After a nearly three-year wait[1], the ATO finalised the risk guideline targeting cross-border related party arrangements (collectively referred to as ‘Intangibles migration arrangements’) involving:

• Migration of intangible assets – ‘Migration’ refers to any restructure or change associated with Australian intangible assets that allows another entity to access, hold, use, transfer or benefit from the intangible assets, and
• Mischaracterisation / non-recognition of Australian activities connected with intangible assets – this includes arrangements relating to the Australian development, enhancement, maintenance, protection and exploitation (DEMPE) activities in connection with intangible assets held offshore.

The Guideline addresses concerns with arrangements:

• under which Australia-led intangibles are transferred, licensed to or otherwise held by an international related party
• lacking the requisite substance to perform or control DEMPE activities and/or assume associated risk and
• where value-adding DEMPE activities remain in the hands of Australian taxpayers.

The Guideline applies from 17 January 2024, and will apply to existing and new arrangements.

The Guideline does not reflect the ATO’s interpretation of tax laws, however serves as a cautionary notice that ATO will focus on scrutinising[2] risky arrangements.

The ATO’s compliance approach

The ATO’s approach to risk assessment is determined by two point-based Risk Assessment Frameworks (RAFs).

RAF Table 1

The below risk factors may trigger risk points for a completed intangible migration during the current year:

• in connection with a restructure or change had associated with intangibles, the Australian entity continues to hold certain economic relationship with the intangibles
• Operational and functional circumstances of the relevant international related party (IRP)o
• tax outcomes of the relevant IRP as well as the Australian entity
• undocumented dealing involving Australian intangible assets / DEMPE activities that are not recognised.  

RAF Table 2

RAF Table 2 becomes relevant where there was no intangible migration completed during the current year. It comprises the below risk factors:

• extent of Australia based DEMP activities in connection with intangible assets owned by an IRP
• operational and functional circumstances of the relevant IRP
• tax outcomes of the relevant IRP
• whether the ongoing intangible arrangement is connected to a past migration (if so, RAF Table 1 needs to be assessed on past migration).

The risk zones / ratings and corresponding compliance approaches are summarised in the table below.

Evidence expectations

Similar to previous drafts, the Guideline continues to place a high bar for evidence and documentation.

The expected evidence focuses on the following aspects:

• evidencing the commercial considerations and business decision-making
• evidencing the legal form and substance of Intangibles migration arrangements
• identifying and evidencing the intangible assets and connected DEMPE activities, and
• evidencing the tax and profit outcomes of Intangibles migration arrangements.

The complexity of taxpayers’ business, the extent to which their Intangibles migration arrangements contribute to that business, and the risk rating of the arrangement will influence the type and level of evidence the ATO expects from them to substantiate the arrangement. However, the Guideline does not serve as substitute for the transfer pricing documentation requirements under Australian tax law.

Examples

Appendix 1 of the Guideline includes 15 examples of Intangibles migration arrangements to illustrate how the RAFs should be applied by taxpayers. Our transfer pricing experts break down and explain these examples here.

Some positive improvements, but still challenging to handle

Compared with PCG 2023/D2, there appears to be some “taxpayer friendly” changes which show that the ATO adopted public feedback during the consultation process. Some positive changes include:

• Introduced ‘Excluded Intangibles Arrangements’ that are not subject to the Guideline – essentially vanilla outbound / inbound distribution arrangement, or low value service arrangement (subject to strict eligibility criteria).
• Expansion of lower end risk zones to White Zone and Blue Zone.
• Reallocation of risk scores – for example, uplifted the point threshold (from 25 to 35) for higher risk zone, and Migration of intangibles, by itself, does not immediately trigger a risk point.
• Providing more scenarios where ‘grouping’ of Intangibles migration arrangements is allowed.

