The Australian Taxation Office releases a TaxPayer Alert on arrangements involving offshore procurement hubs
The Australian Taxation Office (ATO) has released a Taxpayer alert on arrangements involving the use of offshore entities which source goods (procurement hub) on behalf of Australian resident multi-national enterprises (MNEs) (TA 2015/5).
In the alert the ATO announces that it is currently reviewing arrangements involving the use of offshore entities which source goods (procurement hub) on behalf of MNEs. In these arrangements the procurement hub receives services from a related offshore entity (services hub). The ATO states that it concerns about these arrangements primarily relate to the application of the controlled foreign company (CFC) rules, the transfer pricing rules and Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) (General Anti-Avoidance Rules).
According to the ATO these arrangements typically display all or most of the following features:
• A procurement hub and a services hub are established offshore. The hubs are CFCs of the MNE. A lower rate of tax or concessionary tax treatment may apply to the hubs in the relevant foreign jurisdiction(s).
• In procuring goods, the procurement hub enters into contracts with third party suppliers for or on behalf of the MNE. The procurement hub may or may not take title to or physical possession of the goods on the transfer of the goods. It does not substantially transform the goods it buys on behalf of the MNE.
• The procurement hub may have few or no employees and assets.
• The services hub provides services to the procurement hub in exchange for a fee which may be calculated as a percentage of sales or profits. The pricing methodologies adopted may not result in outcomes which could be expected to be observed between parties dealing at arm’s length.
• There is little or no commercial justification for the separation of the procurement function into two separate CFCs/entities.
According to the ATO it is currently reviewing these arrangements and have commenced compliance activities in relation to a number of cases. The ATO also states that compliance activity will continue and it is developing its technical position on the arrangements.
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