Australia: Treaty benefits, DPT, MAAL and BEPS MLI

February 27 2018

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.