Unfortunately, the ATO has identified some of these types of payments to be of a capital nature. While specific marketing support strategies may be acceptable when related to products, services etc. the ATO has taken the view that some are for the purpose of providing financial support through the use of the tax system to fund/subsidise investment strategies. Support for this view was seen in the failure of the local entity’s competitors, effectively increasing the local subsidiary’s market share.
Such arrangements are often structured as follows:
- a profit level indicator (PLI) (e.g. (EBIT)/Sales) range for the foreign entity
- a floor and ceiling outside this range
- results between the top/bottom of the range and the ceiling/floor, a royalty payment to Australia or MSP to the foreign subsidiary occurs
- results outside the ceiling/floor are at the risk or benefit of the foreign subsidiary
In reviewing such arrangements Private Rulings are generally suggested, as some appear to be more akin to capital injections to ensure sufficient operational cash flow for continued trading.
Recently TD 2014/D1 (replacing TD 2013/D3) was released, focusing on instances where such payments are of a capital nature.
This scenario provides important lessons in TP work. Firstly, TP does not exist in isolation of other tax issues and secondly, the dealings must be understood and correctly characterised. Without a strong focus on this aspect of analysis outcomes are unlikely to be correct.