The Australian Taxation Office (ATO) on 19 May 2021 released long-awaited guidance on intangible arrangements with cross-border related parties for public consultation and comment.
Draft Practical Compliance Guidance (PCG 2021/D4) sets out the ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets and/or the migration of intangibles. The guidance supplements the existing Taxpayer Alerts (TA 2020/1 and TA 2018/2) relating to arrangements involving intangible mischaracterisation and non-arm's-length arrangements and schemes.
The draft PCG is far reaching and sets out the ATO’s compliance approach and risk assessment framework relating to all types of intangible arrangements, including DEMPE activities performed on and offshore and the migration of intangibles. While mainly focused on transfer pricing concepts, the draft guidance considers other tax risk areas arising from intangible arrangements such as withholding tax, capital gains tax, general anti-avoidance provisions (GAAR) and diverted profits tax (DPT).
The draft PCG outlines the ATO’s expectations for taxpayers to maintain a high level of analysis and documentation to support their intangible arrangements, as well as the type of documents the ATO expects to be kept to demonstrate compliance with the arm’s length principle.
As currently drafted, the PCG does not include materiality limits and, as such, is intended to apply irrespective of the taxpayer’s size or the nature of the intangible arrangements.
Once finalised, the PCG is intended to apply to arrangements entered into both before and after the date of issue. For companies required to file a reportable tax position (RTP) schedule, additional reporting obligations will include the need to disclose an assessment of each of the risk factors identified by the ATO and how the arrangements compare to the examples contained in Appendix 2 of the PCG, as well as their risk rating under the PCG.
If finalised in its current form, this PCG will increase the burden for taxpayers seeking to support their existing and future intangibles arrangements.
The PCG is divided into two parts:
The ATO seeks to review intangible arrangements focusing on aspects such as the mischaracterisation of DEMPE activities, non-arm’s-length outcomes and structures or restructures that avoid or reduce Australian tax obligations. The PCG’s compliance approach aims at consistency with Australian legislation, such as the GAAR, DPT and capital gains tax provisions, as well as the OECD transfer pricing guidelines, in particular, Chapters I, VI and IX.
Consistent with previous PCGs, the ATO’s level of engagement will depend on high-risk factors applicable to the intangible arrangement. When one or more of the risk factors are determined to be high, as per the PCG, the ATO will likely take further action, including review or audit.
As with all transfer pricing arrangements, taxpayers may request access to the ATO’s advance pricing arrangement program (the APA program) to obtain certainty with respect to their intangible arrangements. However, the ATO has indicated that documentation and analysis in accordance with the PCG will be required for access to the APA program and taxpayers with low risk factors will more likely be accepted.
The risk assessment framework is divided into two parts:
The risk factors focus on the following:
These risk factors are classified as high, medium or low risk, depending on a qualitative assessment of the level of supporting documentation and evidence. A lack of sufficient documentation potentially could result in a high-risk rating.
Notably, the PCG includes a non-exhaustive list of documents that may be considered as evidence to determine the risk profile of a particular arrangement. Some examples of expected evidence are:
The list of evidence the ATO has identified may be beyond the level of information readily available by taxpayers and may not be considered commercially realistic.
The draft guidance also includes 12 examples reflecting the ATO’s view of what constitutes high risk, medium risk or low risk, depending on the level of documentation or evidence available. The examples cover various intangible arrangements, including: