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Aug. 10—The Australian Taxation Office is proposing a five-level framework to assess transfer pricing risk arising from hubs used by multinational companies in Australia to centralize business activities such as marketing, sales and distribution.
Multinational companies would be given 12 months to remedy high-risk activities for using hubs to reduce Australian taxes ahead of a proposed five-level framework introduced Aug. 10 in a draft “ practical compliance guideline .”
The guideline suggests the tax authority will use multiple variables to allocate marketing and other hubs into one of five risk categories. Low-risk activities classified as “green zone” hubs would generally not undergo compliance scrutiny. “Red zone” indicates a very high-risk hub activity, which would undergo scrutiny as a matter of priority from the Australian Tax Office (ATO).
Companies using green zone hubs would also be eligible to use a simplified transfer pricing record-keeping option, and would have access to the ATO's advance pricing agreement program, subject to meeting other criteria.
The ATO said in the 142-page consultation paper that it is concentrating efforts on international related party dealings that pose the highest risk of not complying with the transfer pricing rules. From the release of the paper, complex hubs appear to be within that category.
Use of marketing hubs in Singapore came under scrutiny in 2015 during an Australian Senate inquiry into whether multinationals were shifting profits to lower tax jurisdictions. In appearing before the committee, Rio Tinto Group received praise for providing “considerable detail” about how the company used marketing hubs in Singapore (223 TMIN, 11/19/15).
“Most Australians wouldn't have realized that iron ore was being sold through Singapore,” said Labor Party member Andrew Leigh. “They would imagine that the sales path was the same as the path that the ships took.”
Under the draft guideline, compliance checks would be undertaken for hub activities that fall into one of three intermediate risk categories: blue, yellow and amber that fall between the green, low-risk, and red, high-risk categories.
All hubs rated outside a green zone might be required to disclose additional information, the guidelines say, such as the value of the goods marketed, sold or purchased by the hub, and the effective commission generated by it.
The guideline also cautions that if the ATO opts to review a hub, “we may obtain information from third parties such as your suppliers and customers.”
The risk rating allocated to a hub might also influence the ATO's approach to resolving disputes, such as its willingness to use alternative dispute resolution processes, it says.
The ATO acknowledged the release of the guideline might prompt some taxpayers to adjust the pricing of their hub dealings to ensure a green zone rating, and offers an inducement for them to do so quickly.
“If you have an existing arrangement and you intend to adjust your pricing to move within the green zone going forward, the Commissioner is willing to work with you to resolve the ‘back years' in a co-operative and practical manner,” the guidelines say.
Specifically, if a taxpayer makes a voluntary disclosure on back years and adjusts its pricing to come within the green zone, the commissioner will forgive any penalties under Division 284 of Schedule 1 of the Taxation Administration Act, it said.
It would do so only if hub has commercial and economic substance. It is also conditional on the taxpayer making a “full and true” disclosure of the arm's-length conditions.
The guidance, which also details current compliance hot spots, would be effective when finalized and would apply to existing and new hubs.
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