Practical Compliance Guideline

Further updates have been made to paragraphs 1 to 6 of the final Guideline to clarify the scope.

The Guideline focuses on structuring issues and tax risks associated with Intangibles Migration Arrangements, as defined in the final Guideline. Paragraph 4 of the final Guideline clarifies that the Guideline does not address our compliance approach to other tax issues that may arise in connection with 'Intangibles Migration Arrangements'.^[1] For example, mischaracterisation of payments (including whether payments should be characterised as royalties), and other tax issues.

Paragraph 2 of the final Guideline states that the pricing or valuation outcomes under the 'basic rule' in section 815-130 of the Income Tax Assessment Act 1997 (ITAA 1997) are outside the scope of the Guideline. That is, a risk rating under the Guideline is not an assessment of the risks associated with the transfer pricing or valuation outcomes of properly characterised Intangibles Migration Arrangements.

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The scope of the Guideline should be narrowed to those that are, or have the reasonable potential to be, economically significant, such as by reference whether the intangible assets are 'unique and valuable' (as described in paragraph 6.17 of the 2022 OECD Transfer Pricing Guidelines).

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Some intangible assets that may not be intended to be captured by the Guideline may fall within the wide definition of 'intangible assets', for example, financial instruments, know-how involved in providing administrative services, et cetera.

Paragraphs 36 to 38 of the final Guideline have been included to provide further guidance on grouping intangible assets (or Intangibles Migration Arrangements) together in applying the Guideline where it is reasonable to do so.

To make it easier to apply the Guideline, arrangements satisfying the criteria for 'low value service arrangements' have been excluded from the Guideline (paragraph 44 to 49 of the final Guideline).

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Paragraphs 36 to 38 of the final Guideline have been included to provide further guidance on grouping intangible assets (or arrangements related to intangible assets) together where it is reasonable to do so.

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Three categories of arrangements involving intangible assets, including low value service arrangements, have been excluded from the Guideline (paragraphs 39 to 49 of the final Guideline).

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In relation to the exclusion of low value services, a materiality limit is included because mischaracterisation of these arrangements (resulting in Australian entities being undercompensated) is a risk in relation to these arrangements. A materiality limit is placed to ensure coverage while also providing a practical way to exclude lower value transactions.

More generally, the definition of 'Intangibles Migration Arrangements' has been updated to clarify that the Guideline covers Migration or arrangements involving Australian development, enhancement, maintenance, protection and exploitation (DEMPE) activities in connection with intangible assets held offshore. This includes where the Australian activities are for the benefit of another entity that holds, or has legal or economic ownership of, the Intangible assets.

We do not consider disclosure alone to be a reliable assessment of the level of tax risk (as covered by this Guideline) that may be associated with an Intangibles Migration Arrangement.

Related issues raised include:

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further consideration of how the Risk Assessment Framework Table 1 (RAF Table 1) applies to an outbound licensing arrangement

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clarification of how the broad definition of 'Migration' may apply to global file sharing systems and when that may constitute a 'Migration'.

In response to feedback, 'Excluded Outbound Distribution Arrangement' (paragraph 42 of the final Guideline) has been excluded from the application of the risk assessment framework.

Further, in relation to RAF Table 1:

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changes have been made to RAF Table 1, including Questions 1(a), (c) and (e) to clarify the scope of the relevant questions

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changes have been made to Question 3 in RAF Table 1 to better address different circumstances that may arise under a Migration arrangement.

Clarification has also been made to the final Guideline in other sections more generally, including the identification and grouping of Intangibles Migration Arrangements, that should assist taxpayers in applying the Guideline.

The means of accessing the intangible assets under an arrangement is not expected to affect how the grouping rules or risk assessment would apply.

This is consistent with the revised draft PCG 2023/D2.

The documentation and evidence expectations outlined in the Guideline sets out, as guidance, what we are likely to have regard to when examining Intangibles Arrangements and would typically expect taxpayers to be able to produce to substantiate their arrangements.

We note that these are consistent with our existing compliance approach.

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is priced at arm's length, or

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has occurred for genuine documented commercial reasons.

