Final ATO guidance on migration of intangible assets

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The ATO has released its final Practical Compliance Guideline (PCG 2024/1) which provides a risk assessment framework to enable taxpayers to assess the likelihood of the ATO applying resources to review cross-border related party intangible arrangements. This PCG is the next stage of the ATO’s focus on cross-border intangible asset dealings, and with its compliance approach now finalised, it is likely that we will see a ramp up of reviews.

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19 January 2024

In Brief

The Australian Taxation Office (ATO) released final Practical Compliance Guideline, PCG 2024/1 Intangible migration arrangements, on 17 January 2024. This Guideline provides a risk assessment framework to enable taxpayers to assess the likelihood of the ATO applying resources to consider the potential application of the general anti-avoidance rules or the transfer pricing rules to cross-border related party intangible migration arrangements, broadly comprising:

Migrations of intangible assets – Reflecting any restructure or change associated with the taxpayer’s intangible assets that allows another entity to access, hold, use, transfer or benefit from the intangible assets; and
Mischaracterisation and non-recognition of Australian activities connected with intangible assets – Primarily focusing on tax risks associated with a failure to appropriately recognise and tax Australian development, enhancement, maintenance and protection activities carried out in relation to intangible assets held offshore.

While the above areas of focus is quite broad, certain prima-facie lower risk arrangements may be excluded from the scope of the PCG, namely certain distribution arrangements and arrangements involving low-value services, subject to meeting certain exclusion criteria.

The key drivers of compliance risk ratings provided under this PCG include having certain hallmarks associated with the relevant intangibles migration arrangement, a consideration of the substance of the relevant foreign entity, the tax outcomes of the arrangement and the recognition and documentation of certain arrangements.

The finalisation of this PCG represents the next stage of the ATO’s focus on cross-border dealings and intangible assets. It follows the release of two earlier drafts – one in 2021 and one in 2023. Now that the ATO’s compliance approach is finalised, it is likely that we will see an increase of reviews relating to intangibles, with forthcoming additional Reportable Tax Position (RTP) Schedule disclosures aiding in the identification and prioritisation of arrangements for possible ATO review.

In Detail

Scope of the PCG

Practical Compliance Guidelines provide guidance to taxpayers as to how the ATO will administer the law. They are intended to assist taxpayers in complying with tax laws and are not binding on the ATO. PCG 2024/1, like many others, provides a risk assessment framework that taxpayers can use to assess the likelihood of an ATO review. The PCG indicates that taxpayers should use it to understand:

the kinds of compliance risks that may be presented by any intangibles migration arrangements, enabling taxpayers to make informed decisions about the likelihood that they will be subject to ATO compliance action
the features of intangibles migration arrangements the ATO consider present greater compliance risk, and
the evidence the ATO is likely to ask that taxpayers produce in relation to their intangibles migration arrangements, including the intensity of engagement that can be expected based on the compliance risks associated with the taxpayer’s intangibles migration arrangements.

PCG 2024/1 deals with what are referred to as ‘intangible migration arrangements’, which are defined as cross-border arrangements involving the migration of intangible assets, or arrangements with similar effect. This is said to include arrangements relating to Australian development, enhancement, maintenance, protection and exploitation (DEMPE) activities in connection with intangible assets held offshore. The term 'migration' is said to refer to any restructure or change associated with your intangible assets that allows another entity to access, hold, use, transfer or benefit from the intangible assets. The PCG recognises that in some circumstances it may be appropriate for taxpayers to treat a number of their relevant dealings or arrangements in connection with the same intangible assets as one intangibles migration arrangement.

The PCG borrows concepts from the Transfer Pricing Guidelines produced by the Organisation for Economic Co-operation and Development (OECD) to define ‘intangible assets’ as being a reference to property, assets and rights that are not physical or financial assets, which are capable of being controlled for use in commercial activities, and not restricted by any accounting or legal definitions or concepts.

PCG 2024/1 applies from 17 January 2024 and will apply to existing and new arrangements. Notably, certain arrangements may be excluded from the scope PCG 2024/1, namely certain distribution arrangements and arrangements involving low-value services, subject to meeting the exclusion criteria set out in the PCG.

The ATO’s compliance approach

The ATO’s compliance approach to intangible migration arrangements will vary depending on the risk level, or zone, associated with those arrangements. In this final PCG, the ATO has moved away from a high, medium and low risk rating, to ‘risk zones’, which is aligned with the approach taken in many other PCGs.

