Edited version of private advice

Authorisation Number: 1052262887210

Date of advice: 29 August 2024

Ruling

Subject: GST - taxable supplies and reverse charged

Question

Are you liable for reverse charge GST pursuant to subdivision 84-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to residual profit split payments made to related offshore enterprises under the described transfer pricing methodology?

Answer

No.

This ruling applies for the following period:

1 April 20XX - 30 March 20XX

Relevant facts and circumstances

You are registered for GST and are the representative member of a GST group.

Your group is a global business. The business conducts several activities, including trading in both financial and physical markets across a variety of commodities globally. The ruling application is in respect of the commodity trading business.

The commodity trading business operates globally through highly integrated subsidiaries and branches with revenue earned and expenses incurred spread across the global business.

The profitability of the commodity trading business depends on the positions taken by traders. The total remuneration of traders varies significantly demonstrating the relatively higher risk-taking functions performed by the traders, which reflects contribution to the overall profitability of the desk.

The remuneration of the trading functions of the Australian and offshore enterprises under the new transfer pricing methodology is based on a Residual Profit Split Method (RPSM). This involves allocation of residual profit/loss calculated for in-scope global trading desks in the commodity trading business, to the different Australian and offshore enterprises based on trader employee compensation. This is intended to ensure the economic outcome of trading activity at a global trading desk level sits appropriately with the enterprise(s) that had traders performing relevant activities.

The new TP method applies to determine the arm's length allocation for trading functions based on an aggregated split of net residual profits/losses for each trading desk. The net residual profit/loss is arrived at after the pay-away of associated trading costs (including external costs), overheads, and other charges for routine functions from the gross trading profit and loss. These costs are separately subject to reverse charge. The residual profit/loss is then allocated to the trading entities based on the relative compensation of the traders working on the particular desk.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 84-5

A New Tax System (Goods and Services Tax) Act 1999 section 84-10

A New Tax System (Goods and Services Tax) Act 1999 section 84-15

A New Tax System (Goods and Services Tax) Act 1999 section 84-20

Reasons for decision

Division 84 of the GST Act

Division 84 is a special provision that deals with supplies of things other than goods or real property that are made outside Australia to a recipient in Australia. Supplies that are taxable supplies under this provision are reversed charged to the recipient of the supplies.

Section 84-5 of the GST Act - Offshore supplies that are taxable supplies

Where all requirements in subsection 84-5(1) are satisfied, a supply of anything other than goods or real property (such as services) that is made outside Australia to a recipient in Australia is a taxable supply. Subsection 84-10(1) provides that the GST on a supply that is a taxable supply because of section 84-5 is payable by the recipient of the supply and not payable by the supplier.

In support of your private ruling application, it was submitted that the following provisions are relevant to your case. Section 84-5 provides that:

(1)•         A supply is a taxable supply (except to the extent that it is * GST-free or * input taxed) if:

(a)•          the supply is for * consideration; and

(b)•          the * recipient of the supply is * registered, or * required to be registered; and

(c)•          the supply is covered by the third column of this table.

Table 1: Offshore supplies that are taxable supplies under this Subdivision.

(1A)•         The purpose test referred to in items 1, 2 and 4 of the table in subsection (1) is that:

(a)•          the *recipient of the supply acquires the thing supplied solely or partly for the purpose of an *enterprise that the

recipient *carries on in the indirect tax zone; and

(b)•          the recipient does not acquire the thing supplied solely for a *creditable purpose.

•        ...

(3)•         This section has effect despite section 9-5 (which is about what is a taxable supply).

Conditions for taxable supplies listed in item 1 and 2 in the table of subsection 85-5(1) provide that the supplies must meet the 'reverse charge connection' and 'reverse charge purpose' requirements. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Reverse charge connection requirement

To satisfy the reverse charge connection requirement, the supply must be either:

•         not connected with Australia

•         connected with Australia because of paragraph 9-25(5)(c) (about rights or options to acquire another thing), or

•         connected with Australia only because of paragraph 9-25(5)(d) (about supplies to Australian consumers) where the supplier has obtained information indicating that the recipient is a business recipient and applied section 84-100.

