The Australian Taxation Office (ATO) has issued Taxpayer Alert (TA) 2020/1 concerning non-arm's length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation of intangible assets.
We are currently reviewing international arrangements that mischaracterise Australian activities connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets. We are concerned that these arrangements may be non-arm's length or structured to avoid tax obligations, resulting in inappropriate outcomes for Australian tax purposes.
Our concerns include whether functions performed, assets used and risks assumed by Australian entities in connection with the DEMPE of intangible assets are properly recognised and remunerated in accordance with the arm's length requirements of the transfer pricing provisions in the taxation law.
We are also concerned that parties to these arrangements may fail to properly comply with Australian income tax obligations such as those imposed by the capital gains tax (CGT) and capital allowances provisions. We are particularly concerned where intangible assets and/or associated rights are migrated to international related parties as part of non-arm's length arrangements and/or in a manner intended to avoid Australian tax.
In circumstances where these arrangements lack evidence of commercial rationale and/or substance, our concerns will extend to the application of the exceptions in the transfer pricing provisions and anti-avoidance rules. The general anti-avoidance rule (GAAR) or diverted profits tax (DPT) provisions may apply where a tax benefit or DPT tax benefit is obtained in connection with these arrangements.
Arrangements of particular concern include, but are not limited to, those described in this Alert.