The Australian Tax Office (ATO) is aggressively challenging the transfer pricing arrangements of foreign-owned multinationals operating in Australia. This ATO focus is attracting significant public and media attention, as the cross-border dealings of multinationals and the role of their “Big 4” advisors (who provide both legal and non-audit services) have become front-page news in Australia.
One particular area of focus is the transfer pricing arrangements involving inbound Australian distributors as set out in a draft ATO Guideline: Transfer pricing issues related to inbound distribution arrangements (PCG 2019/1).
An inbound distributor is an Australian business that predominately distributes goods purchased from related foreign entities for resale, primarily to business-to-business customers, not end consumers.
The ATO has identified 3 risk zones: high, medium and low. If inbound distribution arrangements are identified as high risk, the ATO has suggested they will engage in activities such as monitoring the transfer pricing arrangement or commencing a review on an entity.
The ATO compares the profit achieved by the arrangement against profit markers identified by the ATO for specific industries. The measurement the ATO will use to analyse the profit achieved by an inbound distributor is Earnings before Interest and Tax (EBIT) relative to sales. The ATO will assess these profit markers on an industry basis as summarised below.
ATO Practical Compliance Guidelines provide law administration guidance regarding the ATO’s method of assessing tax compliance risk, and how it is likely to deploy its audit resources. Multinationals should review their Australian distribution arrangements. Where they fall into the “High Risk” zone, companies should consider why, and prepare for ATO compliance action. This may include engaging proactively with the ATO to best manage the multinational’s risk profile.
Craig Silverwood – MinterEllison
Email: craig.silverwood@ minterellison.com
Sian Jackson-Findlay - MinterEllison
Kip Harding – Red Consulting
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