Australia’s proposed intangible integrity measure

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3 April 2023 

In brief

On 31 March 2023, Treasury released for comment exposure draft law and draft explanatory materials (the “proposed new law”) to implement the Federal Government’s proposal, as announced in the October 2022 Federal Budget, to deny an income tax deduction for payments relating to intangible assets connected with low corporate tax jurisdictions (primarily with reference to a 15 per cent tax rate). The proposed new rules will apply to in-scope payments made or credited, or liabilities incurred on or after 1 July 2023.

Broadly, under the proposed new law, the Australian deduction denial will apply to a payment, made by a significant global entity (SGE) directly or indirectly to an associate, in relation to exploiting intangible assets which results in the recipient (or another associate) deriving income in a low corporate tax jurisdiction.

The proposed new law will not be contained within the existing suite of general anti-avoidance provisions, and it does not require an anti-avoidance “purpose” to be satisfied for the measures to apply. There are also no substance based carve-outs contemplated.

The proposed new law appears to clarify the use of a country’s headline (as opposed to effective) tax rate in determining the corporate tax rate, however, the determination of a low corporate tax regime is still not straightforward in all circumstances.  

The potential breadth for this undertaxed profits measure appears very wide, including the scope to:

  • assert the mischaracterisation of payments or arrangements (applying a substance over legal form approach),
  • broadly define an arrangement noting that legally documented agreements may not be determinative and undocumented undertakings may be relevant (including express or implied permission to use, or a common understanding of the use of an intangible asset that is not covered by legally documented arrangements),
  • cover intangible assets that are broader than the existing domestic (and Australian tax treaty) definition of royalties,
  • look-through to group arrangements without a strict tracing requirement from the payment itself, or connection between the payment and the intangible asset,  
  • consider apportionment (“to the extent” a payment is attributable to the right to exploit an intangible asset), and
  • apply without a payment, provided a liability has been incurred or amounts credited. 

These proposed new rules are subject to a consultation period with submissions due by 28 April 2023.

In detail

The proposed new law is part of the Government’s multinational tax integrity package announced in the October 2022 Federal Budget. The stated aim is to complement Australia’s existing anti-avoidance provisions by deterring tax avoidance behaviours of SGEs that structure their arrangements such that income from exploiting intangible assets is derived in a low corporate tax jurisdiction.

Broadly, under the proposed new law, the deduction denial will apply:

  • to SGEs;
  • in respect of a payment made to an associate (the recipient);
  • to the extent the payment is attributable to a right to exploit an intangible asset;
  • if, as a result of the arrangement under which a payment is made, or a related arrangement, the SGE or an associate:
    • acquire the intangible asset; or
    • acquire a right to exploit the intangible asset; or
    • exploit the intangible asset; and
  • the payment results in the recipient (or another associate) deriving income in a low corporate tax jurisdiction directly or indirectly from exploiting the intangible asset or from a related intangible asset.

For impacted entities, there is no change to the proposed start date. The proposed new law will apply to payments made or credited, or liabilities incurred on or after 1 July 2023. 

The key components of the proposed new law are broadly drafted, and understanding the interaction with existing measures will be relevant.

Payments in scope

As expected, the proposed new law applies to relevant payments made by a SGE, being multinational groups with consolidated annual global income of A$1 billion or more, to an “associate” (defined as “the recipient”).

The proposed new law operates with respect to payments, but is also expanded to apply in the same manner to the incurring of a liability or the crediting of an amount (collectively referred to as “payments”). 

Payments made directly to unrelated third parties are not within the scope of the proposed new law unless they are also indirect payments to an associate. 

Intangible asset

The proposed new law applies to payments attributable to a right to exploit an intangible asset. The term “intangible asset” is undefined and is intended to take its ordinary meaning (with limited examples such as information or data, including a database of customers and an algorithm specifically set out in the exposure draft law). 

Noting a substantial degree of overlap, the proposed new law also applies to the following specific inclusions in the same way as it applies to intangible assets:

  • The use of, supply or reception of certain items mentioned in the definition of a royalty under subsection 6(1) of the Income Tax Assessment Act 1936 including:
    • copyright, patents, trade marks, secret formulas or other similar rights;
    • scientific, technical, industrial or commercial knowledge or information;
    • visual images, sound transmitted to the public by satellite or cable or similar technology or for use in television broadcasting; and
    • motion picture films.
  • a right in respect of, or an interest in, an intangible asset; and
  • anything prescribed by the regulations for the purposes of this paragraph.