The risk zones, and the ATO’s compliance approach, are summarised in the table below.

Risk zone	Risk rating	ATO compliance approach
Green (less than 20 points)	Lower risk	The ATO will not apply resources to further examine or audit your arrangement with respect to tax risks in scope of the Guideline, other than to verify your self-assessment.
Blue (20 to 24 points)	Lower to medium risk	The ATO may engage with you to understand the compliance risks of your intangibles migration arrangement. In the ATO’s engagement with you, it will have regard to the risk rating of your arrangement. The higher the risk rating, the more likely it is that the ATO will seek evidence beyond your risk assessment as part of any review.
Amber (25 to 34 points)	Medium risk
Red (35 points or more)	Higher risk	The ATO will prioritise its resources to review your arrangement. This may involve commencing a further review or audit. The red zone is a reflection of the features that the ATO considers indicate greater risk; however, it is not a presumption that there is necessarily non-compliance with Australian tax law. The ATO will have regard to the relevant facts and circumstances, including evidence verifying the commercial or non-tax rationale, when it reviews your intangibles migration arrangement.
White	Further risk assessment not required	You do not need to apply the risk assessment framework. The ATO is unlikely to apply compliance resources to further re-examine your arrangement beyond verifying that you can substantiate that the conditions for white zone have been met.

The risk assessment framework (discussed below) is used to calculate points to determine which risk zone an arrangement falls into.

In addition, an arrangement will fall in the white zone if any of the following apply for the current year:

there is a settlement agreement between the taxpayer and the ATO, where the terms of the settlement cover the Australian tax outcomes related to the arrangement for the current year, and the taxpayer has met the conditions of the agreement
there is a court decision in relation to the Australian tax outcomes of the arrangement, where the taxpayer was party to the proceeding, or
the ATO has conducted a review or audit of the arrangement and provided the taxpayer with a 'low risk' rating (or a 'high assurance' rating as part of a Justified Trust review) in relation to the Australian tax outcomes of any relevant migration and the characterisation and recognition of Australian DEMPE activities connected with the intangibles migration arrangement,

provided there have been no material changes in the conditions of the arrangement since the time of the agreement, decision, review or audit.

Taxpayers who are required to complete the ATO’s RTP Schedule will be asked to disclose their self-assessed risk rating in RTP Schedule that is lodged with their income tax return. Notably, while there was some uncertainty as to how far back taxpayers may need to go in considering migrations undertaken historically in conducting the risk scoring analysis set out in the PCG, the PCG notes that the RTP Schedule instructions (which have not been released for 2024 as of the date of this document) will indicate the period for which taxpayers are expected to assess historical transactions.

Risk assessment framework

Before applying the risk assessment framework, taxpayers will need to:

Identify relevant arrangements, including determining whether arrangements involving multiple intangible assets should be treated as one arrangement.
Identify any arrangement in the white zone (refer above for further details).
Identify any Excluded Intangible Arrangements.

The introduction of Excluded Intangible Arrangements in the final of the PCG is a welcome addition and is intended to make the Guideline easier to apply. There are three types of excluded arrangements:

Excluded Outbound Distribution Arrangements – Broadly reflecting simple distribution arrangements relating to tangible finished goods where any associated grant of rights is limited to the right to use the intangible assets (typically brand, logos, trademarks) for the purposes of performing the distribution function in that jurisdiction only and the associated residual profits are booked by the Australian taxpayer.
Excluded Inbound Distribution Arrangements – Broadly reflecting the reciprocal of the above arrangement, however the relevant intangible assets must not have been previously migrated from Australia and the Australian taxpayer (or its Australian associates) must not have conducted development, enhancement or maintenance (DEM) activities including research and development (R&D) or regulatory activities in Australia related to these or connected intangible assets, either currently or historically.
Excluded Low Value Services Arrangements – Broadly aligned with the characterisation of low value services reflected in the OECD Transfer Pricing Guidelines and subject to a number of other criteria set out in the PCG.

Taxpayers wishing to rely on these exclusions should ensure that their arrangements meet the relevant criteria set out in the PCG and should document their analysis in demonstrating that their arrangements qualify for the relevant exclusion.

