The ATO recently released Taxpayer Alert (TA) 2022/2 Treaty shopping arrangements to obtain reduced withholding tax rates.
TA2022/2 gives taxpayers due warning that ‘treaty shopping’ to obtain the benefit of a reduced rate of withholding tax (WHT) in relation to the payment of dividends or royalties from Australia is a key focus area of the ATO.
While ‘treaty shopping' is not a new concept, and the ATO has successfully challenged it, particularly in the landmark case concerning TPG’s disposal of Myer, TA 2022/2 transcends and represents something of a shift from the ATO’s previous guidance on ‘treaty shopping’ in Taxation Determination (TD) 2010/20 Income tax: treaty shopping.
Whereas TD 2010/20 focussed on the application of Australia’s domestic general anti-avoidance provisions contained in Part IVA (which override any treaty) to counteract ‘treaty shopping’, TA 2022/2 focuses on the availability and potential use of anti-avoidance powers contained in certain of Australia’s Double Tax Agreements (DTA) such as the Main Purpose Test (MPT) and Principal Purpose Test (PPT) to achieve the same.
The availability of measures such as the MPT, PPT, and the Diverted Profits Tax (DPT) contained within Part IVA, reflect the societal and government focus in recent years to ensure “multinationals pay their fair share of tax”.
This focus on multinationals has also intensified with the new Labor Government incorporating some proposed changes which would seek to deny deductions for royalty payments where there is “insufficient foreign tax” paid in the counterparty’s jurisdiction. While no draft legislation has been prepared, the ATO does have other avenues currently at its disposal to prevent taxpayers from participating in these kinds of tax-driven arrangements including but not limited to the transfer pricing, hybrid mismatches, and/or DPT regimes.
TA 2022/2 provides two key examples of perceived mischief, one for royalties and one for dividends. Interestingly, these examples from the ATO do not explain any particular restructuring factors which contribute to the arrangement being high risk or what might constitute a low risk, rather the ATO simply notes that a “lack of contemporaneous documentation and other objective evidence supporting these contentions may imply that accessing the reduced WHT rates was one of the principal or main reasons” for the arrangement.
The Tax Alert instead references Law Administration Practice Statement (PS LA) 2020/2, which provides taxpayers with some overview as to how the ATO establishes that a principal or main purpose test applies.
- This Tax Alert serves as a reminder for taxpayers to ensure they maintain contemporaneous documentation for restructures, particularly where there is a reduced WHT on royalties or dividends or they will be lacking in support when the ATO commences any review activity, or when any prospective purchaser performs due diligence.
- Given the large amount of information at the ATO’s disposal with increased reporting and disclosures for most large taxpayers, taxpayers should ensure they are prudent with their positions taken and the level of supporting documentation they have in place to evidence their decisions. Demonstrating the commercial rationale for any chosen structures has been and will continue to be very important.
If you require any assistance with regard to restructuring advice, please contact your local tax team.