Draft ATO guidance on cross-border intangible arrangements

19 May 2021

In brief

The Australian Taxation Office (ATO) has released a draft Practical Compliance Guideline, PCG 2021/D4, on cross-border arrangements connected with intangibles. The draft PCG covers a broad range of issues including intangible transfers, the development, enhancement, maintenance, protection and exploitation (DEMPE) functions, and the characterisation of intangible payments. There is a significant focus on transfer pricing, and the ATO notes that numerous other Australian tax laws may also be relevant, including capital gains tax (CGT), withholding tax, the general anti-avoidance rules (GAAR), and diverted profits tax (DPT). 

The draft PCG outlines a framework for how the ATO assesses whether arrangements involving intangibles will be considered high, medium or low risk. There is a strong focus on documentation and evidence available such that the absence of adequate evidence is likely to result in an arrangement being considered high risk under the ATO’s framework. Taxpayers engaged in, or contemplating, related party transactions involving intangibles will need to consider the new guidance and, if required to lodge a Reportable Tax Position (RTP) Schedule with their annual income tax return, will need to apply the risk framework and self assess the risk outcome in RTP disclosures. 

In detail

Scope of the guidance

The draft PCG is wide-reaching and is applicable to all types of arrangements involving intangibles, including:

  • The transfer or migration of intangible assets between an Australian entity and offshore related parties.

  • The use of intangible assets, e.g. through licensing arrangements.

  • Activities related to DEMPE functions.

  • Characterisation of intangible transactions, including whether payments in the nature of a royalty have been appropriately recognised.

The guidance focuses on Australian transfer pricing risks associated with intangible arrangements, as well as other tax risks including withholding tax, CGT, capital allowances, the GAAR, and DPT. The draft PCG makes reference to other recent ATO alerts on intangibles including Taxpayer Alert TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets and TA 2020/1 Non-arm’s length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets. The draft PCG extends upon these earlier publications and outlines the ATO’s compliance approach for matters involving intangibles, as well as providing a risk assessment framework that may be used by the ATO and taxpayers to evaluate the risk of intangible arrangements.

Evidence and documentation

The draft PCG is heavily focused on the documentation and evidence that the ATO expects to be available to support the nature and basis of intangible arrangements between international related parties. The ATO’s expectations in this regard extend well beyond a general transfer pricing study or valuation of the intangibles (although these remain important). Examples of the documentation and evidence required in order to attain a high level of assurance that the arrangements could be considered arm’s length include (among others):

  • Commercial considerations

    • Analysis of the commercial objectives and anticipated outcomes, whether prepared internally or by independent advisors, such as cost-benefit analyses, modelling/projections, etc.

    • Documents considering the tax implications (Australian and foreign) of the arrangement (especially prior to a restructure)

    • Minutes of board and other meetings where the options were discussed and considered

  • Legal form

    • Legal agreements

    • Policies, manuals, and guidelines

    • Transfer pricing documentation

  • Documents identifying and evidencing the intangible assets and DEMPE functions

    • Intangible asset registers

    • IP registration documents

    • Accounting records

    • Organisation charts and role descriptions of personnel involved in DEMPE activities

    • Correspondence about DEMPE activities

    • Evidence about approvals and decision making on DEMPE activities and intangibles

  • Analysis of tax and profit outcomes, including transfer pricing studies.

The documentation and evidence maintained is a critical part of the risk assessment framework (discussed below). 

PwC observations

The ATO focus areas outlined in the draft PCG are likely to be familiar to taxpayers, with the ATO reiterating its focus on applying guidance outlined in the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines (in particular Chapters I, VI and IX). The draft PCG is however particularly instructive for taxpayers to understand the ATO’s expectations regarding the level of documentation and evidence to be maintained to support these arrangements, including contemporaneously at the time of entering the arrangement.

It is common within multinational groups that decisions will be made centrally about intangibles, including where they should be held and where DEMPE functions should be performed. Where such decisions impact an Australian entity within the group, it will be important to ensure that the ATO’s expectations are communicated to the decision makers so they can be appropriately considered, paying particular regard to the documentation and evidentiary requirements.  

In our experience, ATO teams have regularly issued requests for documents similar to those listed in the  ‘Documentation and Evidence’ section of the draft PCG. On this basis, it is helpful that the PCG provides greater transparency. In practice, a key area of challenge continues to be an expectation gap between the ATO and business. The draft PCG’s expectations of the types of intangible focused documents presumed by the ATO to ordinarily be in existence will vastly exceed the realities of many business led arrangements. Accordingly, the ATO’s thirst for detail on these matters risks being exceedingly onerous in many situations.

Other practical challenges that may arise from the PCG as it is presently drafted include:

  • There are no materiality thresholds in the guidance, so it applies equally regardless of the size of the arrangement or taxpayer. The documentation burden may be challenging for smaller taxpayers to manage.

