2017: ATO transfer pricing issues related to centralised operating models

The Practical Compliance Guideline (Guideline) sets out the Australian Taxation Office’s (ATO’s) compliance approach to transfer pricing issues related to the location and relocation of certain business activities and operating risks into a centralised operating model.

The type of activities commonly centralised include marketing, sales and distribution functions although centralised operating models are not necessarily limited to these functions. For the purposes of this Guideline, these centralised operating models are referred to as ‘hubs’.

The ATO understands that the overall structure of hubs, the transactions that flow in and out and the diversity and sophistication of a hub’s dealings contribute to increased complexity and higher costs for tax compliance. The Guideline is designed to help manage the compliance risk and therefore the compliance costs associated with your hub.

The framework set out in the Guideline can be used to:

(a) assess the compliance risk of the transfer pricing outcomes of hubs in accordance with the ATO’s risk framework

(b) understand the compliance approach that the ATO will likely adopt having regard to the risk profile of hubs

(c) mitigate the transfer pricing risk in relation to hubs , and

(d) understand the type of analysis and evidence the ATO would require when testing the outcomes of hubs.

the ATO’s  engagement will be tailored having regard to the specific hub’s risk rating. If a hub is assessed as being in the low risk zone it can be expected that the ATO will not generally apply compliance resources to test and assess the transfer pricing outcomes. If a hub falls outside the low risk zone, It can be expected that the ATO will monitor, test and/or verify the transfer pricing outcomes. Hubs with a high risk rating will be reviewed as a matter of priority.

There is no presumption that because a hub is outside the low risk zone that the transfer pricing outcomes are incorrect, rather it means that the ATO considers a risk and therefore the ATO may conduct further compliance activity to test the outcomes of the hub.

The transfer pricing methods used in the risk framework in the Guideline are for risk assessment purposes only. Consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 (OECD guidelines), when pricing an arrangements the transfer pricing methodology (or combination of methodologies) that is most appropriate and reliable for your circumstances should be used.

The Guideline is structured as follows:

(a) Part A sets out the general indicators and principles of the hub risk framework. These principles are relevant to all types of offshore hubs and
apply to both outbound and inbound goods and commodity flows

(b) Part B provides guidance to assist you when preparing your transfer pricing analysis if you are outside the green zone, and

(c) Schedules attached to this Guideline set out specific indicators relevant to particular types of hubs.