The Government has published a draft of new measures to amend the existing anti-avoidance measures in Part IVA of the Income Tax Assessment Act 1936 (Cth) to include new integrity measures targeting the diversion of profits from Australia by multinational corporations to no or low tax jurisdictions. The amendments to Part IVA will generally apply from 1 January 2016, but the new penalties regime will apply for years before and after 1 July 2015.

The measure targets global groups with $1 Billion or more turnover and which the Government estimates includes about 30 companies. The Government has allowed four weeks for interested parties to make submissions.

Overview of proposed changes

Part IVA of the Income Tax Assessment Act 1936 (Cth) contains the current income tax anti-avoidance measures. Significantly, Australia’s double tax agreements are subject to Part IVA.

There are three broad areas the Government has targeted;

Artificial Schemes

Summary of new law

The Government will introduce a new targeted anti-avoidance law in Part IVA of the Income Tax Assessment Act 1936 aimed at multinationals which have $1 Billion or more in consolidated global revenues and which artificially avoid having a taxable presence in Australia. The legislation and explanatory memorandum can be found here.

The new law will apply where:

  • a foreign resident makes a supply to an unrelated Australian resident; and
  • the income derived by the foreign resident is not attributable to an Australian PE of that foreign resident; and
  • the activities are undertaken in Australia in connection with the supply; and
  • some or all of those activities are undertaken by an Australian resident (or an Australian PE of an entity) which is an associate of or commercially dependent on the foreign resident; and
  • it is reasonable to conclude the scheme is designed to avoid the foreign resident deriving income attributable to an Australian PE; and
  • a principal purpose is to enable the taxpayer (usually the foreign resident) to obtain a tax benefit, irrespective of whether the scheme also reduces other Australian taxes (e.g. stamp duty) or foreign taxes; and
  • the foreign resident is connected with a no or low tax jurisdiction.

The new law will apply to tax benefits obtained from 1 January 2016 (under both new and existing schemes) where the principal purpose is to avoid Australian tax.

Some Observations

  • The most obvious departure from main Part IVA provisions is that the dominant purpose test is not used. Instead, a principal purpose test is imposed as a deliberately lower threshold and there can be more than one principal purpose.
  • The changes do not generally apply to supplies by a non-resident to an unrelated third party.
  • The concept of supply uses the wide definition in the GST provisions.
  • The connectivity of activities required is vague.
  • “Commercially dependent” Australian entities is an undefined concept.
  • The new provisions can apply even if the foreign tax and Australian stamp duty savings are greater than the Australian tax benefit.
  • “a no or low corporate tax jurisdiction” is not defined. (Examples in the explanatory memorandum include start-up tax free holidays). There is an exception where the income results from substantial economic activity undertaken by the foreign resident in relation to the relevant supply. (The explanatory memorandum suggests the exemption is proportional to the level of activity). The onus is on the taxpayer to provide sufficient information to justify the exemption.

New Transfer Pricing Documentation

The Government will implement the OECDs new transfer pricing documentation standards from 1 January 2016. Under the new documentation standards, the ATO will receive the following information on large companies that operate in Australia:

  • a Country-by-Country 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 intercompany transactions.

The information is stated to provide the ATO with a global picture of how multinational entities operate, assisting it to identify multinational tax avoidance.

New Penalties

The Government will double the maximum administrative penalties that can be applied by the ATO to large companies that enter into tax avoidance and profit shifting schemes. The increased penalties, will apply for income years commencing on or after 1 July 2015 for companies with companies with global revenue of $1 billion or more.

Penalties will not change for taxpayers who have a ‘reasonably arguable’ tax position.