Australia Inbound Distributor Update Is Mixed Bag for Taxpayers

The Australian Taxation Office’s April 22 update to Practical Compliance Guideline 2019/1 introduces increased risk and uncertainty for inbound distributors of digital products and services.

The key change limits who the PCG covers. In particular, the change appears to carve back coverage for distributors of digital products and services if the Australian distributor “significantly contributes” to the creation of products or services. Taxpayers who are carved out may find that the ATO expects higher Australian sourced taxable profits.

Inbound Digital Distributors

PCG 2019/1 is an ATO risk assessment framework that applies to taxpayers categorized as inbound distributors. It doesn’t limit the operation of the law and isn’t binding on the ATO. It provides limited administrative comfort for taxpayers regarding transfer pricing outcomes and ATO scrutiny.

The guideline highlights the ATO’s focus on intangibles through its treatment of inbound distributors of digital products or services. The PCG’s most important change is that businesses that “significantly contribute” to the creation of these products or services are carved out of the definition of “inbound distributors.”

The PCG takes an expansive view of what it means to significantly contribute, giving the example of owning or operating significant equipment in Australia used to host or provide the products or services. It doesn’t define what constitutes significant equipment. Further, the presence of equipment doesn’t necessarily imply a significant contribution to the development of digital products or services.

However, we expect the ATO to take a broad view of this fuzzy concept and point to the equipment’s size, cost, importance, or other factors that can be relied on to establish its significance.

Other Changes

While the digital carveout narrows the PCG’s coverage for certain distributors, a further change to the definition of “inbound distributors” pulls in the opposite direction—which could lead to more taxpayers falling within the guideline’s scope.

The guideline does this by removing the former requirement that businesses be “predominantly” involved in the distribution of goods or digital products or services. Taken together, these changes introduce uncertainty by carving out some digital distributors while broadening the concept of an inbound distributor.

Taxpayers who are now possibly in scope may see ATO focus based on the extent to which their profit outcomes correspond with the profit markers in the guideline.

The PCG assigns risk zones (low, medium, and high) to taxpayers by comparing the taxpayers’ profit outcomes with set profit markers. The guidance update revises profit markers downwards for life sciences and information and communication technology industries.

The changes introduce a white zone for low-risk situations. This zone applies to taxpayers whose arrangements for the current income year fall within limited circumstances such as an advanced pricing arrangement, a settlement agreement with the ATO, a recent court or tribunal decision, or a recent ATO review that resulted in a low-risk or high-assurance rating, where there have been no material changes to the comparability factors or pricing of the arrangements.

The PCG states that the ATO won’t allocate compliance resources to further review the transfer pricing outcomes of white zone taxpayers, other than to confirm that the white zone criteria are met. But in practice, such reviews can lead to further scrutiny.

Takeaways

PCG 2019/1 provides limited administrative comfort to taxpayers who are inbound distributors.

The guideline’s key change reflects the ATO’s focus on intangibles that are developed through significant contributions made by Australian distributors. The PCG narrows the range of taxpayers who obtain limited comfort by introducing a test based on relatively subjective questions of fact and degree.

Taxpayers should factor in the guideline’s limitations and uncertainties when assessing their risk matrix in relation to Australian operations. This should be tested on an ongoing basis through the lifecycle of engagement with the ATO, from information requests and audits, through to resolution by settlement or otherwise.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Niv Tadmore is a partner at Jones Day in Melbourne focused on tax audits, tax disputes, and large-scale transactions.

Richard D. Keys is an associate at Jones Day in Melbourne focused on the conduct and resolution of complex disputes and controversies with the ATO and state revenue offices.

These are personal views or opinions of the authors; they do not necessarily reflect views or opinions of Jones Day.

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