The ability for regulations to be made appears to be in contemplation of new assets developed in the future given “the evolving nature of intangible assets”.

The draft explanatory materials provide a further list of assets which are “specified as falling within the operation of the amendments, whether or not they are already captured within the ordinary meaning of intangible asset”:

  • intellectual property;
  • copyright;
  • access to customer databases;
  • algorithms;
  • software licences;
  • licences;
  • trademarks;
  • patents;
  • leases, licences or other rights over assets.

However, the proposed new law does not apply to rights in respect of, or interests in, tangible assets, interests in land, financial arrangements to which Division 230 of the Income Tax Assessment Act 1997 applies (i.e. taxation of financial arrangements) or anything already prescribed by the regulations. 

There are potential uncertainties with respect to the meaning of “intangible asset”.  For example, it is not clear whether the exclusive right to distribute a branded tangible product is in-scope on the basis it is a right originating from trademark ownership, or is out-of-scope on the basis that it is a right in respect of a tangible product.

For example, the draft explanatory materials provides an in-scope description of an Australian clothing and shoe reseller which uses a trademark (owned by a related party in a low tax jurisdiction) to brand Australian stores and marketing materials. Later in the draft explanatory materials there is an explanation that uses of trademarks on finished goods may be out-of-scope. 


The use of the words ‘to the extent’ in the proposed new law contemplates a scenario where the payment represents an undissected amount for a bundle of rights or benefits such that an apportionment exercise is required to separate and allocate parts of the payment to those rights. There is also reference in the draft explanatory materials to a deduction being “proportionately denied where the payment is genuinely made as consideration for other things…”. 

There are a number of transfer pricing methodologies that could be used to apportion payments, yet the proposed new law is yet to provide guidance on how such an apportionment exercise should be undertaken. This appears similar to the potential for uncertainty on apportionment in the context of draft Taxation Ruling TR 2021/D4 Income tax: royalties - character of receipts in respect of software (albeit relevant to withholding tax).


The proposed new law prescribes a broad definition of the term ‘exploit’ where ‘exploit an intangible asset’ includes:

  1. use the intangible asset;
  2. market, sell, licence or distribute the intangible asset;
  3. supply, receive or forbear in respect of the intangible asset where paragraph (c), (d), (da) or (f) of the definition of a royalty in subsection 6(1) of the Income Tax Assessment Act 1936 applies to the supply, reception or forbearance;
  4. exploit another intangible asset that is a right in respect of, or an interest in, the intangible asset; and
  5. do anything else in respect of the intangible asset.

The scope of this drafting will be important to the process of identifying arrangements where this measure applies. 

Arrangements under which a payment is made 

The proposed new law applies to “payments” made to an associate as a result of an “arrangement” (including a related arrangement) involving, broadly, the right to use, exploit or acquire intangible assets. 

The term “arrangement” is already defined very broadly in the Australian tax law to include any arrangement, agreement, understanding, promise or undertaking whether express or implied and whether or not enforceable (or intended to be enforceable by legal proceedings). The draft explanatory materials affirms this and suggests that the legal agreements may not be determinative and non-legal undertakings may be relevant. This has the potential to create uncertainty in terms of attempting to identify the arrangement(s) in question. 

While the concept of “related arrangement” is not defined, this concept is relevant where the SGE does not acquire any express right to exploit intangible assets under the arrangement but there is a common understanding between the associates allowing access to the intangible assets. 

The arrangement needs to result in the acquisition of intangible assets or the exploitation of rights

The acquisition of an intangible asset appears to cover transactions to obtain legal ownership of the intangible asset. The right to exploit is also included and identified through the rights granted or rights implied in legal form arrangements. 

The concept of exploiting the intangible asset considers the substance of arrangements without giving regard to any rights granted or implied in legal form arrangements. 

Payments through interposed entities 

The proposed new law applies to payments made directly to an associate or indirectly through any number of entities (which do not necessarily need to be associates or located in low corporate tax jurisdictions). Where a payment is made to a jurisdiction with a corporate tax rate greater than 15 per cent, there is a requirement to look beyond the initial recipient to the overall group arrangements. 

