The principal initiative will target 'significant global entities' (those with annual global income of A$1 billion ($700 million) or more, or as determined by the Commission of Taxation) which artificially avoid a taxable presence in Australia, essentially under a scheme that was carried out for the principal purpose or a principal purpose of obtaining a tax benefit relating to the non-attribution of income to an Australian permanent establishment (PE) of the foreign entity – section 177DA. Secondly, and most importantly, the penalties applicable to significant global entities that enter into tax avoidance or profit shifting schemes have been significantly increased to potentially 120% of the relevant scheme shortfall amount (the amount of tax in dispute).
These specially targeted anti-avoidance initiatives generally apply from January 1 2016 and are expected, along with broader disclosure and reporting initiatives for global operations, to strongly encourage large multinationals (particularly significant global entities) to review and evaluate their current global structures and global contractual arrangements, including their international supply, service and technology arrangements. The recent engagement of the ATO and the Senate Economics References Committee with major global technology companies such as Apple, Microsoft, Amazon and Google has been well publicised.
In his second reading speech to the Australian Parliament on September 16 Joe Hockey, the outgoing Australian Treasurer, estimated that there were more than 1,000 multinational entities operating in Australia with global revenues greater than A$1 billion that would be prima facie impacted by the new laws. In a joint press conference with Hockey, Chris Jordan, the Commissioner of Taxation, strongly encouraged voluntary compliance and highlighted the reduced penalties for the early and/or voluntary disclosure of international arrangements by taxpayers.
These specially targeted unilateral initiatives are reflective of the perceived high risk to the Australian tax base of large multinationals' global tax arrangements.
Contemporaneously, the government has introduced new legislation or exposure draft legislation (the latest on September 18, dealing with the Common Reporting Standard (CRS)) dealing with the following complementary initiatives:
Country-by-country reporting (CbCR) (new subdivision 815-E): Significant global entities will be required to report to the Australian Taxation Office (ATO) their income and tax paid in each country in which they operate. This will include the master file, local Australian file and the country-by-country report dealing with income earned and taxes paid globally. This information can be exchanged with other tax authorities to assist in transfer pricing risk assessment and targeting of tax audit activities.
Draft legislation supporting the implementation of CRS was released on September 18 which will provide for the automatic exchange of financial account information between countries and the pursuit of hidden offshore bank accounts. Australia has agreed to implement CRS from January 1 2017, with information exchange expected to commence in 2018.
The extension of the GST to cover intangible supplies made by non-residents from outside Australia covering digital content, services performed remotely for customers in Australia and contractual rights granted from outside Australia. These GST amendments will apply to supplies made on or after July 1 2017.
The Treasurer and the new Turnbull Government are keen to maintain Australia's reputation as having some of the strongest tax integrity rules in the world and will continue its leadership role with the OECD and G20-led global initiatives.
It is noteworthy that most of these tax reform initiatives (other than the extension of GST to intangible supplies to consumers) have unquantifiable revenue implications, and that the broadening of Australia's part IVA general anti-avoidance rule (GAAR), via the introduction of a new section 177DA of the 1936 Act, is not constrained or overridden by Australia's double tax treaties.
Foreign investors need to report
The ATO has published a website update reminding foreign investors of the availability of a reduced penalty period, available until November 30 2015, if they disclose possible breaches of Australia's foreign investment rules for purchases of Australian real property.
Indirect tax reform is also on the Australian Government's agenda. Australian GST and customs duty do not apply to goods that are imported via parcel post and which have a value of less than A$1,000. The government has announced that this threshold will be abolished, at least for GST purposes, with effect from July 1 2017. GST will then apply to all imports, regardless of value. Draft legislation has not yet been released, but is expected in the coming weeks.
The government has also introduced into parliament legislation relating to the China-Australia free trade agreement (FTA). If enacted, the measures will allow goods originating from China to be imported into Australia at preferential duty rates.