The Australian Taxation Office (ATO) has provided important guidance in applying the principal or main purpose test in Australia’s double tax treaties as well as its views on limiting the withholding tax exemption for foreign superannuation funds and the broader tax exemption for sovereign wealth funds. Further, the Australian Board of Tax has outlined two primary reform options relating to corporate tax residency status and the government has released further proposed amendments to Australia’s hybrid mismatch rules.
Principal or main purpose test
On December 16 2019 the ATO issued draft Practice Statement Law Administration (PSLA) 2019/D2 dealing with ‘administering general anti-abuse rules, such as a principal or main purpose test, included in Australia’s double tax treaties’. The principal or main purpose test has been included in many of Australia’s double tax treaties as a consequence of Australia’s and other countries’ commitment to and ratifying the multi-lateral instrument (MLI).
The draft Practice Statement provides practical and technical guidance to ATO staff on the administrative process of applying the principal (or main) purpose test in Australia’s double tax treaties. It essentially provides guidance on questions that should be raised by ATO officers of taxpayers, documents to be produced and the general process and considerations for evaluating the principal or main purpose test. The ATO is open to submissions on the application of the principal purpose test and will closely review international dealing schedule working papers, annual reports, contemporaneous transfer pricing reports and inter-company agreements and policies.
Corporate tax residency
The Board of Tax released a 2nd Consultation Paper on December 9 2019 outlining two primary reform options – firstly, the retention of a modified ‘central management and control’ test and secondly, the adoption of an ‘incorporation only’ test.
The Board is seeking further comments on these two options and has rejected a test based on the international treaties standard of ‘place of effective management’ because of uncertainty risks.
The concept of corporate residency is critical in Australia for a range of reasons including access to treaty benefits, concessional non-portfolio foreign dividend exemption, foreign participation exemption and a range of capital gains tax (CGT) and foreign hybrid type recognition/rules. The Board is carefully considering its options and will report to the government in the coming months.
Separately, the ATO has released an updated version of its Practical Compliance Guideline (PCG) 2018/9 providing guidance to foreign incorporated companies on applying the ‘central management and control test’ as it impacts corporate residency.
The government released draft legislation on December 13 2019 to clarify and amend Australia’s hybrid mismatch rules. Most particularly, it amended the integrity rule as it applies to inbound financing arrangements and related matters.
Finally, the ATO released Draft Law Companion Ruling 2019/D4 on December 4 2019 outlining its views firstly, on the eligibility of foreign superannuation funds for the withholding tax exemption (most particularly related to the ‘influence test’), and secondly, the broader sovereign wealth fund / entity group tax exemption.
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