Australia Puts Multinationals on Notice: Don’t Shift Profits to Offshore Hubs

By Sally So, Senior Associate, Advisory, Radius

On January 18, 2017, the Australian Taxation Office (ATO) published Practical Compliance Guideline PCG 2017/1. It outlines the ATO’s approach to transfer pricing (TP) issues related to offshore “hubs,” which are defined in the Guideline as “centralized operating models” established to locate and relocate “certain business activities and operating risks.” In particular, the Guideline is targeted at the use of offshore hubs that carry out functions such as procurement, marketing, sales and distribution. The implication is that the use of such hubs is an artificial or contrived means of shifting profits out of Australia and into lower tax jurisdictions.

The Guideline sets out the ATO’s standard approach to assessing the risk associated with the use of offshore hubs. It presents six color-coded risk zones, ranging from white (“self-assessment of risk rating unnecessary”) to red (“very high risk”). Practically speaking, effective January 1, 2017, companies operating in Australia are required to:

1. Self-assess the tax risk of any current hub arrangements
2. Understand their disclosure obligations, including the Reportable Tax Position (RTP), and maintain adequate TP documentation

The issuing of PCG 2017/1 should be taken as a warning for multinationals — those headquartered in Australia and in any other jurisdiction — to be able defend their corporate structures and activities against any ATO allegations of profit shifting in Australia. Multinationals should also regard the ATO’s Guideline as part of a trend of tax authorities in all jurisdictions cracking down on base erosion and profit shifting, aided by the guidance of such groups as the Organization for Economic Cooperation and Development.

The Australian Context

In August 2016, Australia made global headlines in its crackdown of dozens of multinational companies alleged to have avoided taxes through the use of offshore hubs located in low-tax jurisdictions. One such taxpayer, BHP Billiton, is one of the world’s largest resource companies. It’s under ATO review regarding a potential tax liability of around USD $755 million. Specifically, the ATO asserts that BHP Billiton used a Singapore marketing hub to vastly reduce its corporate tax on revenues that should have been taxed in Australia. (Australia’s tax rate is 30 percent, while Singapore’s is 17.)

The Global Context

While Australia is indeed at the forefront of targeting perceived base erosion and profit shifting, many other OECD nations are similarly taking action to strengthen their own tax revenues. Put simply, for companies conducting business globally, there is increased scrutiny from tax authorities.

The ATO’s newly effective Guideline, then, is not an isolated example of changing tax guidance. From countries adopting the OECD’s BEPS recommendations on a unilateral basis, to changing transfer pricing documentation requirements and country-by-country reporting (CbCR) requirements (which began at the end of 2016), navigating the uncertainty of international tax, and ensuring that your multinational operations are compliant, are critical.

Complying with Changing Legislation in Multiple Jurisdictions

The key to remaining compliant as a global organization is to be armed with up-to-date, accurate information about your own legal and operational structure, and any related domestic and international tax laws. This will require:

• Reviewing and documenting your company’s global supply chain
• Conducting periodic tax-gap and tax-efficiency reviews
• Ensuring that intra-group cross-border transactions are conducted on an “arm’s length” basis
• Ensuring that adequate contemporaneous documentation is in place to support intra-group transfer pricing
• Ensuring that you understand and comply with the evolving tax laws — and understand the tax-enforcement trends — of all your countries of operation, which almost always requires third-party assistance

For better or worse, corporate taxation and perceived tax avoidance are no longer issues heard only in the boardroom. They are front page news, as last year’s ruling from the European Commission that Apple must repay must repay €13 billion to Irish tax authorities attests. My colleague Tom Lickess wrote about the ruling on this blog, rightly noting that it is a reminder there “are major risks associated with cross-border tax … in a time of increased tax-authority scrutiny, public pressure for corporations to pay their perceived ‘fair share’ of taxes and global initiatives like BEPS that target tax base erosion and profit shifting.” In this time of quickly evolving global tax laws and enforcement, multinationals must be informed — and nimble in their strategies — to protect their bottom lines and reputations.