Offshore marketing hubs have been in the news before and have been blamed by Governments (the onshore Governments) to be facades or shams for the purpose of profit stripping. The ATO has now released some interesting steps to analyse offshore hubs. In the ATO discussion paper, discussed below, the ATO provides a compliance approach to transfer pricing issues relating to centralised operating models involving procurement, marketing, sales and distribution functions. No doubt this will spark interest by other tax authorities as well. Happy reading, and don’t forget to share or comment!
“The ATO has said that it is concerned that certain related-party offshore marketing hub arrangements may be in breach of transfer pricing rules.
Marketing hubs typically provide marketing and sales functions for goods or commodities produced in Australia and sold offshore. These functions may include price negotiation, contract administration and management, customer relations, shipping, and delivery.
The ATO said that these arrangements can give rise to significant profit shifting issues for the Australian entities involved…”
ATO colour codes hubs (Lexology)
“The ATO has released a discussion paper on its draft practical compliance guideline for offshore hubs. Think of it as the ATO’s risk-differentiation framework applied to offshore marketing hubs but on steroids. The purpose of the guideline is for taxpayers to understand the ATO’s view of the transfer pricing risk applicable to their offshore hub and the likelihood of ATO compliance activity.
The guideline uses 5 colour zones to rank the risk to revenue of offshore hubs (green = low to red = very high). The primary test is a cost plus benchmark. If the hub’s mark-up on its costs (e.g. salary of overseas staff, rent, etc) is 100% or less, then (subject to also passing a secondary cross-check test which is yet to be finalised) the taxpayer’s hub will be in the green zone (low risk). The ATO warns against mark-ups “drifting” up towards this 100% benchmark if currently below it. The benefits of being in the green zone are limited ATO compliance activity, simplified transfer pricing record keeping requirements and access to the APA program.
If the hub’s profit is greater than 100% of its costs or the secondary cross-check test is failed, the taxpayer’s hub will be in either the blue, yellow, amber or red zone depending on:
- the net tax impact of the hub;
- the existence of transfer pricing documentation; and
- behavioural aspects of the taxpayer (e.g. level of co-operation and transparency with the ATO).
Moving up in the different zones brings with it a stricter compliance approach from the ATO.
If taxpayers want to transition existing arrangements to the green zone, the ATO will (for the first 12 months) remit penalties and interest if a voluntary disclosure is made in relation to prior years. Although, the ATO also accepts that just because a taxpayer wishes to come within the green zone going forward this does not mean that prior year arrangements were non-arm’s length.
The ATO will use the reportable tax position (RTP) schedule to obtain information about a taxpayer’s marketing hubs and their risk rating under the guideline.
At the moment the guideline only deals with marketing hubs but it is intended that over time additional schedules will be added for other types of hubs (e.g. procurement hubs).”
“The Finnish Tax Administration (Vero Skatt) is advising multinationals of the option for quick advanced discussions to establish transfer pricing positions.
In a notice published Aug. 15, Vero Skatt said the administration is offering “the possibility to examine the tax position flexibly in advance” so that companies can avoid “unexpected tax consequences.” …”
“New law (no. 6728), effective 9 August 2016, provides new rules related to transfer pricing. The provisions make changes to article 13 of Turkey’s corporate tax law (no. 5520) to align Turkish transfer pricing rules to OECD transfer pricing guidelines.
The new law:
- Provides a 10% threshold for purposes of defining a “related party”
- Removes what has been a strict hierarchy among the transfer pricing methods
- Allows certain types of “roll back” for APAs
- Provides a 50% discount on the tax penalty imposed on taxpayers satisfying the rules for timely and proper documentation…”
“The Multistate Tax Commission’s Transfer Pricing Committee voted to adopt an Information Exchange Agreement, which permits states to share taxpayer information with other states participating in the transfer pricing program. The Committee has an October meeting scheduled, at which it intends to discuss specific taxpayers and their transfer pricing regimes…”