The Australian Government’s 2015/16 Federal Budget released on 12 May contained several measures targeted at multinationals. The key announcements included:
- A commitment to implement the new OECD transfer pricing documentation requirements, including country-by-country (CbC) reporting, from 1 January 2016.
- Higher penalties for companies that enter into tax avoidance or profit shifting schemes.
- A new anti-avoidance rule aimed at multinationals selling to Australian customers where the revenue and profits are booked by a non-resident under a structure that is designed to avoid creating a permanent establishment (PE) in Australia.
Other relevant announcements included the provision of additional funding to the Australian Taxation Office (ATO) for auditing transfer pricing and international tax issues under its International Structuring and Profit Shifting Project and taking steps towards adopting other actions from the OECD Base Erosion and Profit Shifting project such as anti-hybrid rules.
Adoption of new OECD documentation requirements
Australia will implement the OECD’s new transfer pricing documentation package including CbC reporting from 1 January 2016. We have summarised below the implications for both Australian multinationals and Australian subsidiaries of large multinational groups. Although it is unlikely that Australian taxpayers (inbound or outbound) will be required to lodge new documentation prior to July 2017, evidence to date suggests that the implementation of the new rules, in terms of data collation and assessing how that data might be perceived by tax authorities, will be a challenge for many taxpayers. As such, an early understanding of your organisation’s readiness to meet the new requirements is critical.
What is it?
The new transfer pricing reporting measures will be relevant to companies with global revenue of AUD 1 billion or more for financial years commencing from 1 January 2016. This threshold is broadly consistent with the OECD’s proposed turnover threshold of EUR 750 million. Consistent with the OECD transfer pricing documentation package, the new requirements will contain three elements:
- a CbC report showing information on the global activities of the multinational, including the location of its income and taxes paid,
- a master file containing an overview of the multinational’s global business, its organisational structure and its transfer pricing policies, and
- a local file that provides detailed information about the local taxpayer’s business, intercompany transactions, and supporting transfer pricing analysis.
Who files a CbC report, and when?
Filing a CbC report is an obligation of the parent entity, not its subsidiaries (mechanisms are being proposed at the OECD level to facilitate reporting where the parent entity is located in a jurisdiction that doesn’t adopt the OECD package). Therefore, only Australian multinationals with global revenue greater than AUD 1 billion will need to lodge a CbC report with the ATO. The ATO will obtain CbC reports of a foreign multinational operating in Australia directly from the tax authority in the parent entity jurisdiction (again, mechanisms to facilitate this information flow are still under discussion).
Who files the master and local TP documentation, and when?
We expect that the master file and local file will be required to be submitted to the ATO by both Australian multinationals and Australian subsidiaries of multinationals with global revenue greater than AUD 1 billion. The ‘when and how’ is still to be determined. On one hand it would be reasonable to expect that it (i.e. the master file together with the local file) would be lodged at the time the Australian tax return is lodged given Australia’s ‘contemporaneous’ documentation requirements. However, there is an acceptance at the OECD level (at least in respect of CbC reporting) that differing local reporting deadlines across a multinational organisation means that CbC reporting doesn’t need to occur until 12 months after the close of the financial year end. We may end up with a ‘hybrid’ scenario whereby there is an expectation that the local file has to exist at the time the tax return is lodged (thereby satisfying contemporaneous requirements) but that it and the master file don’t need to be formally lodged until six months later.
No guidance has been provided yet on how the OECD documentation requirements will be harmonised with the existing local documentation requirements.
The Government has announced that there will be additional penalties for companies that enter into tax avoidance or profit shifting schemes for income years on or after 1 July 2015. The new maximum penalty rate that could apply to a transfer pricing adjustment will be 100% of the tax shortfall in cases where there is a tax avoidance motive and the taxpayer does not have a ‘reasonably arguable position’ (RAP). This measure will increase the importance of maintaining contemporaneous transfer pricing documentation, because documentation legislative pre-requisite for taxpayers to be able to establish a RAP. To establish a RAP on a transfer pricing matter, a taxpayer must have transfer pricing documentation which complies with the Australian law and be able to demonstrate that the position it has taken is ‘about as likely as not’ to be correct.
It had been rumoured that a diverted profits tax, similar to that recently introduced in the UK, may be introduced in Australia. Instead, the Government proposes an amendment to its existing anti-avoidance rules (Part IVA of the Income Tax Assessment Act 1936) that will apply in the following circumstances:
- A non-resident supplies goods or services to an unrelated Australian customer.
- The income derived by the nonresident from that supply is not attributable to an Australian PE.
- Activities are undertaken in Australia in connection with the supply by an associate of, or an entity economically dependent on, the non-resident.
- The non-resident is part of a group with global turnover of more than AUD 1 billion.
- One or more entities within the group are subject to low or no income tax, or the group has ‘stateless income’ which is not subject to tax in any country.
- It is reasonable to conclude that the scheme is designed to avoid the non-resident deriving income through an Australian PE.
- It would be concluded that a principal purpose of the scheme was to obtain a tax benefit.
The rule will not apply if there is no connection between the low or no tax income and the Australian supplies, or if there is ‘substantial economic activity’ performed in the jurisdiction which is subject to low or no tax. Supplies by non-residents to Australians where there is no activity in Australia, or activity performed by an independent agent, will also be excluded.
Where the rule applies, the nonresident will be taxed as if it had been conducting business through an Australian PE. This means the profits attributable to the deemed PE will be subject to Australian income tax, and Australian withholding tax may apply to transactions between the nonresident and other foreign entities.
This rule is proposed to be introduced from 1 January 2016 but will apply to schemes entered into before that date.
While this rule is expected to have narrow application (according to a media release from the Treasurer, the measure is targeted at 30 specific multinationals that are already under investigation by the ATO), there will be significant complexity for the taxpayers who are subject to this rule and there are many areas of uncertainty that could result in disputes with the ATO. In particular:
- no definition has been provided on what is considered to be ‘low’ tax (although it is clear that a tax holiday or preferential regime in a particular jurisdiction could fall within the definition even if the headline corporate tax rate is comparable to Australia’s)
- assessing whether there is ‘substantial economic activity’ in the low tax jurisdiction is likely to be an area of debate, and
- determining the profits attributable to the deemed PE will be complex, particularly as it will be based on a hypothetical scenario rather than the actual facts.
Treasury has released the draft law for public consultation, with submissions due by 9 June 2015.
CbC reporting and the new documentation measures are now a reality. Early discussions with affected taxpayers suggest that responding to these measures is not an easy task. Although the first reporting date in 2017 may seem distant, we encourage multinationals to start considering their readiness for the new requirements.
The new penalty regime raises the stakes for multinationals in ensuring their Australian transfer pricing arrangements are supported by adequate documentation.