Where taxpayers enter into intangibles migration arrangements that do not qualify for any of the exclusions, the PCG contains a complex risk assessment framework for taxpayers to consider, which is divided into two parts and summarised in the tables below:

Table 1 to assess the compliance risks in relation to a migration of intangible assets, and
Table 2 to assess compliance risks associated with Australian activities connected with intangible assets held overseas, in particular, any risks of mischaracterisation and non-recognition of such activities.

Table 1: Migration of intangible assets

Risk factor	Description	Points assigned
A. Restructure or change	Question 1 You sold, transferred, assigned or novated contractual rights in relation to, or otherwise made available the intangible assets to an international related party. You licensed, granted contractual rights or access to, or otherwise made available the intangible assets to an international related party. You, or an international related party, have entered into or terminated a cost contribution agreement (or a similar agreement) relating to your intangible assets. You have written off (for accounting or tax purposes) some or all of the intangible asset, or discontinued your development, enhancement or maintenance activities in respect of the intangible assets, and provided access to the intangible assets (including any work-in-progress results) to an international related party. You have otherwise changed the arrangement in connection to your intangible assets where the functions, assets or risks relating to activities contributing to the DEMPE of the intangible assets have been transferred to an international related party which has resulted, or can reasonably be expected to result, in a change in the profit outcomes of your arrangements in Australia.	No points
A. Restructure or change	Question 2 In connection with or following the restructure or change identified in Question 1, any of the following apply: You entered into an arrangement with an international related party that involves your continued use of, or benefit from, the relevant intangible assets. You continue to be involved in the development, enhancement, maintenance or protection (DEMP) of the relevant intangible assets.	5 points
B. Circumstances of the relevant entity	Question 3 Following the restructure or change identified in Question 1, identify which of the following categories best describes the circumstances of the relevant entity (the relevant entity is the international related party identified in Question 1): Category 1 if any of the following apply: Newly established or in the initial stages of establishing operations. No or very few qualified staff to independently manage, perform or control the DEMPE activities. DEMPE activities continue to be or are primarily conducted by persons located in Australia. No, or very limited, capacity to assume the risks associated with the DEMPE activities. Completely or predominantly outsources DEMPE activities. Not including activities outsourced to other entities, the relevant entity’s activities are wholly or predominately the holding or management of intangible assets. Category 2 if any of the following apply: Employs qualified staff and has ability to independently perform, manage and control some but not all of the relevant DEMPE activities (this includes circumstances where the relevant entity is expected to transition to a position where it does have these staff in the future). Some DEMPE functions are outsourced but there is not a high degree of oversight and supervision. Category 3 if any of the following apply in relation to the current income year: The restructure or change does not involve a change in ownership of the intangible assets. The relevant entity is granted access, use, or rights to use the intangible assets limited to deriving its own active business income, and it does not carry on a business which predominantly involves the holding, management or development of intangible assets (including licensing or undertaking substantial additional DEMP activities). You receive and include the residual profits associated with the intangible assets (such as residual profits from the sale of products associated with the intangible assets) in your Australian assessable income. Category 4 if any of the following apply: Has always managed, owned and controlled DEMPE activities in relation to the relevant intangible assets and employs staff with the relevant expertise and skills. All DEMPE functions are undertaken by the relevant entity or Australian and other associates performs services (e.g. contract R&D) under a high degree of oversight and supervision from the relevant entity.	Category 1 – 15 points Category 2 – 10 points Category 3 – 5 points Category 4 – 0 points
B. Circumstances of the relevant entity	Question 4 If Category 2 or 3 of Question 3 apply, if the relevant entity is a tax resident in the jurisdiction which is also the jurisdiction in which the products or services related to the intangible assets are predominantly sold to unrelated or third parties.	Subtract 5 points
C. Tax outcomes	Question 5 One or more of the following applies: The relevant entity or intangible assets are subject to a harmful preferential tax regime (based on the OECD Forum on Harmful Tax Practices). The relevant entity has a tax holiday, exemption or concession. The relevant entity is resident (or is a branch) in a specified jurisdiction. The relevant entity has available to it R&D tax offsets or credits, deductible amortisation or depreciation in respect of the relevant intangible assets or significant tax losses that are anticipated to substantially offset or shelter its income relating to the intangible assets. The relevant entity is a foreign hybrid company under Australian income tax law and a member of your tax consolidated group, or is characterised differently for income tax purposes in two or more jurisdictions. The relevant entity was previously an Australian tax resident and has subsequently become a tax resident in another jurisdiction. The restructure or change is recognised as an acquisition of the relevant intangible assets in a foreign jurisdiction for tax purposes but is not recognised or taxed as a disposal in Australia for income tax purposes.	If one factor applies – 10 points If two or more factors apply – 20 points If only 7) applies – 15 points
C. Tax outcomes	Question 6 As a result of the restructure or change identified in Question 1, excluding the upfront gains arising from the restructure or change in the year of the transaction (whether capital or revenue), your taxable income is, or might reasonably be expected to be, less than it would have been if the restructure or change had not been entered into.	10 points
D. Undocumented or unrecognised dealings	Question 7 The relevant entity is substantially using or directly benefiting from your intangible assets and: you or your group do not have any documentation that identifies the intangible assets relevant to your intangibles migration arrangement or evidences the processes and activities associated with the intangible assets, and you do not receive any remuneration in relation to such use or benefit. This question captures arrangements of the kind described in Example 3 in Appendix 1 of the PGC.	15 points

