The ATO has released four taxpayer alerts relating to the activities of multinational businesses in Australia and the application of the new Multinational Anti Avoidance Law (MAAL). The purpose of these taxpayer alerts is to provide guidance regarding their activities in Australia and are as follows:
- TA 2016/1: Inappropriate recognition of internally generated intangible assets and revaluation of intangible assets for thin capitalisation purposes.
- TA 2016/2: Interim arrangements in response to the Multinational Anti Avoidance Law.
- TA 2016/3: Arrangements involving related party foreign currency denominated finance with related party cross currency interest rate swaps.
- TA 2016/4: Cross border leasing arrangements involving mobile assets.
Each of these is discussed in detail below. Taxpayer alerts are not formally binding on the ATO.
The ATO is currently reviewing arrangements where internally generated intangible items are inappropriately classified as assets, overvalued or inappropriately revalued resulting in an increased maximum allowable debt limit for thin capitalisation purposes for the entity.
Internally generated intangible items may be inappropriately recognised as assets where:
- the item cannot be separated from the taxpayer;
- the taxpayer does not have the requisite level of control over the asset; or
- all potential future economic benefits from the asset do not flow to the taxpayer.
- the ATO will be paying particular attention to assets such as customer loyalty, skilled staff, internal policies or procedures and assets not owned and controlled by the taxpayer. Assets may be deemed to be inappropriately revalued through the use of questionable management assumptions, the double-counting of asset value across multiple intangibles and revaluation based on economic returns which do not accrue to the taxpayer.
The ATO is undertaking compliance activities in relation to some entities some of which have resulted in adjustments where intangible assets are excessively revalued, where revaluation should have occurred but did not and where the intangible items did not qualify as internally generated assets.
The ATO is currently reviewing interim arrangements being implemented by taxpayers which it considered to be artificial and contrived so as to avoid the MAAL. Whilst it accepts that some interim arrangements are commercially and economically realistic, it is concerned with structures used in response to the MAAL that may be schemes to avoid tax.
Broadly, the MAAL applies to taxpayers who enter schemes aiming to obtain a tax benefit by avoiding attributing income to an Australian permanent establishment. The ATO has stated that interim arrangements put in place for legitimate commercial or operational reasons must distribute profits accordingly where a permanent establishment exists. Taxpayers should also take care that they comply with the appropriate royalty and interest withholding tax obligations.
Of particular concern to the ATO are arrangements where a foreign entity and an Australian entity effectively swap their roles via contract despite no change being made to the underlying functions performed by the entities. Ordinarily, these contracts attempt to make the Australian entity the distributor of the products or services and the foreign entity an agent of the Australian entity, collecting the sales revenue from customers on its behalf. The ATO warns taxpayers to enter these arrangements with caution.
Where the ATO considers an arrangement to be contrived or artificial and amount to schemes to avoid tax, the taxpayer may receive penalties of up to 120% of the tax being avoided.
The ATO is currently reviewing arrangements which are designed to increase the cost of corporate borrowings or avoid interest withholding tax. Under these agreements, companies use related party financing arrangements to create an artificial need to swap currencies and require periodical payments for unsound commercial reasons. This will require the Australian taxpayer to make greater payments to the offshore entity in the form of additional financing costs, but will not be characterised as interest payments.
If the purpose of the arrangement is to avoid the payment of interest withholding tax or to claim increased deductions, the arrangement may attract the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936. It may not be enough for the taxpayer to argue that the arrangement was necessary for accounting or ease of capital extraction.
The ATO is currently reviewing cross-border leasing arrangements used by multinational enterprises which involve mobile assets such as vessels. The diagram below (as set out in Taxpayer Alert TA 2016/4) shows a common type of arrangement that is used by taxpayers and which is of concern to the ATO. In these agreements, the head lessor owns the asset and leases it to the sub-lessor who sub leases it to the sub-lessee, an Australian resident. The structure results in a permanent establishment in Australia.
In determining whether the rules have been breached, the ATO will consider the contribution made by the Australian operator, including the use of the asset and whether the arrangement meets the arm’s length requirements of the transfer pricing rules. ATO guidance is being developed in relation to the transfer pricing and profit attribution issues associated with common cross-border leasing arrangements. Also, where the foreign interposed entity has a limited role and has been positioned for the purpose of avoiding tax, the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may apply.
