Edited version of private advice

Authorisation Number: 1051802016992

Date of advice: 10 February 2021

Ruling

Subject: GST and reverse charge

Question

Are you (Entity X), as representative of the X GST Group liable for GST under Subdivision 84-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you allocate residual profits according to the transfer pricing Residual Profit Split Method ("RPSM") arrangement?

Answer

No. Entity X is not liable for GST under Subdivision 84-A of the GST Act on the residual profit amounts which are allocated according to the RPSM arrangement.

Relevantly in this case we consider that the character of the payments are a reallocation of profits rather than amounts that represent consideration for a supply. As the residual amounts do not represent consideration for a supply, paragraph 84-5(1)(a) of the GST Act is not satisfied and Subdivision 84-A does not apply.

This ruling applies for the following period:

1 July 2017 to quarter ending 30 March 2025

The scheme commences on:

1 July 2017

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity X, is a financial services company and is an affiliate of the wider global Entity X group (the X group).

Entity X is registered for GST and is the representative member of the Entity X GST group that includes a number of Australian entities (collectively the X Australia Entities).

The X Australia Entities operate within the Sales and Trading (or Institutional Securities Group), Investment Banking and Investment Management groups of Entity X. Typical activities of these groups include:

1. Sales and Trading services.
2. Investment Banking services.
3. Investment Management services.

The X Australia Entities make a combination of taxable, GST-free and input taxed supplies.

Intercompany Service Charges / Expense Reimbursement (Expense Transfer Pricing or TPE)

Due to the global and integrated nature of Entity X's business, there are certain entities/hubs that provide services to Entity X operating entities throughout the world (referred to as "service entities"). In providing such services, the Entity X service providing entity typically receives remuneration (i.e. intercompany service charges) and/or reimbursement of costs (i.e. allocation of expenses to the correct entity) from the recipient of the services. Such charges and/or expense allocation is recorded where a provision of a service has been evidenced and the provider and recipient of the service has been identified.

For GST reverse charge purposes, the X Australia Entities account for a GST reverse charge liability under Division 84 of the GST Act where they are a recipient of such services and the relevant cost centre that has incurred the expense includes non-creditable activity (i.e. the GST recovery rate is less than 100%). This also includes any 'support' or 'back office' cost centres that are allocated to such activity.

The consideration paid for the supplies/acquisitions that are subject to Division 84 of the GST Act (reverse charge) are values calculated at arm's length. This is consistent with transfer pricing policies in place.

To illustrate the mechanism of the TPE arrangement you provided an example as part of the application for private ruling request.

Residual Profit Split Method (RPSM)

By way of contrast to the TPE process noted above, Entity X's transfer pricing policies also provide for the allocation of profits or losses between the global group of entities. This methodology is known as the RPSM. The RPSM is applied at a business line level by region. Due to the cross-border nature of the global Entity X group and the integrated manner in which the Entity X group services its clients, the revenues and profits of these activities are generated through multiple entities spread across the world. Additionally, expenses are incurred in companies across multiple jurisdictions.

The X affiliates perform functions and use assets jointly and share the assumption of risks in various segments of the business. The affiliates work collectively to provide these services and an allocation of the profits is required relative to each entity's contribution to the combined profit or loss.

For transfer pricing purposes, an RPSM is described as a two-sided method where the remuneration to both parties is tested. The RPSM is generally found to be more appropriate than other one-sided transactional methods when both parties make significant non-routine, unique or valuable contributions in relation to a controlled transaction, and/or where the parties engage in highly integrated activities.

In contrast to the TPE process, under the RPSM, the residual profit before tax ("residual PBT") of all of the relevant Entity X group entities (i.e. RPSM participants) in respect of the appropriate business lines is pooled by regional business line. This residual PBT is then reallocated resulting in a multilateral settlement, transferring cash to the appropriate participants.

A summarised step-by-step description and illustrative example setting out the RPSM has been provided a part of the application for private ruling request.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Sub-division 84-A

A New Tax System (Goods and Services Tax) Act 1999 paragraph 84-5(1)(a)

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