Table 2: Australian activities connected with intangible assets held overseas

Risk factor	Description	Points assigned
A. Your overall characterisation	Question 1 If you undertake DEMP activities in connection with intangible assets for the benefit of an international related party (the relevant entity) that holds, or has legal or economic ownership of intangible assets, consider how many of the following factors apply: You conduct R&D activities in Australia in relation to the intangible assets. You perform business activities or functions which might be reasonably expected to enhance or add value to those intangible assets in Australia (for example, manufacturing, marketing, installation, customisation or support services for digital products, conducting regulatory functions to seek market access and authorisation). You perform other DEMP activities in Australia in connection with the intangible assets.	If one factor applies – 10 points If two factors apply – 15 points If three factors apply – 20 points
B. Circumstances of the relevant entity	Question 2 Identify which of the following categories best describes the activities of the relevant entity in connection with the intangible assets. Category 1 if any of the following apply: Newly established or in initial stages of establishing operations. Has no or very few qualified staff with relevant expertise or skill to perform or control the DEMPE. DEMPE activities are primarily conducted by persons located in Australia. Has no or very limited capacity to assume the risks associated with the relevant DEMPE activities. The relevant DEMPE activities are completely or predominantly outsourced. Not including activities outsourced to other entities, the relevant entity’s activities are wholly or predominately the holding or management of intangible assets. Category 2 if any of the following apply: Employs qualified staff and has the ability to independently perform, manage and control some but not all of the relevant DEMPE activities. Some of the DEMPE activities are outsourced but there is not a high degree of oversight and supervision. Category 3 if any of the following apply: Has always managed, owned and controlled relevant DEMPE activities and employs staff with the relevant skills and expertise. All DEMPE activities are undertaken by the relevant entity or Australian and other associates performs services (e.g. contract R&D) under a high degree of oversight and supervision.	Category 1 – 15 points Category 2 – 10 points Category 3 – 0 points
B. Circumstances of the relevant entity	Question 3 If Category 1 or 2 in Question 2 apply, and you receive and include residual profits (or a share of the residual profits) associated with the use of the relevant intangible assets in your Australian assessable income in the current income year.	Subtract 5 points
C. Tax Outcomes	Question 4 If one or more of the following apply: The relevant entity or intangible assets are subject to a harmful preferential tax regime according to the OECD Forum on Harmful tax Practices. The relevant entity has a tax holiday, exemption or concession. The relevant entity is resident (or is a branch) in a specified jurisdiction. The relevant entity has available to it R&D tax offsets or credits, deductible amortisation or depreciation in respect of the relevant intangible assets or significant tax losses that are anticipated to substantially offset or shelter its income relating to the intangible assets. The relevant entity is a foreign hybrid company under Australian income tax law and a member of your tax consolidated group, or is characterised differently for income tax purposes in two or more jurisdictions. The relevant entity was previously an Australian tax resident and has subsequently become a tax resident in another jurisdiction.	5 points
D. Connection with a past migration	Question 5 Either of the following apply to you: Your intangibles migration arrangement relates to intangible assets (or intangible assets intrinsically linked to such intangibles) that have previously been held legally or beneficially by you (or your Australian associate). You have legal or beneficial ownership of the intangible assets that are subject to this intangibles migration arrangement, but there was a restructure or change associated with your intangible assets of the kind described in Question 1 in Table 1 (other than an Excluded Outbound Distribution Arrangement) in the past.	You also need to complete Table 1 in relation to the past restructure or change

Appendix 1 of the PCG contains 15 examples illustrating the application of the framework to different types of arrangements.

