On September 26, 2019, the Australian Taxation Office (ATO) issued draft Practical Compliance Guideline (draft PCG) 2019/D5, which addresses its transfer pricing compliance approach to non-resident owned mobile offshore drilling units (MODUs) operating in Australia. The draft PCG applies to drill ship, drilling rig, pipe-laying vessel and heavy-lift vessel assets that are leased into and operated in Australia. The draft PCG does not apply to oil and gas production platforms, cable-laying vessels and port works.

The draft PCG applies the ATO’s ‘traffic light’ risk rating approach based on Australian operating margin results (i.e. EBIT / sales). The operating margin calculation includes all income associated with the offshore drilling activities undertaken and not merely the income attributed to the Australian taxpayer.

The following table summarizes the ATO’s MODUs risk-ratings:

Risk zone


EBIT Margin (%)

Red zone

<5% and total revenue from Australian projects > AUD 20 million

Amber zone

(1) 5% - 10.5% OR
(2) <5% and total revenues from Australian projects < AUD 20 million

Green zone


White zone

APA, settlement agreement, or “low risk” rating for the past two years

The higher risk ratings will be subject to higher levels of scrutiny from the ATO, as are summarized in this table:

Risk zone 

ATO approach


The ATO will conduct risk review to understand the business arrangement, value creation, and transfer pricing treatment. ATO may request documentary evidence including customer contracts, bidding and tendering documents, financial statements, organization charts, project reports, vessel/rig detail involved in the project.



The ATO will generally not allocate compliance resources to assess transfer pricing outcomes and will allow the adoption of the simplified record-keeping concession in PCG 2017/2.

The draft PCG emphasizes that this Guideline does not limit the operation of the law and that the information provided in the Guideline does not replace, alter or affect the ATO's interpretation of the law in any way or relieve the taxpayer of its obligation to self-assess its compliance with all relevant taxation laws. It reiterates the taxpayer’s legislative obligation to price its arrangements using the most appropriate transfer pricing method (or methods) given the taxpayer’s actual circumstances and that the Guideline does not create any safe harbour or administrative concession. Significantly the ATO emphasizes that the profit markers provided are not proxy-benchmarks and should not be relied on as such and as with all of the ATO’s risk-assessments the mere fact that a taxpayer falls outside the green zone does not mean that the taxpayer’s outcome is not arm’s length for Australian transfer pricing purposes. Rather, non-green zone taxpayers need to ensure they have appropriate documentation that can evidence the arm’s length nature of their arrangements and transfer pricing outcomes.

Key Messages

Multinationals with MODUs in Australia need to be fully conversant with the ATO’s views as documented in the draft PCG and should self-assess their risk-profile as the draft PCG will have retrospective application. Affected taxpayers are likely to be required to report their risk ratings in future. If the taxpayer falls outside the low-risk zone, consideration should be given as to how to demonstrate that its outcomes are arm’s length, and this will include having a robust transfer pricing policy with relevant benchmarking studies and appropriate documentation to support the tax filing position. Such taxpayers may want to explore applying for an APA in order mitigate their transfer pricing risks.

The draft PCG can be found here.

Read Transfer Pricing Times – October 2019

Draft Risk Assessment Framework for Offshore Drilling Units in Australia Released 2019-11-14T05:00:00.0000000 /insights/publications/transfer-pricing/transfer-pricing-times-october-2019/draft-risk-assessment-framework-offshore-drilling-units-australia-released /-/media/assets/images/publications/transfer-pricing/transfer-pricing-times-july-2019/ato-transfer-pricing-rules-debtequity.jpg publication {B062D54C-1425-4A04-8F9F-95EA14068E6D} {4C8AF8F6-BAEC-4E94-ACC7-7AC0F36685FC} {A3FAE5E6-C751-4276-AC87-234103D93C38} {2E7EDEAD-E023-488B-8F09-E024DFB699C6} {80211481-0C08-4D73-8897-1EC6A32EC65F} {39D6E6F9-3469-472B-8F01-56C403009AE2} {00DD564D-6E8A-4A1D-980F-FEF2F6DA16CF}

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