In the months prior to the handing down of the 2015 Federal Budget, there was an increasing focus among members of the Australian media on perceived Australian income taxation avoidance by large MNEs. The public interest in these issues were further piqued with the public hearings held in Sydney, Canberra and Melbourne in April 2015 of the Senate Economics References Committee investigations into corporate tax avoidance.
Against that backdrop, the Government on Budget night announced a range of measures aimed at combatting corporate tax avoidance by MNEs. The Government stopped short of replicating the Australian equivalent of UK’s Diverted Profits Tax, but instead announced a suite of measures aimed at looking through contrived arrangements so as to “recover the tax that should be paid in Australia”.
t is also important to note that the Australian Government has decided to commence implementation of many of the key actions it delivered as G20 President in 2014, leading the charge ahead of the broader OECD / G20 base erosion and profit shifting (BEPS) project. Specifically, and in addition to the Budget measures announced and costed in the Budget papers, the Government announced in their “Fairness in Tax and Benefits” Budget document, amongst other items:
- Country-by-country reporting: whereby MNEs will be required to provide tax authorities with a global picture of their operations and taxes paid in every country they operate in, with such information to be shared between tax authorities;
- Treaty abuse rules: Australia will act now to incorporate the OECD’s recommendations for combatting exploitation of treaty rules by some MNEs to avoid taxation altogether;
- Anti-hybrids rules: Australia will be one of the first countries to act on draft rules developed by the OECD for tackling “one sided bets” (broadly, where the MNE claims a tax deduction in one country with no corresponding assessable income in the other); and
- Harmful tax practices and exchange of rulings: the Australian Taxation Office (ATO) has commenced an exchange of information with other countries in relation to secret tax deals provided to certain MNEs to attract their business.
The above announcements mean that MNEs need to be cognisant of whether long standing and tested structures carry heightened long term risk of challenge. It appears clear that the measures announced in the Budget papers and discussed further below are but the first steps on a journey Treasury is undertaking to crack down on what it perceives to be aggressive MNE tax planning.
The specific Budget measures relating to large MNEs (ie those with global revenue of AU $1 billion or more) that appeared in the Budget papers are set out below.
Specific MNE anti-avoidance measure relating to avoiding a taxable presence in Australia
The general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 is to be amended to introduce a “tax integrity multinational anti-avoidance law”. On Budget night Treasury released legislation and explanatory material in exposure draft, inviting interested parties to comment by 9 June 2015.
The targeted new rules are stated to be aimed at approximately 30 companies where:
- the activities of an Australian company or other entity are integral to an Australian customer’s decision to enter into a contract;
- the contract is formally entered into with a foreign related party to the Australian company or other entity; and
- the profit from the sales to the Australian customer are booked overseas and subject to no or low global tax.
For the proposed new rules to apply, it must be reasonable to conclude that the division of activities between the various entities has been designed so as to ensure that the relevant taxpayer is not deriving income from making supplies that would be attributable to the taxable presence in Australia. Further, the taxpayer who entered into or carried out the scheme must have done so for the principal purpose (or for one of the principal purposes) of enabling a taxpayer to obtain a tax benefit (or both to obtain a tax benefit and to reduce other tax liabilities under Australian law (other than income tax) or under a foreign law).
The Commissioner will have the power to look through the scheme and apply the tax rules as if the non-resident entity had been making a supply through a taxable presence in Australia. This includes the business profits from the supply that would have been attributable to an Australia permanent establishment, and obligations arising (for the relevant taxpayer or another taxpayer) under royalty and interest withholding tax.
The new law will apply to tax benefits obtained from 1 January 2016 (under both new and existing schemes), and only to companies with global revenue of AU $1 billion or more in the year in which they sought to obtain a tax benefit under the scheme.
In addition, the multinational anti-avoidance law will only apply to MNEs that have an entity in their structure subject to no corporate tax or a low corporate tax rate (either under the law of a foreign country or through preferential regimes).
The forecast gain to the revenue over the forward estimates period is unquantified.
No doubt, potentially affected taxpayers will have already been contemplating the implementation by the Australian Government of some form of integrity measure. However, the proposed 1 January 2016 start date for the new measures represents a challenging timeframe within which to comply.
New transfer pricing documentation standards
The Government announced that it will implement the OECD’s new transfer pricing documentation standards from 1 January 2016, resulting in an unquantifiable gain over the forward estimates period. The new documentation standards will require large companies (ie, MNEs with global revenue of AU $1 billion or more) to provide to the ATO:
- a country-by-country report showing the global activities of the MNE, including the location of income and taxes paid;
- a master file containing an overview of the MNE’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.
While announced under the cover of “transfer pricing documentation”, for large MNEs obliged to comply this is really an obligation to provide further additional disclosure over and above that already provided in the International Dealings Schedule of the Australian member of the MNE’s annual income tax return.
The maximum administrative penalties applicable to large companies (ie, those with global revenue exceeding AU $1 billion) that enter into tax avoidance and profit shifting schemes will be doubled from 50% of the shortfall amount to 100% of the shortfall amount for income years commencing after 1 July 2015, with an unquantified gain over the forward estimates period.
The stated intention of this measure is to deter tax avoidance, and it is not intended to apply to taxpayers who have a “reasonably arguable position” in relation to the scheme. However, given the materiality of the penalty, as a practical matter we expect that many taxpayers will be forced into having their global tax structure vetted by the ATO.