The scrutiny intensifies in Australia on the use of intangible assets by multinational groups

The rise of digitalisation has undeniably influenced global value chains. This transformation has led to the emergence of new business models associated with app stores, online advertising, cloud computing (also known as software as a service, or SaaS), and online payment solutions.

Multinational corporations have capitalised on the opportunity to outsource functions to achieve cost efficiencies, optimising service delivery, administrative tasks, and marketing operations. Between related parties, this may manifest in the movement of personnel and intangible assets^[1] to enhance return on investment. Some multinational corporations have implemented a hybrid strategy, centralising specific elements of their value chain while maintaining a local presence when necessary to sustain competitive advantage.

The evolution of business structures and models has led to various taxation challenges, including how to allocate taxing rights, value and revenue generated from cross-border activities. These challenges arise in a number of jurisdictions, including Australia.

Overcoming these challenges has been a focus of the Organisation for Economic Co-Operation and Development (OECD) with the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action Project.^[2] OECD and G20 countries have adopted a 15-point Action Plan in response to the growing tax regulator concern that multinationals have taken advantage of gaps created by different tax systems to artificially reduce taxable income and/or shift profits to low-tax jurisdictions, including in some cases in jurisdictions in which there is little or no economic substance to the activities.^[3]

Adjacent to the OECD BEPS Action Project is the approach by the Australian Government and the Australian Taxation Office (ATO) to address a perceived risk of leakage in the Australian tax base. The ATO’s Tax Avoidance Taskforce has been tasked with ensuring that multinationals operating in Australia are paying the right amount of tax in Australia. Since establishing in July 2016, the Tax Avoidance Taskforce has raised more than $30 billion in liabilities.

Current examples of the tax controversy relating to multinationals that are being litigated or investigated by the ATO are set out below.

Transfer pricing outcomes in relation to international financing arrangements

In March 2024, the Full Federal Court dismissed the taxpayer’s appeal in Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29. The case considered the Australian Transfer Pricing provisions to a “debt pushdown” arrangement between international related parties.

The court held that the taxpayer was not entitled to deductions as it had not established that the interest paid under the loan arrangement was at an arm's-length price.

The ATO said that the decision is another win towards the ATO maintaining the integrity of the Australian tax system and that taxpayers that set excessive prices for their related party dealings to shift profits to low-tax jurisdictions should be on notice. The taxpayer has filed an application to have its appeal considered by the High Court of Australia.

Royalty withholding tax and diverted profits tax for use of intellectual property

The majority of the Full Federal Court found in June 2024 for the taxpayer in PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86. Contrary to the ATO’s view (and the decision of the primary judge at first instance), the international arrangements involving the licence of trademarks and other intellectual property (IP) were not subject to withholding tax. The ATO’s alternative argument, that the arrangement had been structured to avoid tax (Diverted Profits Tax, or DPT) also did not succeed.

The case highlights the ATO’s expanded approach to the interpretation of rights to IP. The new approach adopted by the ATO is concerning, given the contracts in question had been in place for almost a decade before the ATO issued amended assessments and did not expressly nominate monetary consideration for the use of the IP by the third party.

In May 2024, the Australian Government announced that from 1 July 2026 it will introduce a new penalty for significant global entities (SGEs, i.e. taxpayers with more than $1 billion in global turnover annually), who have mischaracterised or undervalued royalty payments to which withholding tax would otherwise apply.

The ATO has said that the DPT can be an effective tool for it to use to investigate potential multinational tax avoidance. The DPT aims to prevent the diversion of profits offshore for SGEs and imposes a 40 per cent penalty rate of tax to be paid upfront. The DPT is a separate liability to tax and can be imposed in tandem with other tax provisions in respect of the same period. The ATO has applied to have its appeal considered by the High Court of Australia.

Data centres

The ATO reports that it has observed growth over the last decade in the cloud computing and data-hosting industry, with that trend expected to continue. With the increasing demand for cloud services by Australian customers, and the emergence of artificial intelligence (AI), it appears to be commercially desirable for multinationals to build more data centres in Australia.

The ATO is currently reviewing arrangements to explore whether:

• foreign entities have a taxable presence in Australia, for example, by way of Permanent Establishments (PE) – e.g. having a fixed place of business in Australia through large-scale data centres;
• the structure of the Australian group and whether the fragmentation of the Australian activities (including large-scale data centres) into separate legal entities is for the purpose of reducing Australian tax and subject to Australia’s anti-avoidance rules (i.e. avoidance of a PE to which profits and/or royalty expenses would be attributable and therefore taxable in Australia, or to mischaracterisation of integrated business activities for transfer pricing purposes);
• payments made by Australian subsidiaries of the multinational groups do not appropriately reflect the use or right to use IP or other intangible assets which would result in a liability to Australian Royalty Withholding Tax.

Multinationals investing in data centres in Australia will also need to consider other tax issues associated with the acquisition of Australian real property. This includes considering where to locate the data centres given some Australian jurisdictions have different stamp duty regimes for commercial taxpayers and there can be significant variances in land tax, particularly in those jurisdictions that impose foreign surcharge land tax on commercial and industrial land.

With the ever-increasing reporting and disclosure obligations that multinational groups operating in Australia now face, it is important that organisations consider whether their arrangements are likely to present any taxation risks. There are a variety of steps taxpayers can take to demonstrate why their arrangements and pricing outcomes are appropriate and to ensure any real estate investments are as efficient as possible.

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