Australia: Australia increases focus on MNE tax avoidance and BEPS initiatives
Recent announcements by the Australian Taxation Office (ATO), including statements by two senior ATO officers, confirm the significant focus on multinational tax avoidance and BEPS-related initiatives by the ATO and more broadly by the Australian government.
Firstly, Assistant Commissioner James Beeston said on October 5 2016 that the ATO has contacted 175 entities with respect to the Multinational Anti-Avoidance Law (MAAL) that entered into force on January 1 2016.
Of the 175 cases being reviewed for the potential application of the MAAL, many have progressed from the risk identification phase to the more detailed assessment phase. We expect continuing close internal and external scrutiny of the MAAL review programme being undertaken by the ATO.
Secondly, and separately, ATO International Deputy Commissioner Mark Konza spoke publicly about certain concerns regarding taxpayer/adviser activities when releasing an ATO taxpayer alert (TA 2016/11) on certain restructures undertaken to remove the impact of the MAAL.
TA 2016/11 deals with arrangements regarding the interposition of a partnership between the relevant foreign entity and its Australian customers that can be described as "artificial and contrived" and intended to avoid the application of the MAAL. It follows two earlier tax alerts (TA 2016/2 and TA 2016/8) dealing with, among other things, swap and agency type arrangements. Konza warned promoters of such arrangements that the tax scheme promoter sanctions could be applied.
Significantly, the ATO has updated and rewritten its guidelines (contained in Practice Statement Law Administration (PSLA) 2005/24) for ATO officers on the practical and technical application of Australia's General Anti-Avoidance Rules (GAAR), including most notably Part IVA, dealing with income tax issues, and Division 165, dealing with GST.
These guidelines provide useful assistance in considering the potential application of Part IVA after the important 2013 integrity amendments (dealing with two limbs of the 'tax benefit test') and the Orica Limited 2015 Federal Court decision.
The guidelines outline the ATO's views on, among other things, the objective purpose test, alternative postulate/s, tax benefits and discharging the taxpayer onus of proof.
The ATO has also released high level guidance on the general principles and processes that will be followed when considering an exemption request with respect to country-by-country reporting (CbCR) obligations.
Although this guidance is welcome and provides certain relief for taxpayers who must comply with all aspects of the CbCR obligations, it should be noted that these are only guidelines. Therefore, applications for exemptions will generally only be approved on a limited basis (for example, depending on the risk review or audit status, or global parent entity subject to CbCR in its country of residence), and will be determined based on a broad range of factors set out in the ATO guidance.
Cross-border tax treatment
Finally, in a recent Full Federal Court case (Tech Mahindra Limited v Federal Commissioner of Taxation), the court held that a company resident in India, which carried out IT services for Australian clients, both from a permanent establishment in Australia and by employees located in India, was subject to Australian royalty withholding tax on some components of the income derived from the services provided from India. The interplay between Article 7 (business profits) and Article 12 (royalties) of the double tax treaty between the two countries meant that royalty withholding tax was still applicable on part of the payment for services provided from India.
This case further demonstrates the importance of proper drafting of cross-border contractual arrangements.
Jock McCormack (firstname.lastname@example.org)
DLA Piper Australia
Tel: +61 2 9286 8253
Fax: +61 2 9286 8007