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Key Changes Proposed
On 10 December 2025, the Australian Taxation Office (ATO) issued Draft Practical Compliance Guideline PCG 2019/1DC Transfer pricing issues relates to inbound distribution arrangements (the Draft PCG), which sets out proposed changes to PCG 2019/1, initially published nearly seven years ago.
Key proposed changes thereunder include:
- Revised ‘inbound distributor’ definition: the ATO have substituted the word ‘comprised’ for the term ‘predominantly involves’, thereby expanding the potential application of the Draft PCG.
- Updated profit markers: the specific operating margin benchmarks for certain activities within the life sciences and information and communication technology (ICT) sectors have been revised downwards, to reflect current economic data.
- Introduction of a White Zone: this applies to taxpayers with an Advanced Pricing Agreement (APA) or have obtained a recent low risk .high assurance rating, indicating minimal compliance risk.
- Clarified scope: A stricter definition of digital product distributors has been introduced, which may interact adversely with the ATO’s view on Australian data centre activities as an ‘emerging issue’.
- Enhanced Reportable Tax Position (RTP) guidance: These include clearer instructions for self-assessment and disclosure in the RTP schedule, for applicable taxpayers who are required to complete an RTP schedule.
- Guidance on the use of multi-year data: the ATO clarify at paragraph 41 of the Draft PCG that, in analysing the profit performance of a taxpayer, they calculate a five-year weighted average Earnings Before Interest and Taxes margin that reliably isolates the revenue and costs of inbounds arrangements from other activities carried on.
Commentary – Risk Relativity
In some cases, the ‘low risk’ ranges articulated may be seen as too high from an objective perspective, and a ’low risk’ outcome in Australia may inversely mean a ‘high risk’ position in the other applicable jurisdiction. As such, striving to meet a low risk range may not be appropriate. That said, typically a ‘high risk’ position in Australia will be one which groups will seek to avoid. An objectively balanced position will typically be sought by most groups, so that Australian and foreign risks are shared appropriately.
An appropriate way to manage this risk is usually through the preparation of transfer pricing documentation and benchmarking, with an operating margin that is supported by an arm’s length range of comparable data points. Importantly, judgment needs to be exercised in determining whether the actual result (or the target result in a forward-looking policy) is suitable – given that benchmarking reports are only as good as the data points which have been relied upon.
Commentary – Digital Distributors
As has been the case for some time, the ATO has had a significant focus on intangible arrangements, and the location of the key value drivers for intangibles (i.e. the Development, Enhancement, Maintenance, Protection and Exploitation, or ‘DEMPE, functions). The proposed update excludes digital distributors who hold significant hosting infrastructure, indicating the ATO’s likely concern that such entities are more complex in nature and should be rewarded with a higher return range than that set out in PCG 2019/1. Groups with these facts will particularly need to focus their attention on the appropriateness of their overall position by reference to other objective data sources, and would be well-advised to ensure they have transfer pricing documentation in place.
Practical Implications
Multinationals operating in Australia with a related party distributor should use this opportunity to review their operating margins against the ATO’s published yardsticks in the Draft PCG. This will be particularly relevant for participants in the life sciences and ICT sectors.
It is important to note that although the Draft PCG ranges are not a substitute for arm’s length principles under the law, noting that and a taxpayer in a medium or high risk zone does not necessarily have a position which is unsupportable from a transfer pricing perspective, noting that the Draft PCG is intended as a risk assessment framework, rather than a formal statutory proxy for arm’s length conditions. they do indicate how the ATO is likely to perceive a particular group’s outcomes. For those in medium to high ranges, , though, there may be greater emphasis on the appropriateness of the preparation of transfer pricing documentation.
Those who are subject to the RTP regime are particularly likely to need to do so, given the express disclosure of risk rating outcomes that would typically be required.
FOR MORE INFORMATION
If you would like to learn more about the topics discussed in this article, please contact your local RSM office.
