Australia: Intangibles arrangements; a deeper look at ATO’s draft practical compliance guideline

A draft practical compliance guideline to assist taxpayers with their intangibles arrangements

Draft practical compliance guideline concerning intangibles arrangements

The Australian Taxation Office (ATO) yesterday released a draft practical compliance guideline (PCG 2021/D4) for public comment—thereby continuing the trend by the ATO to provide a framework to assist taxpayers in assessing the level of risk, this time associated with their intangibles arrangements.

The end date of the consultation period for draft PCG 2021/D4 is 18 June 2021.

Overview

With investment in intangible assets surpassing investment in tangible assets across developed economies, intangible assets have become the key driver of value, innovation, and growth for many companies. The ATO is cognisant of this trend, with the PCG further expanding the Commissioner’s suite of products focused on intangibles, following guidance released as “Tax Alerts” in the last few years (for instance, TA2018/2 and TA2020/1) and the soon to be released update to “Taxation Ruling” (TR1993/12) dealing with the application of withholding tax to software arrangements.

Draft PCG 2021/D4 focuses on identifying intangibles arrangements that mischaracterise Australian activities connected with the development, enhancement, maintenance, protection, and exploitation (DEMPE) of intangible assets. As such it covers a wide breadth of arrangements from licensing intangibles, research and development (R&D) activities, cost contribution arrangements, and intangibles migrations.

While the key focus is on the transfer pricing provisions, PCG 2021/D4 also covers other tax risks that may be associated with intangibles arrangements such as withholding tax, capital gains tax, general anti-avoidance, and diverted profits tax (with the latter provisions being highlighted where arrangements lack evidence of commercial rationale and/or substance).

Risk assessment

The ATO sets out a risk assessment framework—a combination of two components:

  • Risk factors—outlining features and examples of arrangements used to inform an assessment of risk
  • Documentation and evidence expectations—setting out the level of evidence the ATO will look to when assessing the intangibles arrangements against the risk factors

The first four risk factors are:

  • Commercial considerations and decision making
  • Understanding the legal form of the intangibles arrangements
  • Identifying and evidencing the intangible assets and connected DEMPE activities
  • Analysing the tax and profit outcomes

These risk factors are assessed as high, medium or low risk depending on a subjective, qualitative assessment of the level of supporting documentation and evidence.

Draft PCG 2021/D4 provides extensive details of the type of evidence and documentation the ATO will look to—but it goes well beyond what is usually prepared as part of transfer pricing documentation. While the ATO acknowledges the level and type of documentation will be influenced by the complexity of the arrangement and that not all the documents may be relevant, it is clear that the ATO has a high bar when it comes to evidentiary records and documentation it expects taxpayers to maintain and retain, consistent with the governance approach the ATO has taken in its justified trust/assurance products.

The final risk factor sets out 12 examples of arrangements that the ATO views as high, medium and low risk. The ATO noted that these will continue to be updated as it becomes aware of new examples. Not surprisingly high-risk examples include migration, bifurcation, and non-recognition (and reward) of intangibles and DEMPE activities. There is a strong focus on the commercial (non-tax) rationale for entering into these arrangements and the consideration of commercial options realistically available, particularly when DEMPE activities are still conducted in Australia. Each example also includes examples of the type of evidence the ATO would request/review in assessing the arrangement.

The ATO does recognise that low-risk scenarios do exist—for example contract R&D when there is clear substance in and direction from the offshore entity to the Australian R&D service provider, supported by robust documentation, evidence, and analysis. The ATO also provides some medium-risk scenarios that might be more relevant to many taxpayers.

In the event of potential risk in their intangibles arrangements, the ATO encourages taxpayers to engage with it early to discuss their arrangements or resolve issues up front.

KPMG observation

With the release of draft PCG 2021/D4 and proposed application to intangibles arrangements both before and after the date of its issue, taxpayers need to consider taking steps to review their arrangements. This review would need to be undertaken with the understanding that taxpayers may be required to disclose their self-assessment of the risk in relation to their intangibles arrangements in the reportable tax position schedule and/or as part of ATO assurance/compliance reviews.

If draft PCG 2021/D4 is finalised in its current form, taxpayers would face a significant compliance burden in gathering/preparing the required documents and analysis to apply the risk assessment framework. The compliance burden is further highlighted by the fact that there is no materiality threshold—that is expected to result in significant time and effort being dedicated to avoid a high-risk outcome under the PCG. This also would require a multi-disciplinary perspective as the PCG crosses over transfer pricing, anti-avoidance, and unique documentary and evidentiary requirements.


For more information, contact a KPMG tax professional in Australia:

Frank Putrino | +61 3 9838 4269 | fputrino@kpmg.com.au

Jeremy Capes | +61 2 9335 7665 | jeremycapes@kpmg.com.au

Jane Rolfe | +61 3 9288 6341 | janerolfe@kpmg.com.au


Read a May 2021 report [PDF 168 KB] prepared by the KPMG member firm in Australia

 

 

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