That is, tracing will be required beyond the immediate recipient where income is derived by an associate indirectly. However, there is no nexus requirement, meaning that the application of these rules is not dependent on demonstrating that each payment was used to fund the next payment or that the payments are made in sequence. Rather, similar to the requirements in the imported hybrid mismatch rules contained in Division 832 of the Income Tax Assessment Act 1997, it will be sufficient that a payment exists between each entity. 

Practically, due to the lack of strict or prescribed tracing, this means taxpayers may need to look through the value chain in order to test the application of the proposed new measure to any in-scope payments. 

What is a low corporate tax jurisdiction?

A key gateway of the proposed new rules is that the payment is received in a “low corporate tax jurisdiction”. Whilst this includes foreign countries with a corporate tax rate of less than 15 per cent (or nil), there is complexity in how this is to be determined that will be relevant for a number of jurisdictions. For example, in working out the corporate tax rate of a foreign country, the following broadly applies:

  • The effect of deductions, offsets, tax credits, tax losses, tax treaties and concessions for intra group dividends are disregarded. 
  • Rates of income tax that apply only to non-residents are disregarded. 
  • The highest possible corporate tax rate is used if the application or rate of income tax in a foreign country depends on the taxpayer’s amount of income. 
  • The rate of tax on an amount of income will be nil if tax is not applied in the foreign country to the particular income. 
  • The lowest tax rate is used where there are different rates of tax for different types of income in a foreign country. 

The proposed new law does not appear to contemplate the aggregation of federal and regional / local taxes in determining whether a foreign country has a federal tax rate of less than 15 per cent. This could be critical for countries that have a national corporate tax rate of less than 15 per cent but regional / local taxes that operate such that the aggregated tax rate meets or exceeds 15 per cent. 

A Government Minister can also determine a foreign country to be a low corporate tax jurisdiction if the foreign country has a preferential patent box regime without sufficient economic substance in that jurisdiction. This provision is not intended to capture all patent box regimes, only those that provide concessional tax treatment without requiring any economic activity to develop the relevant intellectual property in the country that provides the patent box concession. 

The proposed new law states that, in making a determination, the Minister may “have regard to any relevant findings, determinations, advice, reports or other publications” of the Organisation for Economic Co-operation and Development (OECD). 

No allowance appears to have been made in the proposed new law to adjust for circumstances where a foreign country’s Controlled Foreign Company (CFC) rules, the Pillar Two Income Inclusion Rule (IIR) and/or a Qualifying Domestic Minimum Top-up Tax (QDMTT) subjects the intangible asset owner to corporate tax at a rate of 15 per cent or more. This lack of interaction could create uncertainty, complexity and the potential for double taxation.  


The Government is also seeking stakeholder views regarding a shortfall penalty provision that it is considering, as a punitive measure, to penalise SGEs who mischaracterise payments in an attempt to avoid income tax, including withholding tax. 

What happens next?

Submissions on the proposed new law can be made until 28 April 2023. It remains possible that the legislation itself is not enacted prior to 1 July 2023, being the start date of these measures.

The Takeaway

The exposure draft law and draft explanatory materials provide further insights into the concepts which were previously identified in the October 2022 Federal Budget, including, for example, the definition of a “low or no tax jurisdiction” and intangible asset. However, there are still many uncertainties including how the proposed new rules will interact with CFC rules and the Pillar Two IIR and QDMTT rules going forward. 

The proposed new law is far reaching and may also cover a multitude of arrangements where a multinational group entity owns and exploits intangible assets.

This complex set of rules could be assisted by further examples in the explanatory materials to assist taxpayers to understand the anticipated application of the proposed new law, and to assist with the potential compliance burden associated with reaching conclusions on the scope of these new or adapted concepts. 

Jonathan Malone

Partner, Global Tax, Sydney, PwC Australia

+61 408 828 997


Chris Hogger

Director, Melbourne, PwC Australia

+61 413 239 513


Angela Danieletto

Partner, Sydney, PwC Australia

+61 410 510 089


Ross Malone

Partner, Tax, Sydney, PwC Australia

+61 2 8266 5033


Greg Weickhardt

Partner, Global Tax, Melbourne, PwC Australia

613 8603 2547