Australia: Updated draft practical compliance guideline on intangibles arrangements

An updated draft practical compliance guideline—PCG 2023/D2—with respect to intangibles arrangements

An updated draft practical compliance guideline with respect to intangibles arrangements

The Australian Taxation Office (ATO) on 17 May 2023, released an updated draft practical compliance guideline (PCG)—PCG 2023/D2—with respect to intangibles arrangements.

The updated draft PCG was released for consultation purposes and makes significant changes following consultation on the first version of the draft guideline—PCG 2021/D4—which was released two years ago (May 2021).

The updated draft PCG continues to deal with the ATO’s compliance approach to intangibles arrangements involving foreign related parties, with a particular focus on:

  • Cross-border arrangements relating to the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets
  • Migration of intangible assets

While the updated draft PCG acknowledges the proposed intangibles integrity measure exposure draft, it makes it clear it is not covered by the guideline.

The most significant update to the draft PCG is the risk assessment framework (RAF). In PCG 2021/D4, the RAF centered around a qualitative assessment of the level of documentation and evidence around four key risk factors:

  • 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

This has been replaced in the updated draft PCG with two RAF tables, one that applies to the migration of intangible assets and the second that applies to intangibles arrangements connected with DEMPE activities (not connected to the migration of intangibles).

  • When arrangements relate to both intangible assets that have been migrated from the Australian entity and post-restructure DEMPE arrangements, then both RAFs need to be considered and applied.
  • Under the RAF tables, risk factors associated with the intangibles arrangement are allocated points which result in arrangements receiving “high risk”, “medium risk” and/or “low risk” ratings.
  • The risk factors in each RAF table are focused on the economic and tax characteristics of the intangibles arrangement and there is still an inherent level of subjectivity in evaluating these factors.
  • Furthermore, the RAF tables require the most comprehensive analysis in a PCG of the foreign related party’s substance, its financial capacity to assume associated risks and its tax characteristics (including its tax loss profile).

The ATO invites comments on the updated draft PCG, with comments due by 16 June 2023.


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