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May 25, 2023

Australian Taxation Office issues second draft of compliance guidelines on intangibles arrangements

  • The Australian Taxation Office has issued a second draft of "Practical Compliance Guideline PCG 2023/D2: Intangibles arrangements," which outlines the Australian Taxation Office's compliance approach in respect of intangibles arrangements.
  • PCG 2023/D2 includes a point-scoring system that assigns an overall risk rating to taxpayers' arrangements.
  • The risk-assessment framework focuses on the migration of intangible assets and mischaracterisation of activities relating to development, enhancement, maintenance, protection and exploitation of intangible assets.

Executive summary

On 17 May 2023, the Australian Taxation Office (ATO) released the second draft of its guidance on intangible arrangements with international related parties in the draft Practical Compliance Guideline (PCG) 2023/D2, which supersedes the first draft released two years ago (PCG 2021/D4). This represents the latest of the ATO's transfer-pricing-focused PCGs.

The PCG outlines the ATO's compliance approach and risk factors connected with "intangibles arrangements," encompassing arrangements connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets or where intangible assets are migrated offshore.

Similar to the other transfer-pricing-focused PCGs, the ATO's risk-assessment framework comprises several risk categories (low, medium and high risk) for certain intangible arrangements based on various risk factors and the existence of legal agreements (in some circumstances). Intangible Arrangements refers to cross-border arrangements relating to the DEMPE of intangible assets, or the migration of intangible assets. The major change from PCG 2021/D4 is the presentation of the risk-assessment framework in two categories, together with a "scoring system" to determine an overall risk rating.

The two risk-assessment framework categories are:

  • Migration of intangible assets
  • Mischaracterisation of DEMPE activities in connection with intangibles arrangements

A point of heavy emphasis in the draft PCG is the ATO's expectations for taxpayers regarding a significant amount of analysis and supporting evidence in relation to "in scope" Intangible Arrangements. The evidence is intended to inform questions regarding the benefits of the arrangement, relevant commercial considerations, DEMPE activities, and profit outcomes between the parties.

The PCG does not address issues in relation to how Intangibles Arrangements should be remunerated, priced or benchmarked. In light of the scope of PCGs more generally (i.e., representing the ATO's view regarding risk), it is acknowledged that even arrangements "exhibiting Medium or Low Risk Factors may not exclude your intangibles arrangements from further engagement or review."

It is also made explicit in the PCG that it does not address compliance issues in relation to the proposed multinational tax integrity measure (denying deductions for payments relating to intangible assets connected with low corporate tax jurisdictions).

The expectation remains that taxpayers will be required to complete Reportable Tax Positions (RTPs) to disclose the risk rating for their Intangible Arrangements.

Compliance approach

The PCG confirms that the ATO will review intangible arrangements with a focus on identifying arrangements that mischaracterise Australian DEMPE activities. In particular, the ATO is concerned about whether the functions performed by Australian entities (in connection with the DEMPE of intangible assets) are properly recognized and remunerated in accordance with the arm's-length principle embodied in Australia's transfer pricing rules.

The PCG emphasizes the practical DEMPE and motivational-risk factors relating to the migration of intangibles from Australia and ongoing intangibles arrangements. In this context, the ATO maintains that other measures, such as the General Anti-Avoidance Rules (Part IVA) and Diverted Profits Tax may be considered where an arrangement (or a part of an arrangement) lacks substance or probative evidence of the stated non-tax or commercial rationale.

Consistent with other transfer pricing PCGs, the level of engagement (or likely ATO review) will depend upon the risk assessment of the intangibles arrangement. If an intangibles arrangement achieves a high-risk rating, the ATO will likely commence further engagement, which may include a review or audit.

Where the intangibles arrangement meets the requirements to achieve a low-risk rating, ATO engagement is less likely; but if there is evidence the arrangement has been incorrectly priced, the application of this PCG does not preclude the intangibles arrangement from further ATO compliance activity.

The PCG highlights that the advance pricing arrangement (APA) program can provide taxpayers with certainty on their intangibles arrangements. However, to be accepted into the APA program, the ATO will have regard to a taxpayer's risk rating in accordance with the risk-assessment framework.

Risk factors

As noted, the "point-scoring" system in the two risk-assessment frameworks is new in this version of the PCG. Details regarding the two risk-assessment frameworks are set out below.

Migration of intangible assets

Where there is migration of intangible assets to an international related party, the risk-assessment framework sets out a point-scoring table having regard to the following factors:

  • The occurrence of a restructure or change associated with Australian-owned intangible assets
  • Substance of the relevant entity (i.e., the international related party), and its ability to perform, manage and control DEMPE functions
  • Tax outcomes of the intangibles arrangement

It is important to note that, where a current intangibles arrangement relates to or is linked to intangibles that have been previously owned by the taxpayer, the migration table must be completed, regardless of when the migration occurred.

