In detail
Scope of the guidance
Practical Compliance Guidelines (PCGs) provide guidance to taxpayers as to how the ATO will administer the law. They are intended to assist taxpayers in complying with tax laws and are non-binding on the ATO. The ATO has issued several PCGs since 2017 including in respect of tax issues associated with cross-border financing arrangements, transfer pricing issues related to inbound distribution arrangements, the diverted profits tax (DPT) and the imported hybrid mismatch rule.
The draft PCG applies to cross border intangibles arrangements with related parties. The scope is broad and can potentially include a wide range of operating models where intangible assets are developed or used in cross border settings.
Intangibles arrangements covered in the draft PCG are arrangements relating to the DEMPE associated with intangible assets and/or the ‘migration’ of intangible assets. The former might include, for example, intangible assets which are held offshore where development activities occur in Australia under a R&D services arrangement or where exploitation occurs through manufacturing or marketing activities. Regarding the latter, the draft PCG states that migration means a “restructure or change associated with your intangible assets”.
There is to be a particular focus on the risks relating to potential application of transfer pricing rules and the GAAR (including DPT) to intangibles arrangements. However, other Australian tax provisions may also be considered relevant to particular arrangements, for example capital gains tax and capital allowances provisions.
Noting that the ATO may apply different evidence expectations to different taxpayers (considered below), there are no materiality thresholds in the draft guidance, so it applies equally regardless of the size or value of the arrangement or taxpayer.
Risk rating outcomes under the draft PCG will be considered by the ATO in relation to taxpayers seeking entry to the APA program. The ATO will expect evidence of the nature set out in the draft PCG for taxpayers seeking entry to APA and during the APA period.
Once finalised, the PCG will apply before and after its date of issue.
Risk assessment framework
The draft PCG introduces a quantitative framework to assess and provide a single outcome as to whether each intangibles arrangement is high, medium or low risk.
It is first necessary to identify all intangibles arrangements. This is broadly based on considering each individual intangible asset and treating all agreements that relate to that intangible asset as a single intangibles arrangement. It is recognised that intangible assets may be naturally grouped (for example by a particular product) and in such circumstances grouping is permitted.
The risk assessment framework is based on a flowchart which is applied to each intangibles arrangement. If two ‘threshold’ questions are passed, further questions determine whether Risk Assessment Framework Table 1 or 2 or both should be applied in assessing the risk rating for that intangibles arrangement.
One of the threshold questions provides that intangibles arrangements which exhibit features or characteristics of Taxpayer Alert TA 2020/1 (TA 2020/1) will automatically be classified as high risk. TA 2020/1 was issued to provide examples of concerns that the ATO had in relation to the mischaracterisation of Australian DEMPE activities connected to intangible assets. It specifically includes, but is not limited to, arrangements involving the bifurcation of intangible assets and mischaracterisation of Australian DEMPE activities, and non-recognition of DEMPE activities. In this regard, there is a degree of overlap with the draft PCG.
The framework then requires taxpayers to consider and complete a risk table, for each of their intangibles arrangements.
Migration of intangible assets
For arrangements where there has been a migration of intangible assets during the year, Table 1 will need to be considered. A migration of intangible assets is broadly defined as any restructure or change associated with the intangible assets that allows another entity to access, hold, use, transfer, or benefit from the intangible assets.
Table 1 is broadly focussed on assessing the risks by reference to the degree of change that has taken place and the level of substance in respect of DEMPE activities to support the change. It also considers particular tax features or consequences both in Australia and outside Australia that might be seen as indicating higher compliance risk.
Table 1- Migration of intangible assets*
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