If you are concerned that your operations are similar to those described in the various Taxpayer Alerts, please contact one of our tax lawyers for advice.
Legislation and government policy
Senate Committee releases Part 2 of its Corporate Tax Avoidance Report
On 22 April 2016, the Senate Economics Reference Committee (Senate Committee) released Part 2 of its Corporate Tax Avoidance Report, entitled ‘Gaming the System’ (the Report). The Report considers tax avoidance and aggressive tax minimisation by Australian corporations and multinational corporations operating in Australia having regard to the evidence provided during various public hearings conducted over the last year.
Part 1 of the Report, released on 18 August 2015, concluded that there were significant concerns related to multinational corporations not paying an appropriate amount of tax in Australia relative to their Australian activities. The recommendations of Part 1 focused primarily on increasing the transparency of corporate tax affairs and ensuring that tax administrators could access the information required to identify and take on tax minimisation and avoidance.
Part 2 of the Report continues to emphasise the importance of information transparency with a particular focus on transfer pricing and excessive debt loading. Whilst the Report found that many of the tax structures used by multinationals were within the letter of the law, the current legal framework was potentially inadequate and that further reform may be necessary. Despite recent legislative changes in relation to the Base Erosion and Profit Shifting (BEPS) recommendations, the Senate Committee concluded that the current transfer pricing regime does not serve Australia well from a tax revenue perspective as there is still scope for multinationals to avoid paying a proportionate amount of tax in Australia.
Another targeted practice is the use of internal loan arrangements to create debt-related deductions in Australia where those deductions are greater than they would otherwise be in a foreign jurisdiction, given Australia’s high corporate tax rate. This strategy effectively allows multinationals to shift profits out of Australia thereby reducing their liability to Australian corporate tax.
Separately, the Report outlines that despite the problems associated with the use of overseas tax havens by Australians, the Senate Committee has deferred further consideration of these issues in light of the Panama Papers and the ATO’s associated investigations (please refer to Talking Tax – Issue 32 for more information).
The Senate Committee recognises that the ATO is taking a firm stance in an effort to combat corporate tax avoidance. It recommends that the Government allocate additional resources to the ATO to further assist it in matching the ingenuity of multinationals and preventing them ‘gaming the system’.
2016/17 Victorian Budget
Increased stamp duty for foreign investors
The stamp duty surcharge payable by foreign buyers of residential real estate was increased from 3% to 7% from 1 July 2016. The initial 3% surcharge was introduced by the Labor government in the 2015/16 budget. The surcharge is designed so that foreign purchasers who do not pay state taxes, such as payroll tax and GST, still provide a reasonable contribution to the maintenance and development of government services and infrastructure. The increase in the surcharge was considered reasonable by the government given the initial surcharge did not adversely affect the property market, with foreign investment continuing to grow since its implementation.
Separately, the budget also announced an increase to the land tax surcharge on absentee owners from 0.5% to 1.5%. This new surcharge will apply from 1 January 2017. Together, these two tax reforms are expected to raise approximately $486 million in revenue over the next four years.
Other items of note
- The payroll tax-free threshold will be increased from $550,000 to $650,000. This will be phased in by $25,000 increments over four years, starting with an increase to $575 000 from 1 July 2016.
- A payroll tax exemption will be introduced for the wages paid or payable by an employer to a displaced apprentice or trainee from 1 July 2016.
- The absentee landowner surcharge will rise to 1.5% from the 2017 land tax year.
- From 2016/2017, there will be an extension of the exemption from land tax for primary production land. This will now apply in an urban zone to land owned by certain family superannuation trusts.
- The State Revenue Office will undertake compliance programs to ensure property taxes and duties are correctly paid.
- Land transfer duty is expected to be Victoria’s largest source of taxation revenue in 2016/17 and is directly linked to developments in the property market.
- Land tax revenue is forecast to increase in 2016/17 by 28.3% largely as a result of the biennial land revaluation which is currently underway. This latest revaluation cycle covers the period from 1 January 2014 to 1 January 2016. The most recent valuation data suggest that the strength in the property market over this period will translate into significant increases in the value of residential, commercial and industrial land.
If you have any questions about the changes in the Victorian budget, please contact one of our experienced state taxes lawyers.
This article was written with the assistance of Todd Bromwich, Law Graduate