Evidence expectations

Examples of the type of evidence that the ATO is likely to request when reviewing intangibles arrangements is set out in Appendix 2 of the PCG. The items listed are intended to be a general guide and are not exhaustive. Importantly, the evidence expectations are not intended as a substitute for the transfer pricing documentation requirements under Australian tax law.

Examples of the evidence that the ATO requires to substantiate intangibles arrangements include:

Evidencing the commercial reasons and your decision-making process (in circumstances where there has been a change or restructure in relation to the intangibles arrangement)
- 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

Evidencing the legal form and substance of your intangibles Arrangements
- Legal agreements
- Policies, manuals, and guidelines
- Transfer pricing documentation

Identifying and evidencing the intangible assets and connected DEMPE activities
- Intangible asset registers
- IP registration documents
- Accounting records
- Organisational 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
Evidencing the tax and profit outcomes of your Intangibles Arrangements
- Comparability studies, projections, modelling, tax profile of relevant entities

The PCG makes clear that evidence is key to substantiating the self-assessed risk rating. For inbound groups in particular, it is likely that a significant level of support will be required from offshore affiliates in obtaining the relevant evidence needed to support the intangible arrangements.

The evidentiary burden may be challenging for some taxpayers to manage, particularly smaller taxpayers, although there is acknowledgement in the PCG that the type and level of evidence expected will be influenced by the complexity of the business and the extent to which the relevant intangibles arrangements contribute to that business.

What is not covered in the PCG?

The ATO’s compliance approach to the following matters are not currently covered in the PCG:

pricing aspects of intangibles migration arrangements
other tax issues that might arise in connection with intangibles migration arrangements (for example, tax risks associated with amounts not being appropriately characterised as royalties, including, but not limited to, those outlined in Taxpayer Alerts TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets, or TA 2022/2 Treaty shopping arrangements to obtain reduced withholding tax rates), and
the proposed multinational tax integrity measure which will deny deductions to significant global entities for certain payments relating to intangible assets connected with low corporate tax jurisdictions.

It is noted, however, that additional schedules or changes to the risk assessment framework may be included in the PCG in the future to provide further guidance about intangibles migration arrangements in response to what the ATO is seeing.

The Takeaway

Tax risks associated with arrangements involving intangibles remain a key area of focus for the ATO. This PCG is expected to usher in further ATO review activity, highlighting the core issues of ATO concern in relation to intangibles migration arrangements, including arrangements that lack commercial rationale, misalignment of form and substance, and/or inappropriate transfer pricing. The PCG will have broad application and many taxpayers are likely to need to consider the risk assessment framework and self-assess risk ratings in completing RTP Schedules in the near future. Furthermore, PCG risk scoring outcomes are a common request from the ATO in the tax risk review process, including under the Justified Trust Program, and taxpayers should ensure that they are ready to respond to such requests.

For taxpayers who have related party arrangements involving intangible assets, or are considering potential new intangibles arrangements, it remains important to ensure documentation and evidence is collated to support the commercial rationale and expected benefits for the arrangement implemented (including the reasons why it is preferred over other alternatives).

It is also important to ensure that the evidence adequately supports the legal form and economic substance of each intangibles arrangement, and the arm’s length nature of transfer pricing policies and outcomes, as well as any valuations applied.

Contact us

If you would like to further discuss this alert, reach out to our team or your PwC adviser.

Edin Mahir

Partner, Global Tax, Sydney, PwC Australia

+61 415 931 934

Email

Chris Hogger

Director, Melbourne, PwC Australia

+61 413 239 513

Email

Angela Danieletto

Partner, Sydney, PwC Australia

+61 410 510 089

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Jonathan Malone

Partner, Global Tax, Sydney, PwC Australia

+61 408 828 997

Email

Helen Fazzino

Partner, Tax, Melbourne, PwC Australia

+61 438 388 819

Email

Clementine Thompson

Partner, Global Tax, PwC Australia

+61 413 089 431

Email

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Final ATO guidance on migration of intangible assets

Scope of the PCG

The ATO’s compliance approach

Risk assessment framework

Evidence expectations

What is not covered in the PCG?

Contact us

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