Applying the participation test to foreign distributions

Tax Ruling TR 2017/3, issued on 28 June 2017, sets out the Commissioner of Taxation’s view on the meaning of the term ‘at the time the distribution is made’ when applying the participation test (in Subdivision 768-A of the Income Tax Assessment Act 1997), which is relevant to determine if an equity distribution received by an Australian corporate tax entity from a foreign company is not assessable and not exempt (NANE) income.

According to the ruling, for the purposes of Subdivision 768-A:

  • to have a participation interest in the foreign company, an entity must be a registered member of the foreign company at the start of the day the distribution is made

·       where the distribution is a dividend or non-share dividend, the distribution is made on the day that the foreign company pays or credits the distribution

·       where the distribution is a deemed dividend, the distribution is made on the day the tax law deems the dividend to have been taken to be paid.

Several examples provided in the Tax Ruling illustrate the application of the participation test and the meaning of ‘at the time the distribution is made’ in Subdivision 768-A.

Housing affordability package –  foreign residents and indirect real property interests

The Government has released draft legislation in line with the housing affordability package announced in the 2017-18 Federal Budget. The draft legislation seeks to modify the capital gains tax (CGT) principal asset test applicable in determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP). Specifically, the principal asset test will be applied on an associate inclusive basis. This will ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property. These amendments will apply in relation to CGT events happening at or after 7:30 pm, by legal time in the Australian Capital Territory, on 9 May 2017.

This same draft legislation also seeks to remove the main residence CGT exemption for foreign residents, also announced in the 2017-18 Federal Budget (see the Personal Taxes Update for further details).

Comments on the draft legislation are due by 15 August 2017.

Australian foreign investment changes effective from 1 July 2017

Changes to the foreign investment framework announced in the 2017-18 Federal Budget and additional technical amendments take effect from 1 July 2017. The changes include clarifications to the treatment of land used for commercial purposes or as a solar or wind farm, removal of routine and low­risk transactions from ‘low threshold’ non­vacant commercial land, a streamlined and simplified commercial fee framework and improvements to the operation of the exemption for small interests in unlisted land entities and streamlined consortium rules.

G20 Leaders’ Declaration

The G20 Leaders’ Declaration, which was released following the Leaders’ meeting in Hamburg on 7-8 July 2017, highlights a number of issues discussed at the meeting, including trade and investment, and international tax cooperation and financial transparency. The G20 Leaders reiterated their commitment to the implementation of the Organisation of Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) package and encouraged all jurisdictions to join the Inclusive Framework. It was also noted that the Leaders will be provided with an update on jurisdictions that have not made satisfactory progress on implementation of the agreed international standards on tax transparency at the next G20 Summit, and will consider defensive measures against those jurisdictions.

OECD Transfer Pricing Guidelines 2017 edition

The OECD has released the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 edition. The latest edition of the Guidelines mainly reflects a consolidation of the changes resulting from the OECD/G20 BEPS Project. It incorporates, among other things, the substantial revisions introduced by the 2015 BEPS Reports on Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation and Action 13 Transfer Pricing Documentation and Country-by-Country (CbC) Reporting.

Draft contents of 2017 update to OECD Model Tax Convention

The OECD has released the draft contents of the 2017 update to the OECD Model Tax Convention. The content has not yet been approved by the Committee on Fiscal Affairs or by the OECD Council, although significant parts of the 2017 update were previously approved as part of the BEPS Package. Comments are currently requested by 10 August 2017 in respect of certain parts of the 2017 update that have not previously been released for comment.

OECD Global Forum on Transparency and Exchange of Information for Tax Purposes

The OECD-hosted Global Forum on Transparency and Exchange of Information for Tax Purposes has been working to enhance global tax transparency, end banking secrecy and protect public finances by curtailing tax evasion since 2008. The Global Forum established a Fast-Track review process to evaluate continuing efforts by some jurisdictions to meet transparency standards in the run-up to the G20 Leaders’ Summit in Hamburg in July 2017. The Fast-Track review’s latest results show that progress has been made by most jurisdictions in meeting the international tax transparency standards.

Other OECD BEPS development

The OECD has released BEPS discussion drafts on Additional Guidance on Attribution of Profits to Permanent Establishments (Action 7) and Revised Guidance on transactional profit splits (Action 10). Refer to PwC Global’s Tax Policy Bulletin for further information.