  • No indication is provided as to the prioritisation of the categories of documentation/evidence, suggesting that unless all elements are available, the arrangements could be considered high risk.

  • No indication is provided of what evidence is more important for each tax consideration, eg GAAR vs DPT vs transfer pricing. 

The ‘excessive burden’ the draft PCG creates potentially unrealistic ATO expectations - this will be a key matter that PwC will engage in through the public consultation process. 

Risk framework

The risk framework is more complex than the colour-coded risk frameworks in other PCGs issued by the ATO. Furthermore, the risk framework does not include a ‘white’ zone or similar concept, or provide for a streamlined compliance approach or options for low risk arrangements under its framework. The more complex framework reflects the greater complexity inherently involved in cross-border matters involving intangibles. The framework requires taxpayers to consider qualitative risk factors across the following areas:

  • Understanding and evidencing the commercial considerations and decision making, especially where a restructure has occurred
  • Understanding the legal form of intangible arrangements

  • Identifying and evidencing the intangible assets and connected DEMPE activities

  • Analysing the tax and profit outcomes

  • Considering examples of arrangements that the ATO considers to be high, medium or low risk based on this PCG and other ATO guidance on intangibles. 

PwC observations

The first four factors listed above are aligned with the ATO’s guidance on documentation and evidence, and under the risk framework taxpayers will be required to consider the adequacy of their documentation against the ATO’s expectations. The absence  of documentation and evidence will lead to a high risk rating, while documentation and evidence which is incomplete will at best be considered medium risk.   Importantly, we believe it will be highly unlikely that the ATO will consider or be open to co-operative engagement on intangibles arrangements, for example through APAs or private rulings, unless a high standard - both in terms of quality, and comprehensive coverage - of evidence and documentation is available. 


The draft PCG includes 12 examples of intangible arrangements to illustrate factors that may be indicators of high, medium, or low risk. 

The high risk examples include features such as:

  • The non-tax commercial benefits of the arrangement are unclear and/or have not been adequately documented. This includes examples where alternative arrangements that may have been considered, and the commercial rationale for the particular arrangement implemented, have not been documented.

  • There is a misalignment between the legal form and substance of the arrangement, for example intangible ownership has been centralised in an offshore entity that does not have sufficient capacity and expertise to manage the relevant DEMPE activities and is reliant on the Australian entity to perform some or all of these functions.

  • There is inadequate documentation available supporting the pricing of the arrangements.

Helpfully, some low risk examples are also provided. The low risk examples are characterised by:

  • Clear evidence of the non-tax commercial rationale for the arrangements implemented

  • Responsibility for DEMPE functions assumed by an entity with clear capabilities to perform these functions, such as a centralised intangible owner within the group which has a history of managing intangibles and which has qualified personnel with the skills and experience to manage the DEMPE functions and decision making

  • Well maintained documentation and evidence supporting the transfer pricing policies adopted.

PwC observations

The majority of the examples are mostly black and white in terms of being clearly high or low risk, which in our experience, rarely reflects real life scenarios whether with independent or related parties. Similarly, the simplicity does not capture the commercial realities for many businesses where a binary geographic and/or entity based delineation of the parties performing DEMPE activities is not commercially best practice. Notwithstanding these concerns, it is a positive move that a number of low risk examples have been included with some taxpayers potentially being able to attain comfort if these align with their own fact patterns and supporting evidence and documentation. 

The takeaway

The draft PCG elevates the importance of maintaining robust documentation and evidence for arrangements involving intangibles. The core issues of concern, such as arrangements that lack commercial rationale, misalignment of form and substance, and inappropriate transfer pricing are unsurprising. However, the onerous evidentiary requirements mean that if your documentation is insufficient, you could have an arrangement that is rated as high or medium risk even where there are no obvious risk factors present.

If you have related party arrangements involving intangibles, or you are considering potential new intangible arrangements, it is important to ensure that you can evidence the commercial rationale and expected benefits for the model or arrangement implemented (including the reasons why it is preferred over other alternatives). It is also important to ensure that documentation adequately considers the legal form and economic substance of the intangible arrangements, and supports the arm’s length nature of transfer pricing policies and valuations applied.

Contact us

Lyndon James

Director, PwC Australia

Tel: +61 (2) 8266 3278

Michael Bona

Global Tax Leader, PwC Australia

Tel: +61 405 136 010

Sarah Stevens

Managing Director, Tax, PwC Australia

Tel: +61 2 8266 1148

Greg Weickhardt

Partner, Global Tax, PwC Australia

Tel: 613 8603 2547

Hiral Mistry

Director, Tax, PwC Australia

Tel: +61 3 8603 2576

Jonathan Malone

Partner, Global Tax, PwC Australia

Tel: +61 408 828 997