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Australia: Base Erosion and Profit Shifting: An Australian Perspective

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Tom Seymour

The base erosion and profit shifting (BEPS) debate has been active in Australia over the last year. A number of initiatives have been introduced domestically and the Australian Taxation Office (ATO) is gearing its administration to address the challenges presented by BEPS. However, many of the themes arising from the BEPS debate have been on the agenda in Australia for a number of years. In fact, it could be argued that through recent reforms in transfer pricing and anti-avoidance legislation, Australia has already implemented many of the legislative tax tools equipped to deal with risks associated with profit shifting.

Transfer pricing reforms

The rewrite of Australia's transfer pricing rules was initiated in 2011. Phase one of the reform involved introducing retrospective rules from July 1 2004 applying to dealings with related parties in tax treaty countries.

Phase two involved comprehensively rewriting the Australian transfer pricing rules. These new rules have been enacted with effect from July 1 2013 and will operate on a self-assessment basis. The new rules are broader in scope than the existing ones, and require detailed consideration of arm's-length conditions and also introduce reconstruction powers. Documentation will be required to be prepared by the time of lodging tax returns to mitigate penalties.

Increased disclosure and transparency

A number of new disclosure and transparency measures relevant to an Australian taxpayer's transfer pricing arrangements have been introduced in recent times, which include:

  • Recently enacted transparency laws which require the commissioner of taxation to publish from the 2013-14 year certain tax information of large corporate taxpayers (on a named basis);

  • The new International Dealings Schedule replacing the old Schedule 25A which represents a significant increase in disclosure requirements of cross-border related party transactions; and

  • The ATO's reportable tax position schedule, which requires certain key taxpayers (based on ATO criteria) to disclose information about reportable tax positions.

BEPS specific initiatives

At the time of the OECD's release of its BEPS Action Plan, the Australian government released a paper titled Risks to the Sustainability of Australia's Corporate Tax Base – Scoping Paper. This paper looks at the broader issues surrounding multinational profit shifting and the recommendations are aligned to the OECD's BEPS Action Plan.

The former government announced reduction of the safe harbour debt limit under the thin capitalisation rules to address profit shifting through the artificial loading of debt in Australia, which has now been confirmed by the current government.

Review of debt and equity rules is also being undertaken including addressing any inconsistencies between Australia's and other jurisdictions' debt and equity rules that could give rise to arbitrage opportunities.

The ATO's 2013–14 Compliance Program has a strong focus on BEPS. The ATO has set up a new compliance project team, international structuring and profit shifting (ISAPS), which will act as an advisory team to field auditors. A significant number of corporate taxpayers have been identified for a risk questionnaire.

The government is proposing to use its presidency of the G20 in 2014 to try to achieve global action on BEPS reforms. However it is clear than that many of the legislative tools to prevent BEPS in Australia are already sharp and together with the existing general anti-avoidance provisions, the case for radical tax reform in Australia to combat BEPS alone is far from strong.

Tom Seymour (tom.seymour@au.pwc.com)

PwC

Tel: +61 (7) 3257 8623

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