TPguidelines

The ATO is currently reviewing international arrangements that mischaracterise intangible assets[1] and/or activities or conditions connected with intangible assets.

The concerns include whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met. Arrangements that allocate all consideration to tangible goods and/or services, arrangements that allocate no consideration to intangible assets, and arrangements that view intangible assets collectively, or conceal intangible assets, may be more likely to result in a mischaracterisation.

Where arrangements are between related parties, we are concerned about whether the:

• amount deducted by the Australian entity under the arrangement meets the arm’s length requirements of the transfer pricing provisions in the taxation law[2]
• functions performed, assets used and risked assumed by the Australian entity, in connection with the arrangement, are appropriately compensated in accordance with the arm’s length requirements of the transfer pricing provisions in the taxation law.

These arrangements typically display most, if not all, of the following features:

• intangible assets are developed, maintained, protected or owned by an entity located in a foreign jurisdiction (an ‘IP entity’)
• the Australian entity enters into an arrangement to undertake an activity or a combination of activities
• the Australian entity requires the use of the relevant intangible assets in order to undertake these activities
• the Australian entity purchases goods and/or services from an IP entity or a foreign associate of an IP entity in order to undertake these activities
• the Australian entity agrees to pay an amount, or a series of amounts, to a foreign entity which the Australian entity does not recognise or treat as wholly or partly being for the use of an IP entity’s intangible assets.

This Taxpayer Alert (Alert) does not apply to international arrangements which involve an incidental use of an intangible asset. For example, this Alert does not apply to resellers of finished tangible goods where the activity of reselling the goods involves an incidental use of a brand name that appears on the goods and related packaging. Whether a use is incidental in this sense will depend on an analysis of the true relationship and activities of the parties. The fact that an arrangement fails to expressly provide for the use of an intangible asset does not, in itself, determine that a use is incidental.