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

Article Posted date 19 May 2023

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.

 

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.