Targeted Anti-avoidance for Multinationals
Part IVA and permanent establishments
Part IVA is to be amended to introduce what the government calls a ‘tax integrity multinational anti-avoidance law’ to deal with the activities of, initially, 30 identified multinational companies who the government believes are artificially avoiding having a taxable presence in Australia.
The changes will apply to tax benefits obtained by companies from 1 January 2016 that:
- are non-resident entities with annual global revenue of over AU$1bn in the relevant income year
- are or have a related entity (or entities) in their corporate structure that are, subject to no corporate tax or a low corporate tax rate (either under the law of a foreign country or through preferential regimes)
The strengthened Pt IVA measures will apply to both new and existing schemes if under or in connection with the scheme:
- a non-resident entity derives income from the making of a supply of goods or services to Australian customers, with an entity in Australia supporting that supply
- the non-resident avoids the attribution of the income from the supply to a permanent establishment (PE) in Australia
For the multinational anti-avoidance law to apply, it must be reasonable to conclude that the division of activities between the non-resident entity, the Australian entity, and any other related parties has been designed so as to ensure that the relevant taxpayer is not deriving income from making supplies that would be attributable to the PE in Australia.
Additionally, the relevant 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.
Where a scheme is captured by the multinational anti-avoidance law, it will amount to a scheme to which the rest of Pt IVA of the ITAA 1936 applies. This will trigger the Commissioner's power, as it currently operates under s 177F, to cancel tax benefits obtained in connection with the scheme.
Early application of BEPS action plan
The government intends to commence implementation of four of the key actions it delivered at the 2014 G20 meeting to stop multinational tax avoidance prior to the rest of the world agreeing to all 15 items of the BEPS action plan.
The four key actions are:
- country-by-country reporting - Australia will implement the OECD's country-by-country (CbC) reporting from 1 January 2016. For the first time, multinationals will be required to provide tax authorities with a global picture of their operations including income and tax paid in every country they operate in. This information will be shared between tax authorities.
- treaty abuse rules - the OECD has developed a plan to tackle taxpayers that exploit treaty rules to avoid taxation. While Australia already includes anti-abuse rules in its tax treaties, the government says it will now incorporate the OECD's recommendations into Australian treaty practice.
- anti-hybrids rules - different tax rules in different countries can allow multinationals to claim a tax deduction in one country but not pay tax in the other. The OECD has developed a draft plan to tackle this issue and Australia will be one of the first countries to act on the draft rules. The government has asked the Board of Taxation to consult on the implementation of these rules.
- harmful tax practices and exchange of rulings - some countries provide secret or preferential tax deals to multinationals to attract their business, which can be harmful to other countries. Although the OECD has identified that Australia does not engage in any harmful tax practices, the ATO has commenced exchange of information with other countries on secret tax deals provided to multinationals that may contribute to tax avoidance in Australia.
Transfer pricing documentation
From 1 January 2016 the government will implement the OECD's new transfer pricing documentation standards.
Under the new documentation standards, the ATO will receive the following information on companies with global revenue of AU$1bn or more that operate in Australia:
- a CbC Report showing information on the global activities of the multinational, including the location of its income and taxes paid
- a master file containing an overview of the multinational's global business, its organisational structure and its transfer pricing policies
- a local file that provides detailed information about the local taxpayer's intercompany transactions
The government announced that it will double the maximum administrative penalties that can be applied by the commissioner to large companies that enter into tax avoidance and profit shifting schemes and will apply for income years commencing on or after 1 July 2015.
This measure will apply to companies with global revenue of AU$1bn or more. However, penalties will not change for taxpayers who have a reasonably arguable tax position.
Other Multinational Anti-avoidance Measures
Effective tax rate disclosures
In addition to the proposed Part IVA changes, the commissioner is also considering further disclosure requirements via the application of an ATO formula for the effective tax rate (ETR) of a corporation. The concept of an ETR has been around for a long time and is essentially, a ratio between tax and a base consisting of income, revenue or profit. To date, there is no single commonly accepted formula for calculating an ETR.
