February 2018 has seen many important Australian tax
developments. These affect investment funds, investors,
multinationals and their investments into and out of
Australia.
Treaty benefits: court looked through to US partners of
Cayman Island limited partnerships
On February 9 2018, the Australian Federal Court held that
the US tax residents of two Cayman Islands limited partnerships
were not subject to Australian income tax on substantial gains
made by the partnerships from the sale of shares in an
Australian mining company (Resource Capital Fund IV LP v
FCT [2018] FCA 41).
The Federal Court, constituted by single judge Justice
Pagone, held that, even though the gains were Australian
sourced, the partnerships were not taxable entities and the US
tax resident partners were entitled to benefits under Article 7
of the Australia-US double tax treaty (and Article 13 did not
apply, as the Australian mining company was found not to be
Australian 'land-rich').
Foreign investors and limited partnerships should monitor
any subsequent Australian Taxation Office (ATO) clarifications
on resulting matters, such as whether foreign investors now
need to lodge Australian tax returns if they do not qualify for
treaty benefits, or how this decision reconciles with the
Resource Capital Fund III decision handed down in
2014.
DPT: ATO guidance on sufficient economic substance test and
related matters
On February 7 2018, the ATO released draft Practical
Compliance Guideline PCG 2018/D2, setting out further guidance
on Australia's diverted profits tax (DPT).
Satisfying the sufficient economic substance test is one of
the ways to get out of the DPT rules. The PCG 2018/D2 sets out
the ATO's DPT approach and guidance relevant to determining
whether this test is satisfied.
In particular, PCG 2018/D2 includes example situations that
the ATO considers as high- or low- risk, in the context of
lease in lease out arrangements, intangible asset transfers,
limited risk distributor structures and certain captive insurer
arrangements.
Multinationals should review their structures against these
examples. Specifically, the limited risk distributor examples
are particularly relevant to multinationals that restructure
into a limited risk distributor model in the midst of
Australia's Multinational Anti-avoidance Law (MAAL).
MAAL: draft legislation to capture foreign trust and
partnership suppliers
On February 12 2018, the Australian government released
exposure draft legislation to clarify that the MAAL can still
apply where a foreign trust or partnership is interposed
between a foreign entity and its Australian customers.
As identified by the ATO in 2016, some taxpayers have argued
that an interposed foreign trust or partnership are technically
an Australian entity and thus the MAAL cannot apply, as there
is no requisite supply by a foreign entity to Australian
customers (which itself is a MAAL requirement).
Under the draft legislation, supplies made by a trust or a
partnership are deemed to be made by a foreign entity if the
trust or partnership:
- Has at least one foreign entity
participant (e.g. if a foreign entity is a direct or indirect
beneficiary of the trust or partner of the partnership);
and
- Is connected with, an affiliate of, or
part of the same global group as, the foreign entity.
If enacted, the legislation would apply to tax benefits
arising on or after January 1 2016, including structures
implemented on or before that day.
Multinationals with these structures should consider the
need to restructure their affairs to avoid falling foul of the
MAAL and the ATO's continuing scrutiny.
BEPS: draft legislation to give force of law to MLI
On February 8 2018, the Australian government released
exposure draft legislation which would give the BEPS
Multilateral Instrument (MLI) the force of law in
Australia.
Under the draft legislation, an Australian bilateral tax
treaty would have the force of law as modified by the MLI if
ratified by both Australia and the treaty partner and the
Secretary-General of the OECD is notified.
If so modified, the treaty would essentially implement the
OECD's BEPS measures in the MLI, except for any
country-specific modifications.
Multinationals should monitor any country-specific BEPS
modifications as they are incorporated into Australia treaties
and the MLI.
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| Jock McCormack (pictured) and Kenny Mui |
Jock McCormack (jock.mccormack@dlapiper.com)
and Kenny Mui (kenny.mui@dlapiper.com)
DLA Piper Australia
Tel: +61 2 9286 8253 and +61 2 9286 8227
Fax: +61 2 9286 8007
Website: www.dlapiper.com