Reverse charge purpose requirement

To satisfy the reverse charge purpose requirement, the recipient of the supply must:

•         acquire the thing supplied solely or partly for the purpose of an Australian GST presence, and

•         not acquire the thing supplied solely for a creditable purpose.

Not consideration for supply

In your private ruling submission, you consider that the residual profit split payments made from Australian enterprises to offshore enterprises do not represent consideration for any supply (or a transfer/doing of anything). Rather the payments represent a reallocation and distribution of profits (or losses) to offshore enterprises pursuant to the RPSM to ensure an arm's length result for the entities within the RPSM and are not made for any other purpose. As such, paragraph 84-5(1)(a) of the GST Actis not satisfied and Subdivision 84-A does not apply. Consequently, the reverse charge mechanism should not apply to impose a GST liability in respect of the payments.

To determine whether the residual profit split payments are not consideration for any supply, we need to assess whether the legislative provisions apply to your facts and circumstances. You submitted that the reverse charge will only apply in respect of residual profit split payments if several conditions are satisfied:

1.            Your offshore enterprise must make a supply to your Australian enterprise (or, if the offshore enterprise is a branch, the branch must undertake a 'transfer of anything' or 'doing of anything' for the Australian enterprise that is then relevantly treated as a supply)

2.            Consideration must be paid by the Australian enterprise to the offshore enterprise for and in connection with the supply referred to in 1 above (unless the offshore enterprise is an associate of the Australian enterprise)

3.            The supply must be taxable (not GST-free or input taxed)

4.            The Australian enterprise must not acquire the thing supplied by the offshore enterprise solely for a creditable purpose.

Condition 1: Supply/transfer

To determine whether this condition is satisfied, it is necessary to analyse whether:

•         The offshore enterprise has made a 'supply' to the Australian enterprise in circumstances where the enterprises are separate entities; and

•         The offshore enterprise has made a 'transfer of anything' or has undertaken 'the doing of anything' for the Australian enterprise in circumstances where the offshore enterprise is a branch of the Australian enterprise.

The meaning of supply is broadly defined in subsection 9-10(1) of the GST Act to include 'any form of supply whatsoever'. Without limiting subsection (1), subsection 9-10(2) relevantly includes: a supply of services; a provision of advice or information; a grant of right; or the entry into, or release from, an obligation.

Section 84-15 of the GST Act - Transfers etc. between branches of the same entity

Section 84-15 deems certain activities as 'supplies' that would not otherwise be supplies because they are undertaken within the same entity. Subsection 84-15(1) provides that:

(1)•         For the purposes of section 84-5, if an entity:

(a)•          *carries on an *enterprise in the indirect tax zone; and

(b)•          also carries on that or another enterprise outside the indirect tax zone;

•        then:

(c)•          the transfer of anything to the enterprise in the indirect tax zone from the enterprise outside the indirect tax zone; or

(d)•          the doing of anything for the enterprise in the indirect tax zone by the enterprise outside the indirect tax zone;

is taken to be a supply that is not *connected with the indirect tax zone.

The reverse charge rules in Division 84 will apply irrespective of the relevant supply between members of the same GST group due to the operation of paragraph 48-40(2)(a)(i) of the GST Act. This provision ensures that a taxable supply between GST group members that would otherwise be disregarded under the GST grouping provisions will be treated as a taxable supply because section 84-5 applies. The provisions intend to capture those activities that would be 'supplies' if they were made between two separate entities.

The concept of 'supply' including various propositions are discussed in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9). The following proposition are relevant:

Proposition 2 - Generally, for every supply there is a recipient and an acquisition

Proposition 5 - An entity will make a supply if it provides something to another entity

Proposition 6 - 'Supply' usually, but not necessarily, requires something to be passed from one entity to another.

In your private ruling application, you submitted that the commodity trading business is integrated and that it is not always possible to readily identify anything supplied or consideration received between enterprises. The cooperative efforts of these enterprises are directed towards commodity traders with third parties.

Furthermore, while the activities of the relevant employees of these enterprises are primarily directed at the making of supplies to third parties, there are certain activities that could arguably be considered a supply between offshore enterprises and Australian enterprises. Specifically, in their joint endeavour, employees in the commodity trading business cooperate in respect of the management of multiple books within a desk, across multiple jurisdictions. The exchange of rights and performance activities in cooperation may arguably be sufficient to constitute a supply for GST purposes.