In the senate enquiry, the ATO indicated it had developed a formula for calculating an ETR which, if applied, would identify an economic group's total worldwide profit from Australian linked business activities and the associated Australian and offshore tax paid on that profit.
The ATO said the development of this formula is continuing but is at a stage of development that means it can provide useful information on tax borne domestically and internationally. The ATO cautioned however that it has not yet had the opportunity to consult with taxpayers or other stakeholders on the ETR methodology.
To complement CbC reporting, which will provide enhanced information to tax authorities, the government said it will also work with businesses to develop a code on the public disclosure of greater tax information by large corporates.
The government has asked the Board of Taxation to lead the development of this transparency code. Progress will be monitored and the government will consider further changes to the law if required.
Managed investment trusts – deferral
The start date for the new tax regime for managed investment trusts (MITs) has been put back a further 12 months to 1 July 2016 with the option of early application from 1 July 2015. Draft legislation containing the new tax regime was released on 10 April 2015.
The government anticipates most MITs will apply the new rules from 1 July 2016. The provision of a transition period responds to stakeholder feedback that many MITs require additional time to make amendments to their trust deeds and IT systems.
Managed investment trusts and other trusts treated as MITs will continue to be allowed to disregard the trust streaming provisions for the 2015-16 income year. This will ensure these interim arrangements continue to apply until the commencement of the new rules.
Further Changes to Taxation of Employee Share Schemes (ESS)
In March 2015, the government introduced draft legislation changing how the ESS rules would apply to rights and options, and provide concessions for start-up companies in order to promote growth in innovation sectors. Further minor changes to these ESS rules were announced as part of the budget, including:
- allowing start-up companies to exclude eligible venture capital investments from the aggregated turnover test and grouping rules, extending access to the concessions for start-ups
- extending access to the 50% CGT Discount for options that are subject to the start-up concession, by allowing the CGT discount to apply where options are converted into shares, and the shares are sold within 12 months of exercise
- extending the ability for employees of start-up companies to access the concessions, by allowing the Commissioner to exercise discretion in respect of the minimum three-year holding period for ESS interests, where circumstances outside of the employee’s control make it impossible for them to meet that requirement
RSM's tax experts say:
The announced changes merely rectify some minor technical issues identified in the government’s original ESS announcement, and further strengthen the concessions available for start-up companies. This is in-line with the government’s objectives of making Australia a more attractive investment destination for innovative small start-up companies.
Albert is an employee of A-Train Pty Ltd, a small start-up company in the technology sector. Albert received 100,000 options in A-Train under an ESS scheme that was eligible for the start-up concessions. After four years, the company’s performance has exceeded expectations and Albert exercises his options and acquires 100,000 ordinary shares in A-Train. Albert immediately sells 50,000 shares and makes a capital gain of $250,000. This gain will be eligible for the CGT discount, despite Albert not having held the shares for more than 12 months.
Modernising the Offshore Banking Units (OBU) regime
In March 2015, the government released draft legislation outlining changes to how the OBU regime would apply, addressing concerns within the existing regime whilst ensuring the OBU regime continues to provide tax incentives for highly mobile financial sector activities to be undertaken within Australia. Further changes to the OBU tax concessions were announced in the budget, and these changes:
update the list of eligible activities to better target genuine mobile financial sector activities by including, for example, leasing arrangements
update the method of allocating certain expenses between the operations of a taxpayer’s domestic banking unit and the OBU to ensure expenses and revenue are properly matched
Changes will improve the integrity of the regime by:
limiting the availability of the OBU concession by constraining the ability for the domestic bank to transfer ownership of a foreign subsidiary to the OBU part of the bank
ensuring internal financial dealings (for example, between the OBU part of an Australian bank and the offshore branch of the bank) are priced on an arm’s length basis
codifying the ‘choice principle’ to remove uncertainty for taxpayers as recommended by the Johnson Report