The OECD has also released further guidance on CbC reporting (BEPS Action 13), including how to treat an entity owned and/or operated by two or more unrelated multinational enterprise groups, and confirming that aggregated data for each jurisdiction is to be reported in Table 1 of the CbC report regardless of whether the transactions occurred cross-border or within the jurisdiction, or between related or unrelated parties (an exception is where the parent jurisdiction has a tax consolidation regime, such as Australia, where consolidated data at the jurisdictional level can be reported).

In other developments:

·       The OECD has announced the Platform for Collaboration on Tax – a joint initiative of the International Monetary Fund, OECD, United Nations (UN) and World Bank Group – has published a toolkit to provide practical guidance to developing countries to better protect their tax bases in relation to transfer pricing. Refer to PwC Global’s Tax Policy Bulletin for further information.

·        On 3-5 July 2017, fifty delegates representing 10 countries gathered in Cotonou (Benin) for the Second regional meeting of the Inclusive Framework on BEPS for French speaking countries. Participants discussed various topics, including the latest developments on the implementation of the BEPS Project and a workshop on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

·       On 21-22 June 2017, at the third meeting of the Inclusive Framework on BEPS, it was reported that the United States (US) concluded a further set of bilateral competent authority arrangements for the automatic exchange of CbC Reports and that Belize, the Cayman Islands, Colombia, Haiti, Pakistan, Singapore and the Turks and Caicos Islands had signed the Multilateral Competent Authority Agreement for CbC Reporting and that Singapore had signed the Multilateral Competent Authority Agreement for the Common Reporting Standard‎.

·       Montserrat and Barbados has joined the Inclusive Framework on BEPS and Bahrain has joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

·       Mauritius has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

New Zealand and Hong Kong DTA updated

A new tax protocol between New Zealand and Hong Kong was signed on 28 June 2017, which updates the current double tax agreement (DTA) between the two jurisdictions to allow full exchange of tax information. For further information, refer to the media statement issued by the New Zealand Minister for Revenue.

Options for Corporate Tax Simplification in the UK

The United Kingdom’s (UK) Office of Tax Simplification has issued its report calling for UK corporation tax to be modernised and simplified. This report responds to calls to make the calculation of UK corporation tax simpler, with fewer changes and more time to plan, and also recognises the importance of keeping the UK an attractive destination in a post-Brexit world. The report considers the following broad themes:

  • simpler tax for smaller companies
  • aligning tax rules more closely with accounting rules where appropriate
  • simplifying tax relief for capital investment, and
  • a range of issues affecting larger companies.

European Commission proposed mandatory disclosure

The European Commission has proposed a draft Directive that would impose mandatory disclosure obligations on tax advisers or, in certain circumstances, on taxpayers. The Directive would provide for mandatory disclosure of certain cross­border arrangements and automatic exchange of such information between Member States. The Directive is proposed to apply effective 1 January 2019. For further details, refer to PwC Global’s Tax Insights.

Government response to proposed TPP

The Government has responded to the recommendations of the Foreign Affairs, Defence and Trade Report on the proposed Trans-Pacific Partnership (TPP) Agreement. The Government noted the Committee’s recommendation that it should defer undertaking binding treaty action until the future of the TPP is clarified through further negations with Australia’s major trading partners, stating that it is actively engaging with TPP signatories on pathways for giving effect to the TPP.

US Treasury to review debt reclassification, international and partnership regulations

The US Treasury Department has identified eight regulations, including debt reclassification, international and partnership regulations that it states will be modified or repealed to implement an Executive Order issued by President Trump that calls for reducing tax regulatory burdens. Refer to PwC US’ Tax Insights for further information.

US Tax Court supports position that foreign partner’s gain from partnership interest not effectively connected income

On 13 July 2017, the US Tax Court held that a gain from the sale of an interest in a partnership by a foreign partner did not constitute effectively connected income with a US trade or business where the partnership was engaged in a US trade or business. Refer to PwC US’ Tax Insights for further information.

Netherlands seeks comments on implementing minimum measures from ATAD1

The Netherlands has launched a consultation to implement the first European Union (EU) Anti-Tax Avoidance Directive (ATAD1), which the EU agreed upon in 2016. The consultation document proposes an earnings stripping rule, measures for controlled foreign companies and additional measures for exit taxation. Refer to PwC US’ Tax Insights.