However, in your view, it is artificial and inappropriate to conclude that any activity involving two enterprises operating collectively in the context of the integrated commodity trading business would give rise to a supply, as this would not reflect the commercial arrangement. The activity in these circumstances involves traders working together towards a common goal rather than a supply being made from one enterprise to another.

In support of your application, you considered the decision of the Full Federal Court in AP Group Limited v Commissioner of Taxation [2013] FCAFC 105 (AP Group) and submitted that these arrangements do not involve supplies made between enterprises. In AP Group, the Full Federal Court upheld the decision of the Administrative Appeals Tribunal that it appropriately considered the overall arrangement and relationship between the parties. As a result, the Court concluded that certain activities undertaken by car dealers to comply with the overall arrangement did not constitute supplies to the car manufacturer.

In AP Group, dealers and manufacturers (unrelated parties) shared the same commercial objectives (to sell as many cars as practicable) and the performance of activities directed towards these common goals were not considered supplies between them. You submitted that the enterprises have a common goal of executing profitable commodity trades with third parties, and the traders of these enterprises undertake required activities directed towards this common goal. The single business, related enterprise context further supports the conclusion that no supply is made.

You consider that the commodity trading business activities involving traders located in Australia and outside of Australia do not amount to a supply by offshore enterprises to Australian enterprises, on the basis that:

•         the activities or contributions of the traders are so integrated that the deals could not be completed in the absence of both enterprises;

•         the traders collaborate and work together as one business towards a common goal, ultimately making relevant supplies to third parties; and

•         traders, in observing rights and obligations, are complying with the overall arrangement.

Furthermore, you submitted that the implementation of, and adherence to, a transfer pricing methodology does not of itself represent a supply. The traders perform the same function and act in same way irrespective of the transfer pricing policy and any potential residual profit split payment. The transfer pricing adjustments merely reallocate profit in accordance with OECD guidance to ensure an arm's length result for the entities implementing the RPSM.

Condition 2: Consideration for the supply/transfer

To determine whether the consideration for the supply/transfer is satisfied, it is necessary to analyse whether:

•         there has been any consideration paid by the Australian enterprise to the offshore enterprise; and

•         if there has been any such consideration paid, whether there is a relevant nexus between the payment and a supply made by the offshore enterprise to the Australian enterprise.

The meaning of the term 'consideration' in a GST context has been considered judicially by the Full Federal Court in AP Group. In the Case of AP Group, Edmonds and Jagot JJ made the following observations about the meaning of consideration for GST purposes at [33]:

...The consideration must be "in connection with" the supply but the supply must also be "for" the consideration. "For", in this context, means "in order to obtain" (Macquarie Dictionary Online, item 3, Oxford Dictionary Online item 9(a)). The word "for" thus functions in the statutory description to identify the character of the connection which is required. It ensures that not every connection between the giving of consideration and the provision satisfy the first condition of making a taxable supply. If it were otherwise, any form of connection of any character between the making of a supply and the payment of consideration would suffice...

In finding that certain incentive payments made by car manufacturers to car dealers were not consideration for supplies made by the dealers, Edmonds and Jagot JJ noted that in respect of promises and obligations set by the manufacturers' rules and policies:

... these arrangements reflect the overall relationship between the dealer and the manufacturer which always exists and that there is no supply of a service to the manufacturer by the dealer simply complying with those overall arrangements...

It is in your view that a residual profit split payment from Australian enterprises to offshore enterprises, is not consideration for anything that the offshore enterprises have supplied to the Australian enterprises. The residual profit split payment, in accordance with the transfer pricing policy, represents a re-allocation of the profit (or loss) that is attributable to the collective activities performed by Australian and offshore enterprises in connection with trading with third parties.

The residual profit split payments are made to comply with OECD transfer pricing guidance. Noting there may reasonably be no amount payable by the Australian enterprises under the RPSM for a particular period, any amount payable is a product of the RPSM computation and profitability of underlying trades rather than any particular function or activity performed.

