On 2 May 2018, the ATO released Draft Tax Determination TD 2018/D1 ‘schemes that limit a taxable presence in Australia under section 177DA of the Income Tax Assessment Act 1936 – meaning of ‘directly in connection with’’ (Draft Determination). This Draft Determination is in relation to the Multinational Anti-Avoidance Laws (MAAL) which aim to prevent large multinational groups entering tax avoidance schemes.
Section 177DA of the Income Tax Assessment Act 1936 is the operative provision which addresses multinational groups that enter an arrangement to avoid a taxable presence in Australia. Broadly, the requirements of section 177DA(1)(a) are that:
- a foreign entity (specifically a significant global entity) makes a supply to an Australian customer
- there are activities undertaken in Australia by an Australian associate of the foreign supplier that are ‘directly in connection with’ the supply and
- the foreign entity derives income which, in whole or in part, is not attributed to a permanent establishment in Australia.
The Draft Determination provides guidance around the term ‘directly in connection with’ in the context of section 177DA.
The Draft Determination confirms that the phrase ‘directly in connection with’ is intended to be construed broadly (which is not surprising given the MAAL rules are intended to be strict in addressing global tax avoidance). Whether or not an activity is ‘directly in connection with’ a supply will ultimately depend on the facts and circumstances.
Some points noted by the Draft Determination include:
- The test does not require a temporal connection (ie the activities can be in connection with a future supply).
- It is not necessary for every activity of the Australian entity to be connected with the supply to an Australian customer.
- The test may be satisfied even where the foreign entity uses an independent distributor if the Australian entity is still contributing to the foreign entity making supplies in Australia.
The Draft Determination provides various examples to assist taxpayers in determining when they may breach the rules of section 177DA. The ATO is receiving comments on the Draft Determination until 1 June 2018. Once finalised, the Draft Determination is expected to apply retrospectively.