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ATO files request for leave to appeal Glencore decision

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On appeal, the ATO continues to attack Glencore’s win.

Paul McNab of DLA Piper takes a closer look at the Glencore appeal, the decision in La Mancha Group, and the key changes to the Australian Tax Office’s website.

Glencore appeal

On December 10 2020, the Australian Tax Office (ATO) filed a ‘request for leave to appeal’ to the High Court of Australia against the decision of the Full Federal Court of Australia in Commissioner of Taxation v Glencore Investments Pty Ltd [2020] FCAFC. The ATO had lost that appeal on all but one point.

It is interesting to note that Steward J, who was a member of the court that determined the Full Federal Court appeal, has since been appointed to the High Court. Moreover, the senior counsel for the commissioner in the High Court appeal is Pagone QC, who was previously a member of the Federal Court. He was also a member of the Full Court determining the appeal in Chevron, which was heavily discussed by the Full Federal Court in Glencore.

The case is important because it deals with a group which changed their inter-company arrangements. They provided evidence that the new arrangements were ones of a type arm’s-length parties had entered into. However on the ATO’s evidence, the change seemed to have had the effect of reducing the profitability of the Australian entity compared to what it would have been without the change.

On appeal, the ATO continues to attack Glencore’s win on essentially the same basis as in the courts below.

In particular it attacks the quality of Glencore’s comparable evidence and the focus of that evidence. It argues that it is not enough to show that arm’s-length parties had entered into such dealings (which is what Glencore had shown), but that it must show that the Glencore entities would-likely-have entered into the particular arrangements if they had been arm’s-length. Essentially, this would require taxpayers who enter into an arrangement to show that the decision to do so, was one which an arm’s-length party would have made, and not just that the resulting arrangement was of a type arm’s-length parties had entered into.

La Mancha Group decision

On December 16 2020, the Federal Court delivered a judgment giving guidance on the effect of a foreign merger of companies on the parties’ Australian tax liabilities (La Mancha Group International B.V. v Commissioner of Taxation [2020] FCA 1799).

In a decision that provides clarity on a long standing issue in Australia, the court held that the Australian tax liabilities of a company were transferred to another company it merged with under the Dutch/Luxembourg cross border merger rules. The court accepted Dutch and Luxembourg expert witness evidence on the operation of the merger rules, and in particular the intention of the rules that all assets and liabilities of the entity were intended to pass, including foreign ones.

The decision is also interesting since it evidences the existence of a dispute between the group and the ATO, and the fact that security arrangements, including a deed of guarantee from the ultimate parent to the ATO, had also been entered into in relation to the debts.

Updates to the ATO website

The ATO has recently updated its website in relation to a number of important topics which are of interest to international taxpayers.

Software and royalties

One area that has been updated is the list of matters on which they are working to draft guidance for taxpayers. This list is important, since it gives taxpayers potentially affected by a topic (and their advisors) an opportunity to assist the ATO to ensure that guidance addresses actual business models and benefits from specialist insight into commercial and legal issues.

In particular, Item [4000] “Software and royalties” has been updated. This item advises that the guidance in ITR93/12 is to be updated to deal with digital distribution channels and cloud services. The ITR referred to was developed in 1993, and clearly business models have evolved significantly since then. The ATO has, in recent years, looked to provide guidance on issues emerging in this area, but the complexity of the facts and legal issues, and the continued evolution of the business models has prevented this. A draft ruling is scheduled for release in January 2021. Rulings are formal advice by the ATO and are binding on the commissioner and a taxpayer who fails to consider them may suffer penalties in the event of a dispute.

Dealing with intangibles

Another important source of information on topics that the ATO is researching is the list of ‘consultation matters’ which the ATO publishes. Consultation matter [202017] “Intangibles arrangements” (also previously referred to as Public Consultation Item [4006]) proposes a Draft Practical Compliance Guideline which is expected in early 2021. The guidelines explain to taxpayers those features of an arrangement that will lead the ATO to review it, and potentially to dispute it. But they also indicate those features which will lead the ATO to conclude no further action is required.

While the software ruling is most likely of interest to a particular industry group, the intangibles guidelines will be relevant to all taxpayers who have dealings with intangible assets.

Foreign resident employers’ factsheet

On December 11, the ATO has also released a factsheet for foreign employers setting out the obligations that foreign employers have when they have employees working remotely in Australia. COVID-19 has led to employees remaining in Australia unexpectedly, creating significant risks for employers.

In particular, the ATO has noted that it did not expect employers to register for PAYG (personal tax withholding) up to June 30 2020, provided the employee’s presence was purely caused by travel restrictions. However from July 1 2020 this issue needs to be reconsidered. It is also necessary to consider Australian superannuation obligations, and fringe benefit tax obligations for employees remaining here. The factsheet notes the operation of tax treaties needs to be considered on a case-by-case basis. Although not mentioned in this factsheet (dealing with federal taxes), employers must also be careful of state payroll tax obligations in such circumstances.

CbC reporting deferral announced

The ATO also announced that Significant Global Entities have a deferral, from December 31 2020 to January 29 2021, to lodge their country-by-country (CbC) reporting statements. This includes the local file, the master file and the CBC report itself.

This is a lodgment deferral only and does not change the due date for payment. Statements not lodged by January 29 2021 may be subject to penalties.

Paul McNab



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