You submitted that if a view were adopted that there are supplies made by the offshore enterprises to the Australian enterprises, the residual profit split payment is not consideration 'for' these supplies. In a similar vein to AP Group, the promises and obligations made between the parties, either informally or formally, simply reflect the overall cooperative relationship between offshore enterprises and Australian enterprises. There will be no relevant supply for consideration simply by complying with those overall arrangements and making payment in accordance with the RPSM.

If section 84-5 applies to supplies between entities that are 'associates' as defined in section 318 of the Income Tax Assessment Act 1936, a deemed market value rule will operate in circumstances where the consideration for the supply is less than the market value of the supply. This provision is contained in section 84-20 and provides that:

(1)•         The price of a supply that is a *taxable supply because of section 84-5 is the *GST inclusive market value of the supply, if:

(a)•          the supply is from the *recipient's *associate; and

(b)•          the supply is:

(i)•           without *consideration; or

(ii)•           for consideration that is less than the GST inclusive market value.

Note: A supply to an associate without consideration may be a taxable supply, see section 72-5.

(2)•         This section has effect despite section 9-75 (which is about the price of taxable supplies).

You submitted that the deemed market value rule in section 84-20 will not apply to supplies between branches of the same entity (or between branches and a head office) because they do not fall within the meaning of 'associate'.

You claim that these rules will not apply in respect of the residual profit split payments because these payments are calculated in accordance with OECD transfer pricing guidance to be at arm's length and will therefore be equivalent to market value. Furthermore, for the reasons above there is no supply in relation to which market value rules may apply. Paragraph 84-20(1)(b) will therefore not be satisfied.

For the reasons set out above, you are of the view that the residual profit split payments are not consideration for a supply made by the offshore enterprises to Australian enterprises and therefore that the reverse charge will not apply to these payments.

Condition 3: Supply/transfer is taxable and Condition 4: Acquisition must not be solely be for a creditable purpose

For the reasons summarised under Condition 1 and Condition 2, you submit that the offshore enterprises do not make supplies to the Australian enterprises. However, if a supply is made, the residual profit split payments are not consideration for such supply in the context of the RPSM, and as such, it is not relevant to consider condition 3 or condition 4, in your view.

Analysis

A standard transaction may involve domestic and overseas entities conducting both trading and booking tasks. Depending upon the profit and loss outcome of these tasks, the amounts disbursed under the RPSM can move both ways. As seen from the example transactions set out in the facts, a profit outcome may require the Australian-based entity to shift profit overseas. However, a profit outcome can also lead to the requirement under the RPSM where funds are received by the Australian-based entity from its overseas counterpart.

Similar outcomes can be achieved where losses occur.

As such, it is difficult to find a nexus between any payments made under the RPSM and a specific supply made between the entities where that payment could be defined as consideration for a supply.

The net residual profit/loss is arrived at after the pay-away of associated trading costs (including external costs), overheads, and other charges for routine functions (such as marketing functions) from the gross trading profit/loss. These costs are separately subject to a reverse charge policy. Therefore, the residual profit/loss that is allocated to the trading entities, based on the relative compensation of the traders working on the particular desk, bears no relationship to a separate supply made between the entities.

In AP Group at [53], Edmonds and Jagot JJ noted that the relationship between the taxpayer and each entity involves 'a whole raft of obligations from one to the other' and contemplates a 'continuing dialogue' between the parties in which 'promises are routinely exchanged'. Their Honours stated that the 'so-called supplies for consideration... [-] ...are nothing more than the encouragement of an overall business relationship between the parties to the mutual benefit of both', and that 'to characterise this dialogue as involving supply after supply is unrealistic and impractical'. Their Honours further observed that there was 'no basis to infer that the taxpayer would not behave in the same way for free'.

Although the factual detail in AP Group is different to the situation here, the underlying principles are relevant. Both Australian-based entities and their counterparts overseas, work toward making successful commodity transactions. In other words, the 'supplies' are nothing more than what would be expected where there is a business relationship undertaken for the mutual benefit of both parties. They do so with the knowledge that the RPSM will operate based on trader employee compensation. This is intended to ensure the economic outcome of trading activity at a global trading desk level sits appropriately with the enterprise(s) that had traders performing relevant activities.

Conclusion

The RPSM does not give rise to reverse charge GST under Division 84 as the payments are not consideration for a supply.