US withholding tax refunds
The US Internal Revenue Service (IRS) recently began denying refunds of withholding tax for foreign investors on claims from the 2014 and 2015 US tax years. This appears to follow new IRS and US Treasury regulations and procedures to limit claims for refunds or credits to amounts verified by the IRS as actually deposited, or deny claims altogether where the withholding information disclosed on the US tax return does not match the information reported by their withholding agent.
This emphasises the need to ensure that W8-BEN E forms are completed correctly up front, as this is what withholding agents in the US use to determine the correct rates of withholding tax. Funds need to ensure W8 BEN E forms are correctly completed and should work proactively with withholding agents to avoid any issues or inconsistency which could cause the IRS to deny a refund or credit of US taxes.
OECD BEPS Consultation – Pension Fund definition
As part of its “Base Erosion and Profit Shifting” project, specifically Action Item 6 (concerning “preventing access to treaty benefits in inappropriate circumstances”), the OECD called for submissions commenting on its draft proposed changes to the OECD Model Tax Convention relating to the residence of pension/superannuation funds for the purposes of Double Tax Agreements. An important element of this was to ensure that an adequate definition of such funds was included in the Model Convention. PwC prepared two submissions that included comments on the important elements of that definition peculiar to Australian superannuation funds.
Australia’s Double Tax Agreements (DTA) traditionally follow the OECD Model Tax Convention, and it is very important that Australian superannuation funds are recognised under these treaties as “pension funds” in this context, with appropriate access to DTA benefits for their international investments. We will provide further updates on the progress of this exercise.
ATO preparing Tax Governance materials to assess tax governance
The ATO is in the process of consulting on a reference document which it will use to assess the tax risk management frameworks of large taxpayers. From experience, we expect that the ATO will apply these standards to large superannuation funds. This document follows the release on 20 July 2015 of the ATO's Tax Risk Management and Governance Review Guide.
The document is expected to rely upon Auditing Standard ASRS - 4400 (Agreed Upon Procedures) and was developed in response to feedback that the ATO's assessment of governance varied significantly.
Many funds are in the process of assessing their tax governance materials in response to the guide released by the ATO in July last year. We remain involved in the consultation process, and will provide future updates on the progress of this reference document.
Foreign Income Tax Offsets
An addendum to TR 2014/7 was published on 16 March 2016 to replace the Commissioner's views on "source" that were previously withdrawn from that ruling in June 2015. The new content on source emphasises that:
- the formation of the foreign currency hedging contract is the most important element in determining "source" of foreign currency hedging gains
- a contract is formed where the communication of the acceptance is received.
The ATO is currently updating its previously published draft guidance material on how to determine "source" in the context of foreign currency hedging transactions, based on consultation with industry participants, including PwC. It is expected that this material will provide funds with a proxy that the ATO will accept for practically determining source.
The addendum to TR 2014/7 still leaves funds with difficulty in practically determining "source" based on the ATO's views. It will therefore be important that the expected guidance materials provide a practical approach for funds to follow.
New US Tax Regulations re investing into the US
US Treasury has released new draft tax regulations directed at foreign investment into the US. These are aimed at "earnings stripping" and target transactions that increase related-party debt that does not finance new investments in the US. The proposed regulations apply to instruments issued after 4 April 2016. Any changes to structuring arrangements or new US investments involving debt will need to consider these proposed new regulations.