On the other hand, the Guideline remains to place significant challenges and administrative burden on taxpayers:

• The Guideline has very broad application, encompassing scenarios beyond the immediate transfer of assets.  This requires a detailed function and risk analysis to demystify how the Australian entity and its relevant IRP interact in connection with DEMPE activities, regardless of the materiality[1] involved.
• The eligibility criteria for ‘Excluded Intangible Arrangements’ appears to be restricted, and the lack of any direct example for ‘Excluded Intangible Arrangements’ in the Guideline does not help provide confidence in application to the public.
• The Guideline scopes out consideration of other tax aspects such as ‘pricing’ of intangible arrangements. In the RAF, one significant risk trigger is ‘tax outcome’ which focuses on the tax treatment or condition of the IRP.  However, if the pricing is good enough from an Australian perspective, the overall tax risk to the Australian taxpayer could have been lower than that derived from the Guideline.  As such, the risk outcome derived from the RAF, by itself, could be misleading.
• Taxpayers are expected to self-assess their risk based on extensive evidential information, including information possessed by IRPs.  Obtaining intangibles related information or cooperation from overseas could be very challenging, due to confidentiality or other concerns.

Key takeaway for taxpayers

The Guideline’s finalisation highlights the ATO’s focus on tax risks connected to intangible arrangements with offshore related parties. It is relevant to a wide range of Australian taxpayers, regardless where the relevant intangibles are held. The asessment of the relevance and associated risk is not a straightforward process.  It is important for taxpayers to self-assess early and complete these self-assessments before tax returns for the relevant income year are lodged.

For larger taxpayers that are required to complete Reportable Tax Position (RTP) Schedules in the tax return, a new question on Intangibles migration arrangements will need to be completed.  Getting in touch with relevant IRPs early to obtain necessary evidential support is critical for the RTP disclosure.

Regardless of materiality, taxpayers need to ensure sufficient coverage on the arm’s length nature of relevant intangible arrangements is included in its contemporaneous transfer pricing documentation.  All the examples detailed in the Guideline have mentioned transfer pricing as a focus area under the ATO’s compliance approach across all risk categories.

How SW can help

Our experts can assist with:

• further clarification regarding the Guideline
• helping you understand more to what extent your arrangements will be subject to the Guideline
• assessing risk level of your arrangements
• ensuring your RTP disclosures are accurate and supportive
• putting in place transfer pricing documentation to provide a further line of defence for your intangible arrangements.

Reach out to your SW advisor for support from our specialist tax team.

Contributors

Elena Guo

[1] With initial PCG 2021/D4 released in May 2021, followed by PCG 2023/D2 released in May 2023.

[2] Including the potential application of the general anti-avoidance, transfer pricing, capital gains tax rules etc.

The post ATO issues final risk guideline on Intangibles migration arrangements appeared first on SW Accountants & Advisors.

Ampol Group (Ampol) is an Australian energy company that operates in the fuel and convenience retail sector. Its subsidiaries in Singapore (Ampol Singapore) serve as a trading and shipping arm of the group, sourcing refined products and crude oil from outside Australia to provide secure and cost-competitive supply to Ampol’s customers. Ampol Singapore functions as an offshore procurement hub for Ampol Australia and has over 100 employees as of December 31, 2022.

On 20 February 2023, it was reported that Ampol had reached a settlement with the ATO regarding the tax treatment of earnings by Ampol Singapore from transactions with Ampol Australia.

The settlement covers the transfer pricing outcomes of refined products and crude oil between Ampol Singapore and Ampol Australia from 1 January 2014 to 31 December 2022. It also locks in the tax outcomes of the arrangement for future periods until 2033. The settlement also addresses how Australia’s Controlled Foreign Companies (CFC) regime will apply to the profits of Ampol Singapore.

Transfer pricing is the practice of setting the price for goods and services transferred between related entities within a corporate group. The ATO has been actively enforcing transfer pricing rules to ensure that related entities within a corporate group are charging each other an appropriate price for goods and services.

The CFC regime is designed to prevent Australian companies from using offshore entities to avoid paying Australian tax on foreign profits.

Ampol tax settlement details

The settlement is expected to resolve transfer pricing issues related to Ampol Singapore’s transactions with Ampol Australia and provide clarity on the tax treatment of these transactions going forward.

