On 23.11.18, the ATO released Draft Practical Compliance Guideline PCG 2018/D8 – Transfer pricing issues related to inbound distribution arrangements.
It outlines the ATO’s intended compliance approach (or the amount of audit attention, they will apply ) to the transfer pricing outcomes associated with the following activities of inbound distributors:
- distributing goods purchased from related foreign entities for resale, and
- distributing digital products or services where the intellectual property in those products or services is owned by related foreign entities.
For these purposes, the ‘distributors’ do not ‘significantly transform goods. Neither does this PCG cover ‘finance or insurance’ activities (but see PCG 2017/4).
The ATO says that distributors do add value and they, therefore, expect to see some profit (that can be assessed in Australia).
The Commissioner has established ‘profit markers’ to help assess the levels of compliance risk. He says he has done this via a study of arm’s length distributors of the same type.
The lowest level of risk is described as the ‘green zone’, which is an Earnings Before Interest and Tax (EBIT), from the distribution activity, of the following percentages of sales:
- General distributors: EBIT above 5.5% of sales
- Life Science Distributors –
- Category 1 (eg. delivering medical information to potential prescribers and promoting life science products): EBIT above 5.1% of sales.
- Category 2 (eg. interpreting clinical trial data and generating data and product awareness through engagement with the scientific and medical community): EBIT of above 8.9% of sales.
- Category 3 (eg. training and assistance in conducting surgical procedures involving medical devices – including implantables): EBIT of above 10% of sales.
- Information and Communication Technology Distributors –
- Category 1 (eg. Sales and Marketing activities, Pre and/or Post sales services, Logistics and warehousing functions): EBIT of above 4.1% of sales.
- Category 2 (eg. Complex Sales processes, Direct Selling activities, large customer relationship management): EBIT of above 5.4% of sales.
- Motor Vehicle Distributors – (eg. marketing and sales, after sales support, procurement and administration, insurance activities, as well as functions involving transportation, warehousing and inventory management): EBIT above 4.3%.
The Commissioner says: Consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 and other documents covered by section 815-135 of the Income Tax Assessment Act 1997, you should use the transfer pricing methodology (or combination of methodologies) that is most appropriate and reliable for your circumstances when pricing your inbound distribution arrangements.
Submissions due by 21 December 2018
CPD questions (answers available)
- Is this a ‘Practical Compliance Guide’ (swim between the flags guidance) based on how much compliance attention you will get, depending on metrics set out in the PCG?
- It is about transfer pricing risk, for distributors of information or services, into Australia, from a related party?
- Does he use ‘profit markers’ as the relevant metrics (flags on the beach)?
- How does he measure these ‘profit markers’?
- What is the relevant profit marker for green zone treatment for ‘General Distributors’?
- What is the relevant profit marker for green zone treatment for ‘Life Sciences Distributors’ – Category 3?
- What is the relevant profit marker for green zone treatment for ‘Information and Communication Technology Distributors’ – Category 2
- What is the relevant profit marker for green zone treatment for ‘Motor Vehicle Distributors’?