ATO Draft PCG 2025/D4: a practical guide for low-risk software payments

On 6 August 2025, The Australian Taxation Office (ATO) released Draft Practical Compliance Guideline PCG 2025/D4, providing a targeted compliance framework for low-risk cross-border software payments. While narrow in scope, this guidance offers taxpayers an opportunity to reduce uncertainty and better manage compliance in a specific area of tax administration.

Understanding PCG 2025/D4

PCG 2025/D4 outlines the ATO’s compliance approach to determining whether certain cross-border payments for software may be treated as royalties subject to withholding tax. Importantly, the guideline applies only to arrangements that meet the ATO’s definition of low risk, and does not alter the underlying legal interpretation of what constitutes a royalty.

The guidance is intended to complement, not replace, the ATO’s broader interpretative position in TR 2024/D1, which remains in draft pending the outcome of the PepsiCo litigation.

Key features of the guideline

The PCG introduces a risk framework that categorizes arrangements into:

• White zone: No further review (e.g., covered by an APA or court decision).
• Green zone: Low-risk arrangements that will not be subject to ATO review, provided specific criteria are met.

To qualify for the green zone, taxpayers must meet detailed eligibility criteria, including the nature of the software, the terms of the arrangement, and the absence of restructuring aimed at avoiding withholding tax.

Implications for taxpayers

While the scope of PCG 2025/D4 is limited, it provides a useful compliance tool for taxpayers with routine software licensing arrangements. Key considerations include:

• Eligibility assessment: Taxpayers should carefully assess whether their arrangements meet the green zone criteria. This includes reviewing contractual terms and the nature of the software provided.
• Integration with Transfer Pricing: Although the PCG focuses on royalty withholding tax, software payments may also be subject to transfer pricing rules. Taxpayers should ensure that pricing reflects arm’s length principles and is supported by appropriate analysis.
• Restructuring caution: The ATO has indicated that restructures resulting in reduced withholding tax may attract scrutiny, even if the arrangement appears low risk.

Next steps

Taxpayers with software-related cross-border payments should:

• Review existing arrangements against the PCG’s criteria.
• Identify any transactions that may qualify for green zone treatment.
• Prepare supporting documentation to substantiate the risk classification.
• Consider submitting feedback to the ATO before the consultation deadline of 17 September 2025.

Final thoughts

PCG 2025/D4 is a practical step toward greater certainty in a narrow but important area of international tax compliance. For taxpayers with low-risk software arrangements, it offers a pathway to reduce audit exposure and streamline reporting. However, it’s essential to understand its limitations and ensure broader tax and transfer pricing obligations are still met.