On 27 June 2018, the ATO released a draft updated version of Practical Compliance Guideline PCG 2017/1, its guidance on transfer pricing issues related to centralised operating hubs (PCG 2017/1DC).
PCG 2017/1 contains a hub risk assessment framework and one schedule covering offshore marketing hub arrangements. When PCG 2017/1 was first issued, the ATO indicated that it planned to add additional schedules over time.
The First Schedule deals with core products and the Second Schedule (still in draft form) deals with non-core goods and services. You can see this from para 173 of PCG 2017/1DC).
Draft Schedule 2 provides guidance on the transfer pricing risk associated with purchasing non-core goods and services from offshore procurements.
- The ATO plans to assess non-core procurement hub arrangements as low risk (green zone) if the hub profit does not exceed a 25% mark-up on hub costs.
- Taxpayers with a greater than 25% mark-up can move to the green zone if they have a 100% attribution percentage in relation to the non-core procurement hub (under Australia’s CFC rules) and include the income related to the procurement activities of the hub in their assessable income for Australian tax purposes.
PROPOSED DATE OF EFFECT: When finalised, Schedule 2 will apply to income tax years commencing on or after 1 January 2018.
COMMENTS on Draft Schedule 2 are due by 27 July 2018.
[ATO website: Advice Under Development [3902]; LTN 121, 27/6/18; Tax Month – June 2018]
Study Questions (answers available)
- Is PCG 2017/1 about assessing audit risk for ‘procurement’ hubs (in traffic light format: green, orange, red)?
- Is the First Schedule about procurement of ‘core’ goods?
- Is the Draft Second Schedule about ‘non-core’ goods?
- Is the only way to be assessed as in the ‘green zone’ having a mark up of no more than 25%?