While full details of the settlement are covered by confidentiality provisions, the outcomes include:

• Ampol will pay an additional $5.6 million in Australian tax on earnings between 2014 and 2021, and $0.1 million in interest. This is on top of the $104.1 million of tax already paid on Ampol Singapore earnings.
• Ampol will pay $48.2 million in Australian tax on Ampol Singapore earnings for the 2022 financial year.
• The ATO has neither imposed penalties on Ampol nor applied anti-avoidance provisions.
• Ampol Singapore has adjusted its functions such that the majority of earnings by Ampol Singapore from transactions with Ampol Australia will be subject to corporate income tax in Australia at 30% rate (effective from 1 January 2023).

Key takeaways from the Ampol tax settlement with the ATO regarding Ampol Singapore

The ATO’s Tax Avoidance Taskforce has been focusing on offshore procurement hubs to prevent profit shifting and excessive pricing of imported goods and services in an effort to reduce tax paid in Australia.

The ATO has raised tax liabilities of $30.6 billion from large public and private groups and multinationals over the period 2016 to 2022, with the Taskforce contributing over 60% of this amount.

The number of disputes resolved via settlements has increased by nearly 10% from 2020 to 2022, with the majority of settlements occurring at pre-audit or audit stage.

The scope of ATO’s independent review in large market disputes that involve transfer pricing issues is now restricted.

Settlement can be a practical solution to reach long-term tax certainty for taxpayers, as seen in the Ampol case.

However, defensible transfer pricing policies and adequate documentation remain critical for taxpayers involving complex or material cross-border related party dealings, such as offshore procurement hubs, to mitigate potential risk of ATO’s compliance actions.

How SW can help

Taxpayers engaging in cross-border related party dealings need to ensure that their transfer pricing policies and documentation are in line with ATO’s expectations to avoid potential disputes that cost enormous time and resources of taxpayers.

With the ATO’s increasing focus on offshore procurement hubs, it is important for taxpayers to stay informed of the latest developments in transfer pricing regulations and seek expert advice where necessary.

To avoid expensive disputes and ensure your transfer pricing requirements and compliance are up to date, reach out to our global transfer pricing specialist or your SW relationship Partner.

Contributor

Elena Guo

The post Ampol settles ATO tax dispute over offshore procurement hub: Key takeaways for transfer pricing compliance appeared first on SW Accountants & Advisors.

Leo has extensive experience in Mergers & Acquisitions, tax structuring, consolidation and cross border financing etc. across a number of industries including natural resources, property and agriculture.

He has acted for a wide range of clients including State owned Entities (SOE), publicly listed groups and Privately owned Entities (POE).

He is fluent in both English and Mandarin.

Leo’s experience includes:

• Providing strategic tax advice and solutions for Australian local and international business;
• International tax structuring and tax due diligence on inbound and outbound acquisitions;
• Providing tax advice and dealing with the ATO in respect of complex tax matters such as tax consolidation, thin capitalisation, tax losses recoupment, capital gains tax, withholding taxes.
• Australian tax compliance & tax effect accounting.
• Presenting regularly on Australian/International tax updates.

Leo is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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He regularly assists foreign businesses and investors on their move to Australia, providing initial structuring and set up advice, strategic tax planning, ongoing operational advice, as well as full accounting, tax and corporate secretarial compliance outsourcing services.

Andy’s skills include assisting both locally and foreign owned businesses across a range of industries including hotels and hospitality, financial and professional services, start-ups, information technology, property and construction and wholesaler and distributor.

In addition, Andy has developed expertise in providing strategic business and outsourcing services for major hotels and hospitality groups in Australia. His experience includes assisting these clients with due diligence assignments, cross border structuring advice, funding negotiation, post-acquisition settlement review and acting as outsourced CFO with the responsibility of managing the full finance and compliance functions.

His multilingual speaking skills (English, Chinese, Malaysian and Indonesian) together with his ability to bridge the language and cultural barriers have been invaluable in his dealings with businesses from all around the world including China, USA, Europe and other South East Asian countries such as Malaysia, Singapore and Indonesia.

Andy’s experience includes:

• Assisting with the successful acquisition of a major five star hotel for AUD$85m
• Assisting with the divestment of the business operation of a multinational group in Australia for $45m
• Assisting with the delivery of strategic tax restructuring solutions including asset protection and succession planning for a high net wealth family group
• Assisting start-ups with strategic planning, structuring as well as Research & Development and Early Stage Investors Tax Incentives considerations.

Andy is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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