ATO Taxpayer Alert 2020/1 Taxpayer Alert DEMPE

The Taxpayer Alert highlights the ATO’s concerns involving the transfer of intangible assets that are developed or co-created in Australia, such as intellectual property (IP), to foreign jurisdictions.

What are the ATO’s concerns?

The ATO’s concerns are twofold - firstly, the selection of a particular type of payment (for example, services payment or royalty) to arrive at a particular tax outcome and secondly, the remuneration Australian entities receive in connection with the DEMPE of intangible assets (in accordance with transfer pricing principles of considering functions, assets and risks).  As a subset of these issues, the ATO is also concerned with arrangements where intangible assets are migrated to international related parties as part of non-arm’s length arrangements.  This means that the ATO will, therefore, be considering these arrangements under first principles (that is, whether the payments are royalties or simple use), under transfer pricing principles and under the General Anti-Avoidance Rule.

The ATO has identified arrangements of concern, which include, but are not limited to, the following arrangements involving the:

  • bifurcation of intangible assets and mischaracterisation of Australian DEMPE activities; and

  • non-recognition of Australian DEMPE activities.

Examples

The ATO has provided specific examples to illustrate the nature of the concerns. Interestingly, both examples involve research & development (R&D) arrangements being contracted to foreign related companies.

Example Arrangement 1

AusCo ForCo

AusCo’s remuneration under the contract R&D arrangement with ForCo is not reflective of the extent or character of functions performed, assets used and risks assumed by AusCo in connection with the new intangibles.

Example Arrangement 2

AusCo CCA ForCo CCA Agreement

In substance, AusCo undertakes and manages extensive R&D activities relative to the other participants in the CCA, assumes associated risks, and develops and commercialises new intangible assets.  AusCo uses assets, employs specialised staff, applies its specialist expertise to manage risks, and is subject to minimal direction and oversight from ForCo.  ForCo employs limited staff and contributes limited funds and/or assets under the CCA.  Limited contributions are also made by the other related foreign companies to the DEMPE of intangible assets under the CCA.

AusCo develops and enhances the valuable intangible assets, which are exploited by ForCo and the other related foreign companies party to the CCA Agreement to derive income.  The benefits received by AusCo under the CCA Agreement do not reflect the value of AusCo’s contributions to the CCA including the extent or character of functions performed, assets used and risks assumed by AusCo in connection with the intangible assets covered by the CCA. 

What is the ATO doing?

The ATO is reviewing these arrangements and engaging taxpayers who have entered into, or are considering entering into, these arrangements.

It is understood that the ATO is developing a Practical Compliance Guideline outlining its compliance approach in respect of cross-border arrangements involving intangible assets.

What should you do?

Taxpayers are encouraged to proactively analyse and review their cross-border arrangements that involve the development and exploitation of intangible assets and ensure they fall within the circumstances described in the Taxpayer Alert.  Taxpayers that are considering entering into any new arrangements involving intangible assets should structure those arrangements with the ATO’s concerns in mind.