Expanded transfer pricing documentation standards and penalty exposure
Draft legislation has been publically released on August 6 2015, impacting MNEs with annual global revenues in excess of A$1 billion (US$740 million). This draft legislation will:
- firstly, provide the framework for disclosure of much greater international tax and related information including country-by-country reporting, consistent with proposed OECD standards; and
- secondly, significantly increase penalty exposures for tax avoidance and profit shifting schemes.
Voluntary transparency and anti-hybrid rules: Action on 2015-16 Budget announcements
As announced in the 2015-16 Budget (handed down in May), the Australian Government is commencing work with businesses to develop a code on the public disclosure of greater tax information by large MNEs in Australia.
The Board of Taxation (the Board) has received the terms of reference to develop the code which will provide a framework for large businesses to voluntarily take the lead and be more transparent about their compliance with Australian tax law.
The Board is also commencing consultation on the implementation of proposed anti-hybrid rules which may neutralise hybrid mismatch arrangements, consistent with the recommendations of the G20 and OECD under BEPS Action 2. The key implementation strategies are focussed on eliminating double non-taxation with regard to interactions between Australia's domestic legislation (debt/equity rules), international obligations (treaties) and the proposed new anti-hybrid rules.
Foreign resident CGT withholding regime
Draft legislation has been released which introduces a new regime imposing a 10% non-final withholding obligation on purchasers of certain Australian assets (for example, direct or indirect interests in taxable Australian real property (TARP) or assets of Australian permanent establishments) where the purchaser has reason to believe the vendor is a foreign resident. The purpose of the regime is to facilitate the collection of foreign residents' capital gains tax (CGT) liabilities. At present, voluntary compliance by foreign residents, with respect to payment of CGT liabilities on capital gains made from the disposal of Australian assets, is perceived to be low and it is challenging for the ATO to successfully enforce compliance measures.
Advance pricing agreements
As the Australian Government focuses its attention on multinational transfer pricing arrangements, tax administrations worldwide are introducing new legal measures and increasing enforcement efforts on transfer pricing. In these increasingly challenging and uncertain times, MNEs globally are seeking certainty concerning their tax affairs wherever available. Advance pricing agreements (APAs), where appropriate, can provide MNEs with the ultimate certainty concerning their transfer pricing arrangements. Following recent changes to the Australian transfer pricing legislation and the establishment of a new APA programme management unit within the ATO, on July 24 2015, a new practice statement on APAs (PS LA 2015/4) has been introduced. This new PS provides guidance to ATO staff on APAs, including mutual expectations, when the ATO is likely to enter into an APA, the process to be followed and the risk exposure on open tax years. It reflects (a) a principle-based approach; (b) streamlined process and practices to improve timeliness; and (c) reduction of red tape.
Offshore marketing and procurement hubs
The ATO is also now addressing issues regarding compliance with the new transfer pricing regime (Division 815) in respect of the use of related party offshore marketing hubs and offshore procurement hubs which are used in the sourcing, or supply, of goods on behalf of Australian MNEs. In particular, the ATO is concerned that certain offshore procurement hub structures have been established by MNEs to mitigate the controlled foreign company (CFC) rules and to shift profits.