The ATO turn their focus to Australian taxpayer’s who distribute goods or digital products/services acquired from related foreign entities

By Aileen O'Carroll - November 29, 2018

On Friday 23 November 2018, the Commissioner issued a draft practical compliance guideline: Draft PCG 2018/D8 about ‘transfer pricing issues related to inbound distribution arrangements’.

The Draft PCG 2018/D8 will apply to taxpayers the ATO considers to be inbound distributors (those whose main function is to act as an intermediary between an offshore related party producer or developer of a product and a third-party customer.)

The Draft PCG 2018/D8 summarises benchmarks developed by the ATO based on expected profit margins to assess inbound distributors as either low, medium or high from a transfer pricing risk perspective. With each risk zone linking to the likelihood of having transfer pricing practices and policies reviewed i.e. high risk, ATO enquiry is imminent. 

The ATO will use a five-year weighted EBIT margin (i.e. EBIT/Sales %) based on available statutory or management accounts to determine what risk zone a taxpayer falls within. Importantly, the benchmarking and risk assessment process will be a retrospective exercise assessing the last 5 years of returns.

These benchmarks align with the following categories:

  • General distributors;
  • Life Sciences sector;
  • Information and Communications Technology (ICT) sector; and
  • Motor Vehicles sector.

Within each of the industries additional differentiation is provided based on the functional profile of the entity specifically assuming certain activities that add incremental value and therefore, where present, require higher benchmarked returns.

A summary of the profitability benchmarks is provided below:

Taxpayers who believe they fall within the remit of the PCG should assess their position but be cognisant that the PCG does not provide an application of the tax law. Accordingly, being in a high-risk category according to the PCG does not mean a taxpayer isn’t compliant with the transfer pricing legislation, it would however appear that ATO enquiries and/or monitoring is inevitable.

We feel that the release of the PCG further indicates the willingness of the ATO to use guidelines to drive transfer pricing behaviour and it is important that taxpayers are ready for an ATO enquiry.

This enquiry will likely include assessing your arrangements against the legislation and making enquires that the correct documentation exists to support the appropriate application of those provisions.

We anticipate that the ATO will proceed with taxpayer identification and risk assessment activities in the first half of 2019.

Should you believe you fall within the PCG definition of a distributor arrangement we encourage you to contact us to discuss the best way to manage any potential risk.

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