However, the risk rating of an arrangement will influence the likelihood of us seeking evidence beyond the risk assessment in any review.

Paragraph 16 of the final Guideline clarifies that evidence relevant to the tax and profits outcomes of Intangibles Arrangements will be considered as part of any review.

Paragraph 21 of the final Guideline has been updated to explain that while it will influence our resource allocation and compliance approach, we do not presume that there is necessarily non-compliance with Australian tax law if an arrangement is in the red zone. In addition, evidence verifying the commercial or non-tax rationale, will be considered when we review an Intangibles Migration Arrangement.

Clarification was also recommended on various aspects of the risk assessment framework questions, including the meaning and intended scope of certain questions.

Broadly, these include:

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reallocation of risk scores (including to tax outcomes)

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exclusion of certain arrangements from the scope of the Guideline (paragraphs 39 to 49 of the final Guideline).

Other changes have been made to clarify and enhance the robustness of the Risk Assessment Framework Tables, such as changes to the definition of Relevant Entity and expansion of what 'Relevant Intangible Assets 'covers in Questions 3 and 4 of RAF Table 1, and the wording of certain questions in the RAF Tables.

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Valuation outcomes are dependent on facts and circumstances and cannot be appropriately risk assessed under the current risk assessment framework.

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Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) (including the diverted profits tax (DPT)) can apply to a Migration arrangement notwithstanding the recognition of upfront gains.

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Refer to Issue 9 of this Compendium for our reasoning for not incorporating pricing or valuation documentation into the risk assessment framework.

Question 6 of RAF Table 1 has been updated to clarify that upfront gains, including upfront payments under a licence, should be excluded to ensure that there is no asymmetry between a Migration that involves a disposal and one that does not.

Paragraph 16 of the final Guideline clarifies that evidence relevant to the tax and profits outcomes of Intangibles Arrangements will be considered as part of any review.

Taxpayers are encouraged to refer to our evidence expectations and substantiate their Intangibles Migration Arrangements.

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The utilisation of these features is not by itself necessarily a harmful tax practice.

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Inclusion of this as a risk indicator can result in an Intangibles Arrangement having a higher risk rating.

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It will not always be clear whether the income of the intangible assets is 'substantially offset or shelter'.

The words 'substantially offset or shelter' were included in the revised draft PCG 2023/D2 and in the final Guideline to ensure that a more balanced outcome is achieved under the question.

Also refer to Issue 11 of this Compendium for the ATO's response in the overall recalibration of the risk assessment framework and outcomes.

In any further engagement with us, evidence relevant to the Intangibles Migration Arrangements such as evidence relevant to the commercial reasons or decision-making, and evidence relevant to the tax and profits outcome, will be considered along with the facts and circumstances of each case.

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The Guideline should distinguish between the range of DEMPE activities that can be performed, for example, applying only to 'substantial' DEMPE activities.

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The categories in relation to substance of Relevant Entity in RAF Table 1 should consider situations where the Australian entity remains as entrepreneur or is otherwise deriving 'residual profits'.

In response to some of the feedback received, changes have been made to Question 3 in RAF Tables 1 and 2 regarding the Circumstances of the Relevant Entity.

Certain arrangements (Excluded Intangibles Arrangements) have been excluded from the final Guideline (paragraphs 39 to 49 of the final Guideline).

Part 3 of the final Guideline explains and clarifies the evidence expectation for taxpayers, including the acknowledgment that the type and level of documentation we expect can be influenced by a number of factors, such as complexity of their business, the extent to which their Intangibles Migration Arrangements contribute to that business, an appropriate materiality threshold based on their natural business system and their governance processes. (Refer also to our response to Issue 25 of this Compendium.) These comments equally apply to evidence substantiating a taxpayer's risk assessment.

In relation to Question 4 in RAF Table 1, that question is included to provide a means to reduce points where the situation applies and if it is more reasonable to do so, taxpayers can choose not to determine and substantiate whether the question applies.

