The proposed multinational anti-avoidance tax integrity measure (Australia’s version of the ‘Google tax’) will:
- apply only to foreign multinational groups with global turnover exceeding A$1bn
- require a group connection with a low or no corporate tax jurisdiction
- focus on Australian sales revenue artificially ‘diverted’ overseas and away from an Australian permanent establishment of the foreign company, thus escaping Australian taxation
- do so by hypothesising an Australian PE of the foreign company; attributing to that notional PE the profit from the diverted Australian sales revenue; and subjecting that profit to Australian tax
- a ‘principal purpose’ of the arrangement by which Australian sales revenue is diverted, must be the avoidance of Australian or foreign tax
- the new rules will apply to tax benefits arising on or after 1 January 2016, from both existing or new arrangements
- the applicable tax rate remains 30%, but penalty tax of up to 100% of the tax avoided can be applied
Treasurer Joe Hockey presented the 2015-16 Australian Federal Budget on Tuesday, 12 May 2015, and as foreshadowed in his 11 May 2015 announcement, exposure draft legislation was released to give effect to:
- a multinational anti-avoidance tax integrity measure, based on amendments to Australia’s general anti-avoidance rule, Part IVA
- an extension of Australia’s GST regime to the remote supply of digital products to Australian GST unregistered consumers
This note considers the multinational anti-avoidance tax integrity measure (MAATI).
Having distanced Australia from the UK’s diverted profits tax (DPT) in the lead up to the budget presentation, Treasurer Hockey has nevertheless introduced a measure which attacks the very same target as the DPT – profits which (arguably) should be attributed to an Australian permanent establishment of a foreign multinational group (MNC), but which through ‘artificial or contrived arrangements’ are diverted away from the Australian PE. That ‘diversion’ results in those profits escaping Australian tax.
The Australian initiative adds a new section to Part IVA which specifically targets these ‘diverted profits’.
The amendment is succinct, and builds on the existing Part IVA architecture, unlike the UK’s diverted profits tax, which is lengthy and complex as befits an entirely ‘new’ tax.
Irrespective of the different drafting approaches, the result in each country is the same: each has moved to introduce a ‘Google tax’ in response to the erosion of the concept of permanent establishment by large multinational technology companies, and the consequent loss of corporate taxing rights.
When will the new MAATI apply?
The exposure draft legislation will be subject to a public consultation period, with proposed application to tax benefits obtained on or after 1 January 2016, whether arising from arrangements entered into or after that date. In other words, there will not be a grandfathering of existing arrangements.
This will make the first year of application the 2016 calendar year, ie the tax year ending on 31 December 2016. This will coincide conveniently with the Australian tax year for many or most US MNCs, which have a traditional 31 December year end.
It will be interesting to see how foreign MNCs react to this legislation. Will they run the risk of a Part IVA assessment, or will they decide to restructure and recreate an Australian PE, and subject those profits to Australian tax? This is the very same decision presented to MNCs by the UK DPT, except that in Australia’s case, there is seven months to ponder the issue, ahead of the ‘go live’ start date.
How much tax is MAATI expected to raise?
The treasurer, in his 11 May 2015 press conference announcing the two new tax measures, refused to put a figure on the possible tax revenue which may be raised as a result of the introduction of the MAATI.
This reticence has been continued in the treasury budget papers, where no amount of tax revenue has been penciled in over the forward estimates for MAATI. The budget papers explain “…the nature of this measure is such that a reliable estimate cannot be provided”.
This is a sensible approach by the treasurer, as to do otherwise would be to create a rod (of expectation) with which he would be beaten for years to come.
Further, the nature of the amendment (as explained below), the size and sophistication of the taxpayer targets, and the quantum of potential tax revenue in play, will ensure the disputes are tied up in the courts for years, with little or no revenue produced in the short term, and with uncertain chances of ultimate success.
Despite Treasurer Hockey’s reticence on the issue of potential tax revenue to be raised, Australia’s Tax Commissioner, Chris Jordan, is on record as saying he expects to have raised in excess of $A 1.1 bn by 2017 from audit action aimed at twelve MNC technology companies.
Given Treasurer Hockey has indicated MAATI will operate against an initial group of thirty MNC technology companies, one may expect the ATO’s revenue target will be significantly higher than the figure previously nominated by Commissioner Jordan.
However, raising that amount by 2017 would seem achievable only in the event the technology companies all agreed they had serially avoided Australian tax for years, and paid up when asked; a most unlikely outcome.
How will MAATI operate?
The MAATI will be introduced as a new section into Part IVA, targeted specifically at Australian PE avoidance. It will join several other specifically targeted provisions under the umbrella of the general anti-avoidance rule.
In proceeding this way, Australia will not be in breach of its international treaty obligations, nor can there be any argument about the matter. Australia has always made its tax treaty commitments subject to the overriding application of Part IVA, so from a jurisprudential perspective, Australia is doing nothing wrong.
