Australia: Amnesty for voluntary disclosure of offshore hub-related tax risks

Australia: Disclosure of offshore hub-related tax risks

The Australian Taxation Office (ATO) is offering administrative concessions in relation to administrative penalties and interest on historical positions to certain taxpayers that: (1) proactively assess and voluntarily disclose tax risks associated with offshore hubs; and (2) are prepared to restructure their arrangements.

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Non-cooperative taxpayers face ineligibility for the advanced pricing arrangements (APA) program, ATO's formal use of its information gathering authority, and increased prospects of litigation.

The ATO has released a draft “Practical Compliance Guideline” (PCG) setting out its risk assessment framework in relation to hubs. Taxpayers have a strategic decision to make in relation to the hubs—to self-assess risk and proactively engage with the ATO, or risk an ongoing cycle of reviews and audits. The amnesty will be available for a period of 12 months from the finalisation of the PCG.

While the ATO's focus to date has been on potential tax risks associated with hubs, limited guidance has been issued. Instead, the ATO has made announcements regarding its concerns and numerous risk reviews and audits are already underway.

Energy and resource sector hubs

For hub arrangements in the energy and resources sector, when the hub profit is greater than a 100% mark up of hub costs, the draft PCG indicates a current compliance focus on:

  • The use of third-party commission rates in circumstances when there is an absence of supporting information that addresses the Organisation for Economic Cooperation and Development comparability factors (particularly so for LNG projects)
  • Testing transfer prices and the use of alternative profit level indicators
  • Failure to revisit the price setting mechanism in response to significant changes in the external environment

KPMG observation

In an environment of increased scrutiny on taxpayer payments of the appropriate amount of tax, the ATO’s concern is not limited to transfer pricing risks, but may also involve the controlled foreign corporation (CFC) regime, capital gains tax, and the general anti-avoidance provisions. Specifically areas of focus may include whether:

  • The economic substance of the arrangements materially differs from the associated legal form
  • The pricing for the functions performed, assets used, and risks assumed do not reflect conditions that would operate between independent entities dealing at arm’s length

Prudent taxpayers would consider the tax risks associated with their position in light of the PCG. Taxpayers need to consider strategies to manage risk—including preparation of appropriate transfer pricing analysis and evidence, if their position were to be examined by the ATO or ultimately a court or tribunal.

The draft PCG has been released for public consultation, with comments due by 30 September 2016. It is expected that the PCG will be finalised in October 2016.


Read an August 2016 report prepared by the KPMG member firm in Australia

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