The ATO deepens its focus on intangible assets and related TP matters
Jock McCormack of DLA Piper discusses the guidelines, issued by the Australian Taxation Office, on the tax risks associated with the DEMPE of intangible assets.
It is increasingly important to proactively address potential transfer pricing (TP) issues and related tax risks associated with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets in the global economic environment.
While recent Australian cases, including Tech Mahindra Limited v. Federal Commissioner of Taxation (2015) TR 775, have principally focused on, among other things, the distinction between royalties and either payments for services rendered or payments for the assignment of intellectual property, the Australian Taxation Office (ATO) has been more rigorously pursuing and issuing guidelines on the TP, withholding tax and related consequences of a broad range of dealings with intangible assets.
The ATO has been principally concerned with the bifurcation of intangible assets and the mischaracterisation of Australian DEMPE activities, including among other things, the migration or centralisation of intangible assets, non-arm’s length licensing and related research and development activities.
In addition to its active audit engagements, the ATO has issued various guidance including firstly, Taxpayer Alert TA 2018/2 dealing with undivided payments for tangible goods, trademarks and know-how to a related/unrelated foreign entity with no Australian royalty withholding tax deducted/remitted. Further, the ATO has issued Taxpayer Alert TA 2020/1 targeted at broader non arm’s-length arrangements connected with the DEMPE and the broader proper recognition of intangible assets.
On May 19 2021 the ATO released draft Practical Compliance Guideline 2021/D4 which principally focuses on a broad range of tax risks associated with the DEMPE of intangible assets. While its principal focus is on the potential application of the TP provisions, it also deals with other associated tax risks including withholding tax, capital gains tax, capital allowances, the General Anti-Avoidance Rule (Part IVA) and diverted profits tax (DPT).
Multinationals should be mindful of the ATO’s potential reconstruction powers within Australia’s TP provisions (particularly related to the assignment of intellectual property rights) and that the draft ATO Guidance is intended to be operative both pre and post finalisation (i.e. retrospectively).
Further, the ATO issued draft Taxation Ruling TR 2021/D4 on June 25 2021 which outlines the ATO’s views as to when receipts from the licensing and/or distribution of software will be ‘royalties’ under Australia’s domestic law definition. The draft tax ruling will replace existing TR 93/12 however, will be subject to consultation and submissions which close on July 23 2021.
Australia supports two-pillar approach
Australia, most particularly the Treasurer, the Hon Josh Frydenberg MP, has publicly strongly supported the two-pillar plan proposed by the OECD, including at the upcoming G20 finance minister’s meeting in July.
Australia was the vice chair of the Steering Group working on the G20/OECD Framework on behalf of 139 countries. These proposed reforms build on certain Australian tax initiatives including the Multinational Tax Avoidance Law (MAAL) and DPT enacted in recent years. Australia will continue to support initiatives that encourage international trade, investment and innovation.
Foreign incorporated companies: Non-Australian residency status extended
The ATO has recently extended until June 30 2022 certain concessional transitional compliance arrangements for certain foreign incorporated companies treated as non-residents related to COVID-19 related arrangements – pending changes to specific governance arrangements and proposed legislative amendments to the corporate residency test.
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