The ATO has finalised Practical Compliance Guideline 2024/1 (‘PCG 2024/1’), replacing the previous draft guidance PCG 2021/D4 and PCG 2023/D2.
PCG 2024/1 is a risk assessment framework allowing taxpayers to assess the likelihood the ATO will apply the general anti-avoidance rules (“GAARs”) or the transfer pricing rules to their arrangements involving intangible assets. The guideline is applicable from 17 January 2024 to all new and existing arrangements.
The Australian Government has identified cross-border dealings involving intangible assets as an ongoing area of concern. The finalisation of PCG 2024/1 follows the ATO’s recent win in the PepsiCo case on embedded royalties, and the successful Atlassian negotiation to have locally developed and maintained intellectual property remain in Australia.
More recently, a new provision was announced in the Federal Budget where from 1 July 2026, penalties will apply to taxpayers who are part of a group with over $1 billion in global turnover that have mischaracterised or undervalued royalty payments.
With the finalisation of PCG 2024/1 and these recent developments, we expect the ATO will increase reviews involving intangibles, and the upcoming Reportable Tax Position Schedule disclosures will likely assist the ATO identify and prioritise these reviews.
What is an Intangible Migration Arrangement?
Consistent with the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines, an intangible asset is defined as any property, assets and rights that are not physical or financial assets, and are capable of being controlled for use in commercial activities. Migration refers to any restructure or change associated with intangible assets that allows another entity to access, hold, use, transfer or benefit from the intangible asset. PCG 2024/1 also considers the development, enhancement, maintenance, protection and exploitation (‘DEMPE’) activities performed in Australia for intangible assets held offshore to be an ‘intangibles migration arrangement’.
However, certain distribution and low-value service arrangements involving intangible assets are excluded. The earlier draft versions of the guidelines did not contain this exclusion.
What is the Risk Assessment Framework and what is the ATO’s compliance approach?
PCG 2024/1 contains a risk assessment framework comprising a detailed list of questions for taxpayers to assess the risk factors applicable to the migration or restructure of intangibles (Risk Assessment Framework Table 1) and DEMPE activities undertaken for intangibles held by a related party offshore (Risk Assessment Framework Table 2).
The outcome of the assessment will determine the risk rating of the arrangement and the expected compliance approach of the ATO. The ATO’s compliance approach varies depending on the risk zone determined for the intangible arrangements and is summarised below.
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What are the key risk factors?
A combination of the following factors could result in the intangible migration arrangements being considered high risk:
- The Australian taxpayer has migrated intangibles assets to a related party that is newly established or has very few staff qualified with the expertise to independently manage, perform or control the DEMPE activities associated with the intangible asset or the capacity to assume the risks.
- The related party is located in a specified jurisdiction (including Hong Kong, Singapore and Switzerland) or is subject to a preferential tax regime, exemption or concession which substantially reduces its tax payable.
- The related party has the ability to deduct depreciation or amortisation expense for the migrated intangibles, R&D tax offsets or credits or significant tax losses to offset income derived from the commercialisation of the intangible asset.
- The intangibles asset has been migrated to a foreign hybrid company or the restructure is not taxed as a disposal in Australia for income tax purposes but is recognised as an acquisition in the foreign jurisdiction.
- The taxpayer allows its related party to use or benefit from the intangible asset it owns and does not have documentation prepared to identify the relevant intangible asset and does not receive any remuneration.
- The taxpayer performs R&D activities for intangible assets held by a related party and undertakes other development, enhancement, maintenance or protection activities which might be expected to enhance or add value to the intangible assets in Australia.
What do taxpayers need to disclose and how should risk be managed?
The ATO expects taxpayers to maintain comprehensive evidence to document their intangible migration arrangements. These include the following:
- Evidence the entity’s commercial considerations and business decision making including verifying the market value of the intangibles acquired and the tax or commercial objectives achieved under the arrangement.
- Evidence the legal form and substance of the arrangement including executing legal agreements, referencing global guidelines, manuals, polices and procedure documents, and preparing transfer pricing documentation.
- Identify and evidence the intangible assets and connected DEMPE activities including preparing intangible asset registers, IP registration and R&D stage gate documents, and producing transfer pricing documentation to clarify the DEMPE activities performed.
- Evidence the tax and profit outcomes of the intangible migration arrangement including financial models, evidence of cash flow, annual reports, and foreign tax returns.
Taxpayers will also have to report the risk rating of their intangible migration arrangements in the Reportable Tax Position Schedule, including arrangements that occurred in the last five years.
Recommendations for impacted taxpayers
Taxpayers who have migrated intangibles (including those that perform DEMPE activities in Australia for intangible assets held offshore) should be aware of the ATO’s latest guidance, and:
- Assess how the ATO’s guidance may apply to their arrangements and how they would be viewed by the ATO
- Consider if the distribution and low-value service exclusions apply
- Conduct a review of existing documentation against the ATO’s expectations and proactively bridge any gaps, and
- Maintain evidence to support the commerciality and legal substance of arrangements.
Concluding thoughts
The finalisation of PCG 2024/1 reaffirms the ATO’s continued focus on arrangements involving intangibles. The guidelines highlight the importance for multinationals to implement an intangible asset strategy which considers commercial, transfer pricing, tax, legal and is consistent with the group’s global policy. Taxpayers should ensure the ATO’s evidentiary expectations are considered prior to making changes to existing arrangements. For any historical arrangements, a gap analysis should be performed on existing documentation against the ATO’s expectations given PCG 2024/1’s retrospective application.
If you would like to discuss any of the information contained in this article, please get in touch.
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