Australia: ‘Significant global entities’ in Australia contending with new anti-avoidance laws

Melissa Lim

As a result of and consistent with increased international cooperation via G20/OECD actions in 2015, Australia's 2016 tax landscape will be dominated by a focus on combating perceived or actual multinational tax avoidance. The biggest impact will be on 'significant global entities', that is, those with an annual global income of A$1 billion or more.

The most significant piece of legislation has been the Multinational Anti-Avoidance Legislation (MAAL), which passed into law during December 2015, and has been in effect since January 1 2016. The purpose of the MAAL is to prevent significant global entities from entering into artificial or contrived arrangements which are designed to avoid a taxable presence or creation of a permanent establishment (PE) in Australia.

This has been implemented by introducing a lower purpose threshold regarding tax benefits, with the test now being 'one or more of the principal purposes'. The MAAL is included in Australia's General Anti-Avoidance Rule (Part IVA) and as such is not constrained or overridden by Australia's double tax treaties. Since the enactment of the MAAL, the ATO has released LCG 2015/2 (on December 18 2015), a guideline which provides for transitional arrangements, including the development of a "client experience road-map" to help taxpayers determine if the MAAL applies to them. Companies which are potentially affected should be considering whether their structures and arrangements are impacted by the legislation.

Additionally, tax compliance burdens have increased on significant global entities with the introduction of country-by-country reporting requirements from January 1 2016. Under the requirements, significant global entities will be required to provide three statements to the ATO: (i) a 'CbC report' which details where economic activity occurs, where profits are reported, and taxes paid; (ii) a 'master file' detailing business operations, organisational structure and the global allocation of income; and (iii) a 'local file' detailing the management structure and strategy of local entities, as well as cross-border related party data (specific transactions).

Australia's crackdown on multinational tax avoidance has also been reflected in its treaties. The new Australia-Germany treaty is the first to action the BEPS recommendations from the G20 summit and targets, among other things, entities artificially avoiding a PE status. Article 5 previously prescribed situations (such as storage) which would not typically constitute a PE. This has now been qualified by the requirement that such situations must be of a "preparatory or auxiliary" character in order to not be deemed a PE.

Article 5 has also been extended to classify an entity (a non-independent agent) as a PE if it regularly performs the leading role in negotiating sale contracts (including pricing and discount issues). This is the case even if the entity does not formally conclude contracts on behalf of the foreign entity.

In what is believed to be the most favourable bilateral trade agreement China has entered into with any developed economy, the China-Australia Free Trade Agreement (ChAFTA) has implemented two rounds of annual tariff cuts for Australian exporters, the first round occurring on December 20 2015, and the second on January 1 2016. Upon its enactment, more than 86% of Australian goods exported to China will pass through duty-free (with value of A$86 billion in 2014). This will increase to 96% upon ChAFTA's full implementation.

The Federal Court recently held in Tech Mahindra Limited v Commissioner of Taxation [2015] FCA 1082 that the taxpayer (which is a company resident in India and registered in Australia) is liable to Australian taxation on the part of the income derived from the provision of information technology services to Australian customers by the taxpayer's employees located in India, on the basis that the payments made in Australia for certain categories of services undertaken in India constituted royalties pursuant to article 12(3)(g) of the Australia-India double tax agreement and are deemed to be income derived from Australian sources pursuant to article 23.

In another decision, Orica Limited v Commissioner of Taxation [2015] FCA 1399, the Federal Court held that the anti-avoidance rules under Part IVA of the Income Tax Assessment Act 1936 applied to an intra-group financing arrangement entered into by the Australian Orica tax consolidated group (Orica Australia). Pursuant to the arrangement, the Orica Group subscribed for redeemable preference shares in a US subsidiary (Orica US) and Orica US lent the funds back to Orica Australia at interest rates ranging from 4.46% to 5.43% per annum. As a consequence, Orica Australia claimed tax deductions for the interest incurred on the loan and Orica US was able to utilise its existing significant tax losses to shelter against the interest income received (and was thus able to recognise its tax losses for accounting purposes). The Federal Court found that the scheme was entered into for the dominant purpose of obtaining a tax benefit (being the interest deductions in Australia) and accordingly Part IVA applied to the scheme. Further, the Federal Court upheld the imposition of the administrative penalty on the basis that the taxpayer's position did not meet the 'reasonably arguable' threshold.

Melissa Lim (melissa.lim@dlapiper.com)

DLA Piper

Tel: +61 2 9286 8239

Website: www.dlapiper.com