Clients with intangible assets (such as intellectual properties (IP), software, licences, systems) relating to Australian development, enhancement, maintenance, protection, and exploitation (DEMPE) activities such as R&D held offshore, will need to consider PCG 2024/1 (PCG 2024).
PCG 2024 sets out when the ATO is likely to apply general anti-avoidance rules (GAARs) or transfer pricing rules to cross-border related party intangibles migration arrangements.
Evidence Expectations - Documents
The ATO is focusing on documentation and evidence expectations with a point based, risk assessment framework in determining risk rating (i.e. high, medium, or low risk). Inappropriate or lack of documentation and evidence resulting in the mischaracterization and nonrecognition of Australian activities connected with intangible assets held offshore may tip clients into different risk zones (i.e. green (lower risk), blue (lower to medium risk), amber (medium risk), and red (higher risk)).
The ATO’s expectations is to ensure that documentation, evidence, and governance processes are in place to support all arrangements in totality. Importantly, the ATO require information and documents that evidences detailed legal form and substance of Intangibles Migration Arrangements including:
+ documents from tax personnel or tax advisers disclosing anticipated or potential Australian and foreign tax effects disclosing tax and profit outcomes
+ transfer pricing documentation including identification of all relevant intangible assets, entities, activities and associated transfer pricing outcomes in supporting an arm's length arrangement
+ governance documents including guidelines, manuals, policies (such as R&D policies), procedures, specifications
Evidence Expectations – DEMPE activities
The ATO also expects that the DEMPE activities are substantiated and will seek to obtain evidence to substantiate aspects of legal form, the nature of relevant intangible assets and aspects of DEMPE activities.
The substance of Intangibles Migration Arrangements needs to align with the legal form of the arrangement and what is occurring in practice. The ATO will analyse specific clauses in legal agreements, group policies, correspondence or transfer pricing documentation.
Undertake a holistic review now
Clients should undertake a holistic review of their intangible arrangements against the ATO’s expectations in PCG 2024 and address any gaps to manage potential level of associated tax risk.
Having an appropriate intangible asset strategy aligned with the ATO’s expectations for any risk assessment that considers tax, transfer pricing, legal, and governance issues is imperative.
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