Senate Inquiry into Corporate Tax Avoidance public hearing

The Senate Economics Committee inquiry into Corporate Tax Avoidance is continuing. A public hearing was held on 14 March 2018 at which various parties, including Treasury and the Australian Taxation Office (ATO), appeared. Discussion at the hearing was focused on the proposed mandatory disclosure regime, the Petroleum Resource Rent Tax (PRRT) and the broader issue of corporate tax avoidance. The ATO also provided a compliance and staff update, discussion of the corporate tax gap and an update on lodgment of Country by Country (CbC) reports.

In addition, the ATO, in its supplementary submission presented to the Committee, highlighted the high level of tax compliance large companies have in Australia, noting in this context, the Multinational Anti-Avoidance Law (MAAL) has provided a permanent improvement in mitigating tax avoidance, whilst the Chevron case and the ATO’s PCG 2017/4 on cross-border related party financing arrangements have resulted in a significant improvement. Other ATO areas of work which were highlighted included compliance in the oil, gas and pharmaceutical industries, fragmentation of businesses into stapled group structures, the transfer of intellectual property offshore, the examination of CbC reporting, new legislation to deal with significant hybrid risk and implementation of the Diverted Profits Tax (DPT). The submission also discussed ATO compliance activity and year to date results and improvements in ATO capability.

Tribunal finds companies were not ‘associates’ of CFC

The Administrative Appeals Tribunal (AAT) in MWYS and Commissioner of Taxation [2017] AATA 3037 has found for the taxpayer and held that the Commissioner of Taxation had incorrectly included ‘tainted sales income’ in the assessable income of a company under the Controlled Foreign Company (CFC) provisions. The Tribunal found that the Australian subsidiaries of a company incorporated in the United Kingdom (UK) that made sales of commodities to the CFC were not ‘associates’ for the purposes of section 318 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) as the ‘sufficiently influenced’ test was not satisfied.

The ‘sufficiently influenced’ test is set out in section s318(6)(b) of the ITAA 1936 as follows:

“(b) a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts);”

The Tribunal made reference to the taxpayer group’s Dual-listed Structure Sharing Agreement, which the Commissioner had used to draw an inference that the taxpayer was obliged, or might reasonably be expected, to act in accordance with the UK listed group’s directions, instructions or wishes (and vice versa). The Tribunal also considered various other factors including:

  • There was no abrogation by any party to the dual listed arrangement of an ‘effective control’, either by the shareholders or the board of directors of the respective corporate parties of either the company concerned or its subsidiaries. The boards of each of the entities (and the CFC) each met and exercised independent judgments rather than ‘rubber-stamping decisions actually made elsewhere by others’.
  • Even though the taxpayers’ and the UK listed groups’ boards were comprised of the same individuals, those individuals acted in a separate capacity as directors of the relevant entity, and the duality of the role is not indicative of the application of the ‘sufficiently influenced’ definition. The individuals concerned were obliged to act in the interests of each of the companies based on obligations imposed under the relevant constituent documents of each company.
  • The directors were authorised and directed to make their decisions in a way to advance the ‘single unified economic entity’ principle under the sharing agreement. The agreement also allowed the directors to cause each company (or its respective subsidiaries) to enter into transactions for the benefit of the overall group. The Tribunal stated that this ability to act in concert is consistent with the submission that the arrangement is similar to a joint venture and that does not make them ‘associates’ as defined.