17 January 2024 the Australian Taxation Office published the final version of its Practical Compliance Guideline PCG 2024/1 Intangibles migration arrangements. The PCG has previously been released in drafts as PCG 2021/D4 and PCG 2023/D2 Intangibles arrangements. The final version sets out ATO’s compliance approach to the tax risks associated with certain cross-border related party intangibles arrangements involving: restructures or changes to arrangements involving intangible assets (referred to as ‘migrations’ in the PCG) the mischaracterisation or non-recognition of Australian activities connected with intangible assets. Changes and additions included in the final version: further clarification of the arrangements in scope exclusion of certain arrangements (‘Excluded Intangibles Arrangement’) from the scope inclusion of a ‘white zone’ for arrangements that have been subject to previous ATO audit or reviews further explaining our compliance approach, including the engagement taxpayers can expect based on the compliance risks associated with an arrangement expanding the guidance allowing taxpayers to group intangible assets or arrangements to make it easier for taxpayers apply the PCG providing more information on the reporting requirements taxpayers can expect to complete the reportable tax position schedule ...

The Australian Taxation Office (ATO) has released a new draft of Compliance Guidelines on Intangible Arrangements, PCG 2023/D2. When finalised, the guidelines will set out the ATO’s compliance approach to the development, use and transfer of intangible assets. The guidelines focus on tax risks associated with the potential application of the transfer pricing provisions, withholding tax provisions, capital gains tax (CGT), capital allowances, the general anti-avoidance rule (GAAR) and the diverted profits tax (DPT). Examples of high-risk intangibles arrangements under the draft guidelines include centralisation of intangible assets bifurcation (separation) of intangible assets non-recognition of local intangible assets and DEMPE activities migration of pre-commercialised intangible assets (HTVI) transfer of intangibles assets to a foreign hybrid entity ...

The ATO is currently reviewing treaty shopping arrangements designed to obtain the benefit of a reduced withholding tax (WHT) rate under a double-tax agreement (DTA) in relation to royalty or dividend payments from Australia. Typically, this benefit is sought via the interposition of one or more related entities between an Australian resident and the ultimate recipient of the royalty or dividend, where the interposed entity is a resident of a treaty partner jurisdiction. The ultimate recipient is generally located in a jurisdiction that either does not have a DTA with Australia or, where it is a treaty partner of Australia, the DTA provides a less favourable treaty benefit. A key purpose of Australia’s treaty network is to eliminate double taxation without creating opportunities for tax avoidance practices, such as treaty shopping arrangements. We are concerned that some taxpayers have entered into, or are considering implementing, arrangements interposing entities in treaty jurisdictions to obtain a more favourable tax outcome under a DTA in the form of reduced WHT rates. These taxpayers may not be entitled to such benefits under our DTAs. Arrangements that pose a potential risk of treaty shopping may display some of the following features and we are likely to make further enquiries where such factors exist: • Structures and restructures involving the interposition of an existing or newly incorporated entity between Australia and the ultimate recipient of royalties or unfranked dividends. • The interposed entity may have significant existing operations and employees and the taxpayer may contend that commercial benefits and/or synergies flow to the Australian operations or the interposed entity. • Royalty or unfranked dividend payments (or potential future royalty or unfranked dividend payments) to the interposed entity are (or would be) subject to WHT at reduced rates under the relevant DTA compared with Australian domestic law or the applicable WHT rate under the DTA between Australia and the country of residence of the ultimate recipient ...

The Australian Taxation Office (ATO) has issued draft Compliance Guidelines on intangible arrangements, PCG 2021/D4. These Guidelines will (when finalised)  set out the ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation of intangible assets, specifically, the potential application of the transfer pricing, general anti-avoidance rule (GAAR) and the diverted profits tax (DPT) provisions. The capital gains tax and capital allowances provisions will also be discussed in this Guideline where these may be considered alongside, or relevant to, the ATO’s transfer pricing, GAAR or DPT risk assessment. The draft Guidelines sets out ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets and/or involving a migration of intangible assets. The Guidelines applies to Intangibles Arrangements and focuses on tax risks associated with the potential application of the transfer pricing provisions. It also focuses on other tax risks that may be associated with Intangibles Arrangements, specifically the withholding tax provisions, capital gains tax (CGT), capital allowances, the general anti-avoidance rule (GAAR) and the diverted profits tax (DPT). The Guidelines has been prepared to accompany the release and publication of Taxpayer Alerts TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets and TA 2020/1 Non-arm’s length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets. It is not the intention of the Guidelines to limit, deter or prevent arm’s length dealings involving intangible assets. Rather it is intended that the Guideline will serve as a point of reference and assist in understanding arrangements which is seen as representing a higher risk from a compliance perspective. Examples of high risk arrangements centralisation of intangible assets bifurcation (separation) of intangible assets non-recognition of local intangible assets and DEMPE activities migration of pre-commercialised intangible assets non-arm’s length licence arrangements ...

The ATO is currently reviewing international arrangements that mischaracterise Australian activities connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets. Such arrangements may be non-arm’s length or structured to avoid tax obligations, resulting in inappropriate outcomes for Australian tax purposes. One of the issues is whether functions performed, assets used and risks assumed by Australian entities in connection with the DEMPE of intangible assets are properly recognised and remunerated in accordance with the arm’s length requirements of the transfer pricing provisions in the taxation law. These arrangements are particularly in focus where intangible assets and/or associated rights are migrated to international related parties as part of non-arm’s length arrangements and/or in a manner intended to avoid Australian tax. In circumstances where these arrangements lack evidence of commercial rationale and/or substance, the ATO will apply of the exceptions in the transfer pricing provisions (non-recognition) and anti-avoidance rules.  The general anti-avoidance rule (GAAR) or diverted profits tax (DPT) provisions may apply where a tax benefit or DPT tax benefit is obtained in connection with these arrangements. Arrangements of particular concern include, but are not limited to, those described in the Alert ...

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 ...