Self-assessment Of Tax Risk By MNEs With A Centralised Business Model - A New Tax Screening Tool Developed By The ATO

In early 2017, the Australian Tax Office (‘ATO’) released a guideline, setting out a compliance approach to assess the transfer pricing outcomes based on self-assessment of tax risks in existing and newly created offshore centralised operating models (‘hubs’). This guideline is applicable from 1 January 2017 to hubs performing a wide range of activities such as the marketing, sale, distribution and procurement of goods and commodities as well as financial services. At present, however, the risk indicators have only been provided for offshore marketing hubs under Schedule 1 of this Guidance. Additional schedules will be added by ATO to address other types of hubs.

The guideline provides MNEs with a self-assessment risk framework in order for them to assess its transfer pricing risks. Emphasis has been laid on the hub’s commerciality, its functions, risks assumed by the hub and the arm’s length nature of the pricing arrangements. This will result in a risk rating, which is made up of the following six risk zones:

Further, in case the hub falls under one of the latter four zones, the ATO will review the transfer pricing outcome of the hub in reference to its business context and environment, global value chain and transfer pricing treatment. In this regard, it is important to note that in countries such as South Africa, China and Germany, conducting a value chain analysis is already an integral part of the determination of transfer pricing outcomes.

These risk ratings merely give the taxpayer an indication whether chances are high that the ATO will allocate compliance resources (in the form of an audit, for example). Reporting the risk rating to the ATO is voluntary, but opting out or being unable to self-assess would definitely spark the ATO’s attention.

This isn’t the only initiative of the ATO towards risk assessment, as it has also shown an active participation in the International Compliance Assurance Program.

International Compliance Assurance Program (‘ICAP’)

Eight countries such as Italy, Spain, Australia, Germany, Canada, Netherlands, U.K. and U.S.A. have met in June to launch a pilot program to attract voluntary participation of MNEs who are interested to work together with the tax authorities to assess their tax risks. The purpose of the program is to avert cross-border disputes as a result of the information disclosed in the country-by-country reporting (‘CbCr’). This program will be a beneficial exercise for both tax authorities and MNEs to understand the connection between the data required under CbCr and the tax risk which may arise as a consequence. This also provides the tax authorities with an opportunity to form a consensus on a universal approach to be followed to either categorise an MNE as a high or a low risk. This program will commence this year in October, by participation from MNEs who have been confirmed by July 2017.

Source: Anusha Pande, Sander Pleijsier, TPA Global, Amsterdam (NL)

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