Following on from a press release issued by the Treasurer on May 11th, the government has released a draft bill containing a new limb to the general anti-avoidance provision, which is directed at foreign multinational groups who have global revenue exceeding $1 billion. The law will apply where:
- the activities of an Australian company or other entity contribute to an Australian customer’s decision to enter into a contract;
- the contract is formally entered into with a foreign related party to that entity; and
- the profit from the Australian sale is booked overseas and subject to no or low corporate tax.
Where these arrangements are entered into for the “principal purpose” of avoiding tax, the profits from Australian sales will be taxed in Australia as if the foreign company had a permanent establishment in Australia. In addition, withholding taxes that would have been payable by such a permanent establishment may also be imposed.
The amendments apply in relation to tax benefits that a taxpayer obtains on or after 1 January 2016 in connection with a scheme, whether or not the scheme was entered into or commenced to be carried out before that day. As such, it applies to pre-existing arrangements and in that sense has retrospective application.
And to top it off, the government will double the administrative penalties that can apply (up to 100%) of the tax payable for large companies that enter into tax avoidance and profit shifting schemes, and do not have a reasonably arguable position.
A number of aspects of the proposal remain unclear, such as how the Australian Taxation Office will collect the taxes from foreign entities, how the purpose test will be applied in relation to longstanding arrangements, how the rules interact with the obligations to avoid double taxation under Australia’s tax treaties and what is a “low corporate tax jurisdiction”.
The government has indicated that it has identified some 30 companies to which the measure will apply, but has not quantified the additional revenue that the measure is expected to raise.
The government has also committed to implementing the OECD’s new transfer pricing documentation standards, including country by country reporting, from 1 January 2016. This will result in the ATO receiving specific information on large companies operating in Australia with a global revenue of $1 billion or more to assist them in identifying multinational tax avoidance. In addition, the government has indicated that Australia will adopt the OECD’s recommendations for tackling tax treaty abuse and will ask the Board of Taxation to advise on rules to address hybrid mismatches in order to prevent multinational organisations claiming a tax deduction in one country, while not paying tax in another.