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The OECD defines intangibles broadly, from patents and trademarks to copyrights, software, customer lists and proprietary processes. Valuing these assets and allocating returns across a group is rarely straightforward.
The ATO looks beyond legal ownership. It focuses on where development, enhancement, maintenance, protection and exploitation (DEMPE) activities occur. These DEMPE functions help determine where economic value truly sits. Arrangements where significant returns flow offshore without matching activity often attract ATO scrutiny.
Risk increases when IP migrates offshore, particularly following a foreign acquisition of an Australian business. Centralising IP ownership can make commercial sense, but the ATO expects the transfer value is substantiated and evidence the movement of IP is aligned with a change in substance.
Hard‑to‑value intangibles add complexity. Where outcomes differ from expectations, the ATO may revisit pricing with hindsight, creating uncertainty years after the transaction.
Related party R&D arrangements also attract attention. Where one entity performs R&D for another, remuneration must reflect the functions performed, assets used and risks assumed.
ATO adjustments can be triggered where contracts and real‑world conduct are misaligned or where a R&D entity bears meaningful risk without appropriate reward.
Recent litigation shapes how the ATO applies the rules in practice. The PepsiCo decision provided guidance on how payments linked to IP are characterised and where Australia’s anti‑avoidance rules apply. While favourable to the taxpayer, it has not reduced ATO focus on similar arrangements. Courts expect evidence, consistency and a strong link between pricing and behaviour.
Many issues surface through ATO assurance programs before moving into targeted reviews or audits. Litigation is not inevitable, but a credible position supported by evidence can influence outcomes and support resolution before disputes escalate. Being prepared changes the conversation.
Our transfer pricing specialists closely monitor ATO and litigation developments to assist clients identify and value their intangibles, and structure IP arrangements effectively. Whether you are seeking to strengthen your transfer pricing governance or facing an audit, our team is equipped to provide strategic support informed by the latest case law.
The ATO’s draft PCG 2026/D1 introduces a new compliance framework for attributing risk weighted assets to Australian branches of foreign banks, reshaping thin capitalisation methodologies and documentation expectations.
PepsiCo embedded royalties, ATO Decision Impact Statement, embedded royalties Australia, royalty withholding tax, diverted profits tax, intellectual property payments, IP arrangements Australia, multinational tax Australia, ATO royalties guidance
US tariffs and IEEPA changes impacts on Australian exporters and trade compliance.
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