Updated ATO guidance raises the bar for TP compliance

On 17 May 2023 the Australian Taxation Office (ATO) released the second draft of its Practical Compliance Guideline (PCG) 2023/D2 on Intangibles Arrangements.

The PCG does not express a view on the pricing of individual arrangements. Instead, it provides a high-level framework for taxpayers to self-assess (and self-report) the risk presented by different arrangements involving intangibles, using a points system.

Obviously the PCG reflects an Australian perspective on TP compliance. But I think it should be mandatory reading for all TP advisers, corporate lawyers and IP lawyers who are involved in cross-border structures.

It focuses on two types of arrangement: migration of intangibles; and other arrangements involving a mischaracterisation of DEMPE activities. It provides 13 examples of arrangements, and provides a suggested risk scoring for each.

From my perspective, the PCG is interesting for the focus it places on legal substance. For example, as regards the ‘evidence expectations’ for intangibles arrangements, the focus is on four areas (see para 213):

1. Evidencing commercial considerations and business decision-making
2. Evidencing the legal form and substance of the arrangements
3. Identifying and evidencing the intangible assets and connected DEMPE activities, and
4. Evidencing the tax and profit outcomes of the arrangements.

Legal agreements (or lack of them) are clearly central to item 2. They’re also central to item 1, particularly as regards the commercial rationale for transitioning from one legal arrangement to another. And of course, item 3 is likely to involve – at the very least – a clear understanding of the legal nature of the intangibles involved.

Of course, just because a group has intercompany agreements in place, it doesn’t mean that those agreements have substance. Consider arrangements between unconnected parties, such as an agreement with an employee which is ‘dressed up’ as self-employed consultancy.

I’ll admit that I’m biased, as a corporate lawyer who specialises in the legal implementation of TP compliance. But in my view, developments such as this PCG are part of a global ‘raising of the bar’ in terms of TP compliance. And this means that it is now even more critical to ensure that the legal form and substance of intercompany arrangements is clearly and accurately articulated. Not just as regards the current state and the proposed future state, but also as regards the rationale for moving from one to the other.