However, Australia’s tax treaty partners, particularly the US, are unlikely to respond well to this development.
Australia’s approach to this matter can be contrasted with that of the UK, and its introduction of the new and free-standing Diverted Profits Tax. There has been a chorus of objections that the DPT is nothing but a form of company tax, and its introduction breaches the UK’s treaty obligations. Australia’s approach completely sidesteps this issue.
Proposed new section 177DA will apply to a ‘scheme’ exhibiting the following characteristics:
- a foreign company makes supplies to unrelated Australian resident customers
- the Australian sales revenue derived by the foreign company is not attributable to an Australian PE of the foreign company
- sales related activities are undertaken in Australia by either a related Australian subsidiary, or through an Australian PE of the foreign company, or through an Australian dependent agent of the foreign company
- it is reasonable to assume having regard to certain Matters the scheme is designed to divert the Australian sales revenue away from the foreign company’s Australian PE
- it is reasonable to conclude that a principal purpose, or more than one principal purpose of a participant in the scheme was to enable the foreign company to obtain an Australian tax benefit or to avoid foreign tax
- the foreign company is connected with a no or low corporate tax jurisdiction
- the foreign company is part of an MNC group with annual global turnover exceeding A$1 bn
The matters to be considered in determining whether the scheme is designed to divert Australian sales revenue away from a foreign company’s Australian PE include the eight factors sitting at the heart of Part IVA, and in addition '….any other matters that the minister determines by legislative instrument'.
At this point, there is no indication of what other matters may be in the mind of the minister.
Avoidance of foreign tax
The inclusion of the avoidance of foreign tax as a factor does not suggest that Australia is trying to collect tax in lieu of that foreign tax. The role of this concept is far more limited. It will avoid foreign companies arguing that the principal purpose of their structure is to avoid foreign tax, rather than Australian tax. But for the inclusion of this concept, a foreign company could argue the principal purpose of its structures was to avoid foreign tax, in which case the avoidance of Australian tax would be incidental and would therefore fall outside the definition of tax benefit. Part IVA would then have no application.
With the inclusion of the reference to ‘avoidance of foreign tax’, Part IVA can still apply where the avoidance of Australian tax is but merely an incidental benefit provided the avoidance of foreign tax is a principal purpose of the scheme.
Australian tax benefit
Where a foreign MNC group has a global structure which meets the requirements above, proposed new section 177DA will apply. The remainder of Part IVA will then come into operation – specifically, the rules for the calculation of the ‘tax benefit’.
It will be necessary to hypothesise be existence of an Australian PE of the foreign company (in circumstances where there is no existing PE), or where there is an existing Australian PE of the foreign company then to hypothesise an extension of that PE, to which the diverted Australian sales revenue will be attributed.
Allowable deductions will be offset against the assessable Australian sales revenue in order to calculate a ‘tax profit’ referable to the Australian sales revenue.
The ‘tax benefit’ will be the difference between the tax liability of the foreign company under its scheme structure (generally nil), and the tax liability as calculated through the hypothesised Australian PE of the foreign company.
In general terms, it would be expected the tax benefit will equal the tax liability of the hypothesised Australian PE.
What about the exceptions to the definition of PE?
Whilst the foregoing explanation of the quantification of the tax benefit seems straightforward, significant difficulties can be anticipated where the foreign company is incorporated in a jurisdiction with which Australia has a comprehensive double tax agreement.
In that case, the treaty definition of PE will likely include the usual raft of de minimise exceptions to the existence of a PE. Exactly how the treaty exceptions will impact in hypothesising the scope of the Australian PE, may create practical challenges.
No opportunistic tax grab
With the benefit of the exposure draft legislation, it is now clear that Australia is not seeking to claim taxing rights over ‘stateless income’ in an unlimited sense; rather, Australia seeks only to tax the profit which (arguably) would have been attributed to a foreign company’s Australian PE had the artificial structuring and Australian sales revenue diversion not occurred.
Connection with a no or low corporate tax jurisdiction
It is important to remember this further requirement; if profits arising from Australian sales revenues do not find their way to a no or low corporate tax jurisdiction, then the provision will not apply. This is based on the (reasonable) assumption that if the revenues do not go to a no or low corporate tax jurisdiction, then they must end up in a comparably taxed jurisdiction.
If that is the case, even though Australia will (arguably) lose out in the carve-up of the global revenue take, Australia will not seek to chase tax on those profits.
G20/OECD BEPS Action 7
The result of the proposed section 177DA is broadly consistent with the BEPS Action 7 discussion draft, ie. the reestablishment (in some cases the extension) of the boundaries of the PE concept.
With Australia and the UK breaking ranks in this matter, it will be interesting to see how many other nations follow suite- if the treasurer is to be believed, there will be many, which will threaten the global consensus approach to ‘fixing’ the current international tax system.