In focus: Procurement hubs of Australian multinational enterprises
On 8 July we released details of what we are doing about Offshore marketing hubs. As part of our focus in this area, we are also reviewing arrangements involving the use of offshore procurement hubs that involve the source, or supply, of goods on behalf of Australian multinational enterprises (MNEs). Typically, these arrangements are used to source offshore goods that are on-sold in the Australian market.
The functions carried out by procurement hubs may include price and contract negotiation, packaging and design input, quality control input, contract administration and management, supplier relations, and shipping and delivery. Australia has a comprehensive controlled foreign companies (CFC) regime intended to capture profits attributable to functions such as procurement that a MNE shifts offshore.
What are we doing?
We are engaging with taxpayers to ensure they comply with Australia's tax rules, including compliance with the new self-assessment transfer pricing regime.
In conjunction with work being done in relation to offshore marketing hubs, we are reviewing certain Australian MNE procurement hub structures to determine whether the current CFC and transfer pricing rules are being applied appropriately.
We are reviewing certain procurement hubs structures and whether they are structured in ways that may attempt to circumvent the CFC rules. While the reasons to establish a procurement hub are generally commercially driven, the particular structure implemented might be considered tax driven or inconsistent with the economic substance of the activities carried out by the procurement hub entities in practice.
We will also be consulting with a range of Australian MNEs and interested parties. Our concerns will be highlighted at upcoming industry forums.
What is our concern?
We have observed an increasing number of procurement hubs being used by Australian MNEs and are concerned that:
- some arrangements do not comply with the CFC regime, or may feature elements intended to avoid the CFC regime
- some transactions shifting existing operations to procurement hubs, or creating new operations through these hubs, may not comply with the capital gains tax provisions, especially market value substitution rules
- as with other hub arrangements, the pricing by the procurement hub to the Australian company or between procurement hub entities, is not what arm’s length parties would pay so that the transfer pricing provisions will substitute arm’s length conditions
- some arrangements may be subject to the general anti-avoidance rules.
What should you do?
If you have entered into, or are considering an arrangement of this type, we recommend you review the arrangement and assess your compliance with the CGT, CFC and transfer pricing rules. If you have concerns about the risk profile of the arrangement you should:
We're reviewing arrangements involving offshore entities that are being used by Australia's multinational enterprises to source goods for the Australian market.