Acclime strengthens transfer pricing support for life sciences R&D in Australia.

Australia is a preferred location for global biotech and life sciences groups to run their research and development (R&D). Strong scientific talent, a supportive regulatory environment, mature clinical ecosystem and the R&D Tax Incentive have been particularly attractive for early-stage, pre-revenue companies. None of this has changed, on paper. However, the Australian Tax Office (ATO) has sharpened its focus on these structures.

Taxpayer Alerts TA 2023/4 and TA 2023/5 sent a clear message: It is not enough to have contracts and diagrams that put “substance” in Australia. The underlying people, decisions and risks must genuinely reside in Australia.

For early-stage biotech, where value is concentrated in IP, data and future upside rather than current profits, getting this right from day one is critical.

What “substance” means for an Australian R&D entity

The basis of any transfer pricing assessment is often a Functions, Assets and Risks (FAR) analysis to determine the actual characterisation of an entity in the group context. R&D entities in Australia could be considered one of the following two.

Contract R&D service providers (or Agents)

The Australian entity performs R&D activities on behalf of a foreign parent or IP owner, under its direction, and is remunerated with a service fee. Strategic and entrepreneurial decisions largely sit offshore.

Entrepreneur (or for-itself)

The Australian entity takes on key development risks, makes or drives major decisions and funds (or co-funds) the R&D. It would therefore expect a share of the long-term upside if the R&D is successful.

Key factors to consider in “form” vs “substance”

From a Transfer Pricing perspective, we need to look beyond contracts and labels (form) to determine if actual activities on the ground (substance) support a characterisation. For early-stage biotech companies, some aspects to consider are the following.

Qualified people on the ground

Is there Australian-based personnel with relevant technical and commercial experience, who understand the science, development plan and risk profile and not simply local signatories?

Decision-making process

Are strategic and day-to-day operational decisions regarding the R&D undertaking, such as Clinical Research Organisation (CRO) selection and management, indication or target selection, trial design input and go/no-go decisions, made by or meaningfully influenced by Australian personnel?

Funding of R&D activities

Has the Australian entity secured sufficient funding to take on the financial risk of conducting costly R&D activities? If financing is provided by a group entity, what are the requirements attached to that funding?

Commercial arrangements that make sense

An entrepreneur assuming significant downside risks would only take on these risks if there is a credible route to a future upside. For example, through IP ownership or participation in future returns. In contrast, a service provider would expect to be paid for and make a profit on services provided.

Documentation that reflects reality and stays current

Setting up operations appropriately is only the first step and shouldn’t be seen as “set and forget.” Substance and commercial aspects must be reviewed regularly to ensure they align with the facts and outlook of the R&D undertaking as well as the latest regulatory requirements.

Why this matters now

The ATO is actively reviewing R&D Tax Incentive claimants and cross-border arrangements, with particular attention on whether the Australian entity genuinely conducts the activities and has the commercial prospects its characterisation suggests. For pre-revenue biotech companies, the consequences of getting this wrong can be significant: cashflow disruption, uncertainty for investors and potential challenges to where value is created in the group.

How Acclime can help

Acclime has recently strengthened its advisory capabilities by appointing Greg Wilhelmi as Associate Director, Transfer Pricing. Greg and Acclime’s R&D Tax specialists can assist with the following.

• Design or refine the transfer pricing structure of Australian operations
• Run practical substance and risk health checks for existing arrangements
• Prepare and maintain transfer pricing documentation that aligns with R&D Tax Incentive position
• Support transfer pricing set-up during an ATO review or enquiry

If you are conducting, or planning to conduct, R&D in Australia and have not recently revisited the structure, substance and transfer pricing, now is a good time to act. A focused review can provide comfort to founders, boards and investors and help you avoid unwelcome surprises during an ATO review.

Schedule a consultation with Greg to discuss your situation.