As Australia heads towards a federal election in the coming months, much attention is focussed on further implementation of BEPS-driven unilateral and bilateral initiatives, including: firstly, ATO actions on the Multinational Anti-Avoidance Law (MAAL) post the critical March 31 2016 deadline; secondly, enhanced tax disclosure requirements under our Australian foreign Investment policy guidelines; and thirdly, actions to implement various BEPS-inspired initiatives under the new Australia/Germany double tax treaty.
Firstly, the March 31 2016 deadline for voluntary disclosure and related engagement with the ATO on MAAL and associated tax risks has passed. Many taxpayers are expected to have taken this opportunity to initiate dialogue with the ATO which may include more detailed reviews, tax audits, potential rulings and advance pricing agreements. The ATO has identified almost 400 taxpayers that may be subject to the MAAL and has written to many of these taxpayers leading up to March 31 2016. With substantial exposure to penalties of up to 120% of the tax avoided/in dispute, taxpayers have been strongly encouraged to proactively engage with the ATO.
The MAAL is an anti-avoidance rule (contained in Part IVA) and focuses on significant global entities (with global revenues of AUD1 billion or more), that supply goods or services to Australian-based entities or customers with assistance commonly from a local Australian associate, whereby the sales income or services income is not subject to Australian tax or withholding tax. Essentially, if the tax benefits secured are a principal purpose of the arrangement, the ATO may reconstruct the arrangement to impute profits attributed to, among other things, a notional permanent establishment in Australia of the significant global entity.
It is critical that taxpayers adopt a holistic approach and consider other transfer pricing issues, double tax treaties, pre-MAAL risk/legacy issues, and the interface of GST/VAT and customs duty.
Secondly, the Foreign Investment Review Board in late March released a Guidance Note on the new requirements for foreign investment applications to include standard conditions related to tax undertakings and compliance. This Guidance Note provides more details on the material transactions or other dealings associated with Australian assets to be acquired and the disclosure of the potential application of Australia's transfer pricing rules and anti-avoidance rules in Part IVA (that have not been previously notified to the ATO). More detail is provided on the materiality of potential tax adjustments, the meaning of 'associate' and 'best endeavours'. The Australian foreign investment approval process is returning to a tax screening process.
Thirdly, and most importantly, Australian Treasury released for consultation the draft legislation and detailed explanatory memorandum to implement the new Australia/Germany Double Tax Agreement (DTA) which was signed on November 12 2015. This draft DTA provides a range of integrity provisions which are expected to be adopted in other Australian bilateral tax treaties, to address BEPS-type practices, as well as other treaty provisions intended to make tax treaty dispute resolution mechanisms more effective, including by way of arbitration.
Significant enhancements have been made to tighten the permanent establishment (PE) concept (for example, limiting the scope of the 'preparatory or auxiliary character' exemption, persons acting habitually in a principal role leading to the conclusion of contracts may constitute a PE), stricter anti-treaty abuse or limitation of benefits provisions, and the broader override of anti-avoidance provisions in Australia's domestic law. However, fiscally transparent entities are recognised for purposes of the DTA.
Finally, as the Australian Government approaches the end of the electoral cycle, it is expected that its tax plan, including broader tax policy initiatives, will be announced in the 2016-17 Federal Budget to be handed down on Tuesday May 3 2016. It appears unlikely that broader, fundamental tax reform will be initiated at this time (including a potential broadening of the GST tax base or rate increase – currently 10%). We await the May Budget with great interest. The opposition Labour Party has previously announced the policy to further tighten Australia's thin capitalisation rules and, along with the Green Party, has proposed further strengthening of the ATO's resources to pursue international transfer pricing and stronger anti-avoidance rules.