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  • Intangible assets

    We review international arrangements that incorrectly characterise either intangible assets, or activities or conditions connected with intangible assets.

    Taxpayers may engage in operations that require the use or enjoyment of intangible assets developed, maintained, protected or owned in a foreign jurisdiction. We are concerned when these taxpayers fail to pay, or recognise payment of, a royalty under Australia’s tax treaties and laws. We are also concerned with migration of intangible assets. Migration refers to any transaction(s) that allows an offshore party to access, hold, use, transfer, or obtain benefits in connection with, Australian intangible assets or associated rights.

    In these circumstances, there is typically a significant mismatch between the substance of the relevant parties' operations and the form of their legal agreements. There is also generally an incorrect characterisation of the relevant assets and activities performed in connection with such assets.

    We are concerned that:

    • parties to arrangements of this type may not comply with Australian royalty withholding tax obligations associated with consideration for the use of intangible assets, under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953
    • the analysis or methodology used to determine the arm's length conditions or profits connected with these arrangements may result in parties obtaining a transfer pricing benefit for the purposes of Division 815 of the ITAA 1997
    • the Australian entity disposes of their intangible assets to the offshore related party for low consideration on non-arm’s length terms, thereby minimising its CGT liability – the Australian entity may have also inappropriately utilised other CGT concessions, such as the rollover in subdivision 126-B ITAA 1997
    • such arrangements may be entered into or carried out for the dominant or principal purpose of obtaining a tax benefit – this may attract the application of Part IVA of the ITAA 1936 or the diverted profits tax or both
    • intellectual property arrangements involving inadequate reward for either  
      • value contributed by the Australian entity
      • non-arm's length migration of rights in property created by the Australian entity.
       

    See also

    • TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets
    • TA 2020/1 Non-arm’s length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets
    Last modified: 09 May 2022QC 69443