The focus of this Guideline on Australian activities in relation to intangible assets held offshore (as opposed to offshore activities in relation to intangible assets held by an Australian entity where this is no Migration) is clarified through changes made to the definition of 'Intangibles Migration Arrangements' from the original definition of 'Intangibles Arrangements' in revised draft PCG 2023/D2 and previous draft PCG 2021/D4.

This Guideline and PCG 2019/1 relate to different tax risks. Paragraph 6 of PCG 2019/1 states that PCG 2019/1 is limited to the transfer pricing risks associated with inbound distribution arrangements.

When reviewing Intangibles Migration Arrangements, we will consider evidence substantiating a taxpayer's Intangibles Migration Arrangements, including evidence relevant to commercial reasons and decision-making. This includes any review of higher-risk (red zone) arrangements.

Relevant evidence substantiating a taxpayer's Intangibles Migration Arrangement will be considered in our review.

Some guidance should be included to give taxpayers certainty in respect of the ATO's expectations in respect of past Migration Intangibles Arrangements.

We have updated paragraphs 26 to 28 of the final Guideline to clarify that while it is best practice for a taxpayer to assess their Intangibles Migration Arrangements, we will not require reporting of their self-assessment of past Migration in the reportable tax position (RTP) schedule beyond a period specified in the relevant instructions.

Two examples from TA 2020/1 have been included as Examples 7 and 8 in Appendix 1 to the final Guideline.

The ATO places a strong emphasis on documentation, despite the fact that such materials do not directly reduce the risk assessment framework scores and risk assessment outcomes. Such emphasis creates a risk that taxpayers will be required to prepare documents not required for any other commercial purpose or by any other tax jurisdiction, purely to meet the evidence expectations set out in the Guideline.

The evidence expectations in Part 3 and Appendix 2 to the final Guideline are included as guidance to set out what we are likely to have regard to when examining Intangibles Migration Arrangements and would typically expect taxpayers to be able to produce to substantiate their arrangements.

We note that these are consistent with our existing compliance approach.

While the risk assessment framework influences our resource allocation and compliance approach, if we review a taxpayer's Intangibles Migration Arrangements, we will consider the relevant facts and circumstances in reaching a view on the level of risks associated with their Intangibles Migration Arrangements. This will include a consideration of the evidence substantiating their Intangibles Migration Arrangements.

Paragraph 63 of the final Guideline has been included to explain that it is not the intention of the Guideline to unnecessarily impose burdensome requirements on a taxpayer in respect of the evidence required to substantiate their Intangibles Migration Arrangements. Rather, setting out the kinds of information and documents we are likely to request may assist taxpayers to mitigate the level of compliance risk posed by their Intangibles Arrangements and ensure that any engagement with us is as efficient as possible.

Part 3 of the Guideline explains and clarifies the evidence expectation for taxpayers, including the acknowledgment that the type and level of documentation we expect can be influenced by a number of factors such as the complexity of their business, the extent to which the taxpayer's Intangibles Migration Arrangements contribute to that business, an appropriate materiality threshold based on the taxpayer's natural business system, and governance processes.

Due to the complexity involved in pricing intangible arrangements, it is recommended that a 'best effort' criterion is introduced as part of the final Guideline.

Refer to paragraphs 26 to 28 of the final Guideline for our approach regarding reporting requirements in the RTP schedule.

A limit of the number of disclosures required should be considered (similar to the question in respect of PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.

Taxpayers should be provided with reasonable notice of when the Guideline will be finalised and enough time to undertake self-assessments.

Refer to paragraphs 26 to 28 of the final Guideline in relation to RTP disclosure requirements in connection with past Migration arrangements.

Certain arrangements have been excluded from the scope of the final Guideline.

Withdrawal of RTP Schedule questions related to TA 2018/2 and TA 2020/1 should be considered.

As issues related to TA 2018/2 are explicitly out of scope of the Guideline, it is not appropriate to withdraw the RTP Schedule question related to TA 2018/2.

Withdrawal of the question related to TA 2020/1 will be considered when we develop guidance for the RTP schedule in due course.

We will consider whether it is appropriate to refer to the final Guideline as part of our engagement in the FIRB process on a case-by-case basis.