Several features of the scoring system are noteworthy. For example, newly established restructured entities are automatically assigned a higher risk rating with no economic substance "carve out." Similarly, certain tax outcomes (attributable to, for example, an entity's residence in a "specified jurisdiction" or the availability of research and development (R&D) tax offsets) automatically attract a higher risk score, irrespective of the underlying economic substance in the restructured entity.

A higher risk score is also applicable if the restructure results in a reduction (or might "reasonably be expected" to result in a reduction) in a taxpayer's taxable income — again irrespective of any consideration of underlying economic substance.

Other intangibles arrangements

Similarly, a scoring system based on "risk factors" applies for other intangibles arrangements.

The point-scoring table focuses on the following factors:

  • The taxpayer's overall characterization and activities in relation to intangibles
  • Substance of the relevant entity (i.e., the international related party), with an emphasis on the other party's ability to perform, manage and control DEMPE functions
  • Tax outcomes of the Intangibles Arrangement

A higher risk score is automatically applied to arrangements where an Australian taxpayer performs DEMPE activities or other activities in connection with the intangibles, or enhancing their value, including R&D activities, manufacturing and marketing.

Similar to the "migration of intangible assets" framework, newly established restructured entities are automatically assigned a higher risk rating without regard for their economic substance.

Aside from the risk-assessment frameworks, an intangibles arrangement is to be rated high-risk if it exhibits features or characteristics of (or has a similar effect to) arrangements described in Taxpayer Alert TA 2020/1: non-arm's-length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets (TA 2020/1).

PCG examples

The 12 examples previously provided in PCG 2021/D4 have been included in Appendix 1 to this draft PCG, with some modifications and the addition of: (i) a specific example on transfer of intangible assets to a foreign hybrid entity, (ii) an example of service arrangements involving intangible assets, and (iii) the removal of the example on cost contribution arrangements. The PCG also provides the application and calculation of risk scores under these examples.

ATO's evidence expectations

Appendix 2 to the PCG sets out the ATO's expectations relating to evidence and record keeping for intangibles arrangements to substantiate risk ratings and the arm's-length nature of such arrangements more generally. The ATO's evidence expectations remain substantially the same. While it is noted in the PCG that the intention is not to "unnecessarily impose burdensome requirements" in relation to evidence, the ATO's expectations are likely to be onerous for taxpayers.

Specific factors identified include:

  • Evidencing the commercial reasons and decision-making process
  • Evidencing the legal form and substance of intangibles arrangements, including:
    • Legal agreements
    • Guidelines, manuals, policies and governance-like like documents
    • Transfer pricing documentation
    • Country-by-country reporting documentation
  • Identifying and evidencing the intangible assets and connected DEMPE activities
  • Evidencing the tax and profit outcomes of your intangibles arrangements

Reportable tax positions

As noted, the PCG anticipates companies required to lodge an RTP Schedule with their corporate income tax return may be required to disclose the risk ratings obtained under the risk-assessment frameworks, which will make the risk rating highly visible.


Our key takeaways from the release of the PCG include:

  • The release of the revised draft PCG indicates that intangible arrangements continue to be a priority compliance issue for the ATO. As noted, the Government has also proposed an integrity measure on denial of deductions relating to intangible assets for Significant Global Entities (SGEs), where payments are made to low-tax jurisdictions.
  • This draft PCG emphasizes understanding the location of DEMPE functions, with the key risk feature being DEMPE functions occurring in locations different from those where legal and beneficial ownership of the underlying intangible resides.
  • The factors considered in the risk-assessment frameworks will likely mean many taxpayers' intangibles arrangements would fall into the high-risk zone, even where demonstrably the transfer pricing framework results in an appropriate arm's-length outcome.
  • The guidance contemplates comprehensive analysis and documentation as necessary to demonstrate a "low risk" intangibles arrangement. In particular, information on the international related party's tax profile, including eligibility for any credits, offsets or concessions, will be required.
  • It is reasonable to assume that the ATO's expectations of the comprehensiveness of documentation is beyond what may historically have been prepared, which could place pressure on taxpayers that may need to make decisions regarding intangibles arrangements urgently. The PCG also does not have regard to the likelihood of different businesses having different decision-making processes and evidence (e.g., a large public company versus an entrepreneurial business).
  • The PCG does not provide taxpayers with additional guidance on how intangible arrangements should be remunerated or benchmarked or what an acceptable transfer pricing methodology may be. Among other things, to assist taxpayers, there remains an ongoing need for positive early engagement with the ATO on complex intangible arrangements cases (including APA program engagement). The ATO has indicated that it encourages this type of engagement.


For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Sydney

Ernst & Young (Australia), Perth

Ernst & Young (Australia), Melbourne

Ernst & Young (Australia), Brisbane

Ernst & Young (Australia), Adelaide

Ernst & Young LLP (United States), Australia Tax Desk, New York

Ernst & Young LLP (United Kingdom), Australia Tax Desk, London

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor


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