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ATO releases guidelines for inbound distributors, hybrid mismatch rules

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In recent months, there have been several important tax developments driven by the Australian Taxation Office (ATO) that are relevant to inbound distributors, multinationals and foreign-incorporated companies.

ATO guidance on transfer pricing risks for inbound distributors

On November 23 2018, the ATO released a draft practical compliance guideline (PCG) 2018/D8 that outlines the intended compliance approach to transfer pricing issues related to "inbound distribution arrangements". The draft provides a framework for "inbound distributors" to assess their potential risk of an ATO transfer pricing review against specific "profit markers". The draft applies to Australian entities engaged in the distribution of:

  • Goods purchased from related foreign entities for re-sale; and/or

  • Digital products or services where the intellectual property in those products or services is owned by related foreign entities.

The draft guideline provides "profit markers" for inbound distributors in the information and communication technology (ICT) industry, life sciences industry, motor vehicles industry and a catchall "general distributors" category.

ATO guidance for hybrid mismatch rules

In December 2018, the ATO issued draft PCG 2018/D9 and draft law companion ruling (LCR) 2018/D9 to provide guidance on the recently enacted hybrid mismatch rules, which came into effect on January 1 2019.

Draft LCR 2018/D9 discusses the key terms "structured arrangement" and "party to the structured arrangement". Draft PCG 2018/D9 contains proposed practical guidance to help taxpayers determine whether the structured arrangement definition is satisfied and, if so, whether an entity is a party to the arrangement.

High Court decision on the valuation of goodwill

On December 5 2018, the High Court of Australia handed down its decision in Commissioner of State Revenue v Placer Dome (Inc [2018] HCA 59), which addressed the imposition of Western Australia's (WA) land rich duty in respect of the acquisition of Placer Dome Inc, a mining company in 2006.

This case concerned the nature and value goodwill for legal purposes (as opposed to accounting purposes), and whether certain valuation methodologies are appropriate in ascertaining the value of land.

In summary, the High Court held that goodwill for legal purposes only includes sources which generated or added value (or earnings) to a business by attracting custom, such as from assets, locations, people, techniques, etc.

The High Court's decision means that it may be difficult for taxpayers in the mining/commodity industries to argue that they have any material recognisable legal goodwill.

The High Court made a number of observations with regards to valuation:

  • A 'top-down approach' to valuing land (i.e. by subtracting the value of all non-land assets from the total consideration paid for the shares in Placer, and the residual value is attributable to the land) is appropriate for the purposes of the land-rich duty provisions;

  • Goodwill has no existence independently of the conduct of a business, and goodwill cannot be severed from the business which creates it; and

  • The High Court cautioned against attributing a value to goodwill which already inheres in an asset (e.g. land), which is a source of goodwill.

Foreign-incorporated companies: ATO guidance on residency tests

On December 20 2018, the ATO finalised PCG 2018/9 to provide guidance to foreign-incorporated companies on applying the central management and control (CM&C) test of residency.

The guideline provides a transitional period ending on June 30 2019 for taxpayers to make changes to governance arrangements so that CM&C is exercised outside Australia.

Debt/equity and cross-border financing

The ATO has recently released a number of materials relevant to cross-border financing:

  • Draft taxation determination (TD) 2018/D6, released on October 31 2018, which considers the interaction between the debt and equity rules and Australia's transfer pricing rules;

  • Draft taxation ruling (TR) 2005/5DC, released on November 28 2018, which considers the right to tax UK and US financial institutions on interest income arising in Australia. The ruling focuses on the definition of "financial institution" in Australia's double tax agreements with the US and UK; and

  • Taxpayer Alert (TA) 2018/4, released on December 20 2018, which outlines the ATO's concern on tax-driven cross-border financial arrangements where deductions are claimed in Australia (on an accruals basis), but without triggering Australian withholding tax.

Update to list of exchange of information (EOI) countries

On November 23 2018, the Australian government included an additional 54 new countries as EOI countries in the Taxation Administration Regulations 2017.

Residency in an EOI country is the key condition for investors to benefit from the concessional managed investment trust (MIT) withholding tax rate of 15% (or in certain cases 10%), in respect of qualifying MIT distributions.

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