The ATO has released two pieces of guidance focusing on Australian cross border supply chains, particularly involving distribution operations and the recognition of intangibles in global supply chains. Over the past 18 months, it is widely known that such structures have been subject to scrutiny, as a consequence of the evolution of BEPS as well as in the context of unilateral Australian tax measures like the Multinational Anti-Avoidance Law (MAAL) and Diverted Profits Tax (DPT).
The accompanying ATO press release notes the ATO's "concerns about multinational taxpayers inappropriately pricing goods in their supply chains or mischaracterising intangible assets, with the ultimate effect of understating profits in Australia". For multinationals operating through an Australian distributor or which have recently restructured their supply chains, this presents an additional layer which they should consider in order to prudently mitigate their risk profile in Australia. As a beneficiary of inbound foreign multinational sales, Australia is being proactive in considering the tax profile of such structures, asserting its view on value creation and characterisation of supply chains selling into Australia.
The ATO in its press release notes: "Assets such as intellectual property, manufacturing know how, trademarks and brand need to be recognised, especially for those taxpayers where intangible assets make up a significant proportion of the inherent value of the goods sold in Australia." Further, the ATO notes Australia has "one of the strongest transfer pricing regimes in the world."
Any approach to Australian characterisation and transfer pricing should therefore be considered from a holistic perspective (commerciality, substance, tax and legal factors) and needs to be well attuned to the rigour that will be applied by the ATO on greater scrutiny.
Two practical points which multinationals operating through Australian distributors should consider as a result of the ATO's recent guidance include:
- whether the return earned by the Australian distributor would be considered as low, medium or high risk according the new draft PCG; and
- critically evaluating whether the payments made to related parties are accurately characterised, in particular, whether there is a possible royalty withholding tax obligations on such payments in light of the ATO's new taxpayer alert.
We have outlined the two new documents in more detail in this alert.