Inbound distributors - Transfer pricing issues ahead!
The ATO released the Draft Practical Compliance Guideline PCG 2018/D8. Transfer pricing arrangements have been one of the ATO’s focal points in recent years due to the increasing number of multinationals operating in Australia through subsidiaries acting as inbound distributors.
The ATO’s risk assessment framework considers an inbound distributor to be an intermediary between the producer of a good and another entity in the distribution channel or supply chain. The ATO’s draft ruling applies to a wide variety of inbound distributors including limited risk distributors for goods or digital products or services. The Guidelines also include any related activities involving the provision of ancillary services such as warehousing.
There is a carve out to the new guidelines if an inbound distributor chooses to adopt the simplified transfer pricing record keeping option (PCG 2017/2). Accessing the concessions in the simplified rules requires certain criteria to be met.
How are transfer pricing risks assessed?
The new framework assesses the transfer pricing risk by comparing the profit outcome of the arrangement against industry based profit markers. The profit markers are at the Earnings Before Interest and Tax (EBIT) level relative to sales. This measure of profit performance is calculated as a five-year weighted average EBIT margin.
The ATO’s position is that they do not generally expect inbound distributors to enter into substantial debt arrangements.
The Risk Assessment Framework & Profit Markers
The new framework consists of three transfer pricing risk zones outlined below and is used across all industries:
While there are profit markers for general distributors, there are also industry specific markers for Life Science, Information and Communication Technology and Motor Vehicles.
If the risk rating is low, the ATO will generally not apply compliance resources to review the transfer pricing outcomes of their arrangements. The higher the risk rating, the more likely the ATO is to review the distributor’s arrangements as a matter of priority.
This draft Guideline is limited to the transfer pricing risks associated with inbound distribution arrangements and does not impact the ATO’s compliance approach to other tax issues that might arise with the inbound distributor’s arrangements. If the ATO considers any inbound distribution arrangement to pose a risk under other tax provisions, it will apply compliance resources to review this.
While these Guidelines are only in the draft stage, it is vital to consider how these changes will impact your whether you are an Australian inbound distributor or have relationships with businesses that could be affected.
If you have any questions in relation to the above, or in relation to the other profit markers, please contact your engagement partner on 02 9283 1666.