative and qualitative indicators relevant to the life sciences, information and communications technology, motor vehicle and general distributors industries.
The allocation of an MNEs risk zone as within the low (green), medium (amber) or high (red) zone, is broadly determined with reference to its five-year weighted Earnings Before Interest and Tax margin, compared with industry margins (referred to in the Guideline as ‘profit markers’).
The Guideline operates as a tool for MNEs to assess their transfer pricing risk and consider how closely the ATO will be looking at their intercompany dealings. In the medium to high risk zones, taxpayers should consider seeking pre-emptive advice on whether their current transfer pricing arrangements are compliant with Australia’s transfer pricing rules as the ATO will likely be actively monitoring the taxpayer’s activities and may commence a review or audit.
What is a ‘restructuring’ under Div 125?
On 20 March 2019 the ATO released Draft Taxation Determination TD 2019/D1 (Draft Determination) on the meaning of ‘restructuring’ for the purposes of Division 125 (Div 125) Income Tax Assessment Act 1997 (Cth) (ITAA 1997) (which relates to obtaining CGT relief in a qualifying demerger situation).
The Draft Determination clarifies what kinds of actions and transactions fall within the scope of ‘restructuring’ under Subdivision 125-B, and as a consequence, which of these must satisfy the other conditions for CGT relief, such as the ‘nothing else’ condition.
In short, the Draft Determination notes that ‘restructuring’ of the relevant demerger group takes on its ordinary business meaning and in that sense it refers to the reorganisation of a group of companies or trusts. In determining what constitutes a particular restructuring, the Draft Determination notes that this is a question of fact.
Under the demerger provisions, CGT roll-over relief may be available where the requisite conditions are satisfied. The overall objective is to defer a taxing event where a group undertakes a genuine reorganisation of its operations leaving members in the same economic position as they were immediately before the reorganisation.
A necessary condition to meet the definition of an eligible ‘demerger’ is that there is a restructuring of the demerger group. In the past the interpretation of this requirement has been ambiguous with respect to the nature of transactions that fall within the scope of ‘restructuring’ for these purposes.
Under the Draft Determination, the Commissioner states that a ‘restructuring’ of a demerger group should be given its ordinary business meaning; that is, the reorganisation of a group of companies or trusts.
The Commissioner notes that the ‘preferred’ interpretation of restructuring requires:
- identifying all steps and transactions which are connected to, required to give effect to or are expected to result from, the disposal, ending or issue of the original and new ownership interest in a demerger; and
- where relevant referring to case law on the meaning of the more general terms ‘scheme’ and ‘arrangement’; and
- in some circumstances, considering whether the restructuring would make sense without the relevant step(s) in the commercial context.
In determining whether transactions or steps form part of a single plan, the Commissioner notes that a key factor should be the proposal that is presented to the affected shareholders or unit holders.
The Draft Determination is open for comment until 30 April 2019.
The Tax Industry’s Night of Nights for 2019, the Federal Budget release, is set for 2 April. Hall & Wilcox will be hosting its own internal lock-up, with the Tax Team and Firm industry leaders analysing the release live and providing their considered thoughts by video on Budget night. This will be followed by a brief written update the following morning.