January 23, 2020
Australian Taxation Office issues Taxpayer Alert on non-armís length arrangements and schemes connected with the DEMPE of intangible assets
The Australian Taxation Office (ATO) has issued the long-anticipated , on aspects of intangibles migration out of Australia (TA 2020/1 “Non-arm’s length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets (DEMPE)”).
In brief, the ATO has identified that Australian companies are entering into various arrangements with (typically related) foreign companies involving the transfer of intellectual property (IP) developed in Australia into foreign jurisdictions using techniques such as:
The ATO considers that Australian participants in these arrangements are not properly recognizing Australian obligations under transfer pricing rules, capital gains tax, outcomes under the capital allowance rules and the general anti-avoidance rule.
The following examples from the ATO Taxpayer Alert (see ATO Taxpayer Alert link above for illustrated versions) highlight the transactions that could be challenged from the perspective of the commercial nature of the arrangement to the Australian entity and/or not being aligned with OECD1 guidelines on DEMPE.
The underlying principles have already been identified in the ATO Diverted Profits Tax guidance (example 1 in particular is almost identical).
While these types of tax issues have been around for a long time, the Taxpayer Alert was likely brought on by a renewed ATO focus on IP as an area of risk and a perceived increase in these types of arrangements. It is also part of a broader more systematic ATO initiative foreshadowed during 2019, about offshore migration of IP out of Australia.
Further ATO guidance is expected in 2020 to outline the ATO’s perception of risks related to intangibles migration, evidence the ATO expects that taxpayers should maintain and the practical application of the transfer pricing law to those high-risk arrangements. This will allow taxpayers to manage their risk profile related to IP migration.
1. Organisation for Economic Co-operation and Development.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Perth
Ernst & Young LLP (United States), Australian Tax Desk, New York
Ernst & Young LLP (United Kingdom), Australian Tax Desk, London