RSM welcomes updated PCG on transfer pricing for inbound distributors

“The PCG is a really helpful and welcome guideline that the ATO has published which will continue to help both taxpayers and their advisors understand the ATO’s perception of risks,” Delahunty told Accountants Daily.

“It's a timely reinforcement that the ATO does continue to reassess market conditions. So it's positive.”

Key changes in the ATO’s PCG 2019/1 Transfer pricing issues related to inbound distribution arrangements included a broadened definition of inbound distributors, updated profit markers, the introduction of a white zone and clearer guidance on reportable tax position (RTP) schedules.

The operating margin benchmarks for certain activities in the life sciences and ICT sectors were revised downwards to reflect market conditions, which Delahunty noted had weakened.

“Probably the most important thing that it shows is that the ATO has reassessed market conditions, and found that market conditions are such that now there's an expectation of less profit in Australia for some sectors,” he said.

“Particularly for Life Sciences, the expected profit levels have come down. And for ICT, the profit markers have come down as well. So that just is a reflection, I suppose, of market conditions being tougher in those sectors, and therefore the ATO’s expectations of profit levels also come down.”

The ATO also expanded its definition of ‘inbound distributor’ in the updated PCG, swapping the word ‘comprised’ to ‘predominantly involves,’ a change RSM said had expanded the potential application of the guide.

The updated PCG also tightened the definition of digital product distributors, a change RSM said may interact adversely with the ATO’s view on Australian data centre activities as an emerging issue.

The new definition included businesses that sold digital products or services, where the associated intellectual property was substantially held by related foreign entities, in cases where the inbound distributor did not significantly contribute to the creation of the products or services.

“For example, you significantly contribute to the creation of digital products or services if you or your related entities own or operate significant equipment in Australia used to host or provide the products or services you are selling or distributing,” the PCG read.

In the updated PCG, the tax office also introduced a ‘white zone’ in addition to its green, yellow and red zone risk ratings. The white zone would apply to cases where taxpayers had an advanced pricing agreement (APA) with the ATO, for example following a court judgement.

“We will not have cause to apply compliance resources to further review the transfer pricing outcomes of your inbound distribution arrangements, other than to confirm ongoing consistency with the agreed approach,” the ATO said of its approach to ‘white zone’ cases.