Taxpayer Alert Of Dempe

KnowledgeTaxpayer Alert Of Dempe

Taxpayer Alert of Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) Analysis in Australia 

Digital transformation has contributed significant changes to the world, changing the nature of the business and the industry value chain, even the way people interact with each other. Intangible properties (“IPs”) has become the main driver of business profits within Multinational Enterprises (“MNEs”) especially in the digital economy ecosystem. With the increasing complexity of IPs and myriad Transfer Pricing cases surrounding the exploitation of IPs, DEMPE analysis was introduced to tackle this issue. 

On 22 January 2020, the Australian Taxation Office (“ATO”) issued Taxpayer Alert related to intangibles to warn taxpayers and advisers of arrangements that are considered as high risk. This Alert outlines the ATO concerns with arrangements that:

Hence, the functions performed, assets used and risks assumed by Australian entities in connection with the DEMPE of  intangible assets should be properly recognised, documented and remunerated in accordance with the arm's length requirements. The following framework outlined by the OECD Guidelines 2017 is a tool to determine an arm’s length price in connection with the intangibles.

Framework Analysis for DEMPE

The framework for analysing transactions involving intangibles between associated enterprises requires taking the following steps, consistent with the guidance for identifying the commercial or financial relations provided in the OECD Guidelines Section D.1 of Chapter I:  

  1. Identify the intangibles and risks associated with the DEMPE;
  2. Identify the contractual arrangements, with special emphasis on determining legal ownership of intangibles, including contractual assumption of risks;
  3. Identify the parties performing functions using assets, and managing risks related to DEMPE by means of the functional analysis;
  4. Confirm the consistency between the terms of the relevant contractual arrangements and the conduct of the parties relating to the DEMPE;
  5. Delineate the actual controlled transactions related to the DEMPE in light of the legal ownership of the intangibles; and
  6. Where possible, determine arm’s length prices for these transactions.

The first step involves listing out all the valuable patents, trade marks, know-how, copyright and like assets (intangibles).
Secondly, analyse the legal rights and contractual arrangements involving intangibles. The ATO will review the arrangements connected to the DEMPE of intangibles. This is of ATO’s concern where the division of the right(s) to exploit intangible assets is not consistent with the share of global income from the exploitation of such assets.

Thirdly, functional analysis will be conducted to identify the parties performing economically significant functions, using assets, and managing risks related to DEMPE of the intangibles.

 The concept of DEMPE enables delineation of the transactions through: 

An example summarising the parties involved in the relevant DEMPE functions are provided below:

In Step 4, the relevant contractual arrangements and the conduct/ substance should be consistent. In the ATO Alert, ATO recognises the substance of the arrangement taking into account the contribution of specialised employees/ assets and which party provides direction and oversight.   

Hence, in Step 5, the extent or character of functions performed, assets used and risks assumed by the Australia company and other foreign companies in connection with the intangible asset should be delineated along with the benefits. The arrangement should be commercially rational or consistent with its best economic interests having regard to the commercial options realistically available.

The last step of the DEMPE analysis involves the determination of the arm’s length prices for the transactions. The selection of the most appropriate TP method should be based on a functional analysis that provides a clear understanding of the MNE’s global business processes and how the transfer of IP would have an impact on the business.

Although the 2017 OECD Guidelines mentioned that the any one of the five transfer pricing methods could be selected and applied based on the facts and circumstances. Nevertheless, the Guidelines mentioned that there are situations where the Profit Split Method (two-sided method) would be more appropriate than others one-sided method.

 You can now refer to our article for Overview of Profit Split Method in our website!

Actions to be taken

Companies that do not align their DEMPE functions with IP ownership are encouraged to assess their current transfer pricing structures and determine whether any remedial action is required.

The ATO have concerns that these arrangements may fail to properly comply with the provisions for capital gains tax, capital allowances, transfer pricing, general anti-avoidance and diverted profits tax.

Contributed by our Director Shannon Smit 

Shannon Smit is the founding director of Transfer Pricing Solutions and has consulted multi-national companies on transfer pricing, taxation and accounting for over 25 years. Transfer Pricing Solutions has been recognized for their expertise, and in 2017 Shannon was thrilled to be awarded Asia Pacific Transfer Pricing Leader of the Year.


Contact Transfer Pricing Solutions


+61 (3) 59117001


+65 31585806


+ 603 2298 7153