The Australian Tax Office (ATO) has recently issued guidance on thin capitalization arm’s length debt and outbound interest-free loans.
The guidance is especially valuable as it provides a risk assessment framework outlining their compliance approach to arm’s length debt.
The ATO is known for its reference to risk assessment frameworks, as this trend will continue in other countries and is a valuable read.
In what may be the next int’l trend in risk assessment, the Australian Tax Office (“ATO”) has quantified, in sector tables, stated ranges of distributor profit margins by which a taxpayer’s risk will be determined for potential review/audit. A Reportable Tax Position schedule will be the reporting vehicle for such self-assessment, effective for years ending on or after June 30, 2018.
The guidance is likely to affect the ATO’s starting position for unilateral APA, Mutual Agreement Procedure and bilateral APA discussions.
All inbound distributor arrangements are subject to reporting. As a result, many multinationals may further consider an APA going forward.
General distributor results are as follows:
High risk: Less than 2.1%
Medium risk: 2.1% – 5.3%
Low risk: Above 5.3%
EY’s Global Tax Alert provides additional guidance on this important development:
Click to access 2019G_000801-19Gbl_TP_Australia%20-%20Guidance%20to%20distributor%20profit%20margins%20-%20Action%20required.pdf
The Australian Tax Office (ATO) has published guidelines addressing general anti-avoidance rules (GAAR) for restructures of hybrid arrangements.
This guidance is a valuable reference for taxpayers not only operating in Australia, although having hybrid arrangements that may need restructuring.
Click to access 2018G_011633-18Gbl_Australia%20-%20Guidance%20on%20GAAR%20and%20hybrid%20mismatches.pdf
The referenced link is a Best Practices portrayal of tax risk management and governance overview as published by the Australian Tax Office (ATO).
The outline summarizes:
- Director’s Summary
- Board-level responsibilities
- Managerial level responsibilities
- Tax control framework
- Testing of controls
- Self-assessment procedures
The outline is a valuable review of the tax processes and controls that demand a more formal approach, with the advent of subjective guidelines, anti-avoidance rules, etc.
EY’s Global Tax Alert provides details on Australia’s new Diverted Profits Tax (DPT), effective in 2018 for calendar year taxpayers.
- Penalty up to 40% can be assessed
- Interaction with transfer pricing documentation and country-by-country (CbC) risk assessment
- Diverted profits taxed at less than 24% are vulnerable
- Proactive review of one’s documentation and risk assessment is recommended
Australia has patterned their DPT after the UK implemented a similar scheme, although posing some different characteristics.
As countries are reaching out to tax profits that are subject to a lower rate of tax elsewhere, this is providing a license to tax that cannot be ignored by multinationals with Australian operations.
Click to access 2017G_01485-171Gbl_Australia%20passes%20Diverted%20Profits%20Tax%20and%20Penalties%20law.pdf
The drive for additional transparency, among efforts by countries to implement anti-avoidance rules that trump tax treaties, continues with the latest round of BEPS updates, as EY’s Global Tax Alert provides added insight:
Click to access 2016G_00921-161Gbl_The%20Latest%20on%20BEPS%20–%209%20May%202016.pdf
- Australian Tax Office (ATO) release of 4 tax alerts for issues of concern, a Diverted Profits Tax (DPT) is to be implemented, hybrid mismatch arrangements will be addressed in legislation, and the effective date for the new/revised OECD’s arms-length principle standards will move forward to 1 July, 2016.
- Ecuador: the most recently version, as of 1/1 of a taxpayer’s year, of the OECD’s Guidelines will be used as transfer pricing reference absent domestic rules.
- Hungary: A “modified nexus” IP approach will come into force.
- Netherlands: The innovation box rules will be amended to comply with OECD’s Action 5 guidelines.
- New Zealand: Domestic anti-avoidance rules will trump double treaty arrangements.
- Taiwan: CFC rules will be promulgated.
- Turkey: An “electronic place of business” draft legislation would empower taxation.
- Ukraine: A working group is forming anti-BEPS measures for consideration.
- US: Treasury is trying to extricate itself from its 1-year lag in obligatory country-by-country (CbC) reporting, although global acceptance is not expected.
The impact of BEPS is still accelerating, although the efforts by countries to avoid treaty provisions will provoke additional disputes and double taxation. Accordingly, the veil of anti-BEPS legislative efforts overshadows mutual transparency and collecting a fair share of tax while avoiding double taxation. Thus, all multinationals should be extra vigilant in the new era of international tax for additional documentation and support for significant transactions with low-tax countries.
The Australian Tax Office (ATO) has recently released a consultation paper re: implementation of a Diverted Profits Tax (DPT); comments are due by 17 June 2016. Although Australia has taken a long look at the DPT in concert with UK’s quickly enacted provisions, it took a breather while the OECD urged restraint on a far-reaching “tax” that may go beyond the intent of the OECD’s Guidelines. A link to the paper is provided for reference:
The focus of the paper is summarized in the first sentence: “The Government is strongly committed to ensuring that multinationals pay their fair share of tax in Australia.”
Highlights of the proposal:
- 40% penalty tax (non-deductible) rate, not offset by another jurisdiction’s tax (30% tax rate if an amended tax return is filed)
- Subjective determination (i.e. reasonable to conclude)
- Will not operate on a self-assessment basis
- Pay first, discuss later philosophy, copying UK’s direction (12-month review period and a right to appeal)
- Effective for years commencing on or after 1 July, 2017
- Flow chart appendix
- Efective for transactions that have an effective tax mismatch test (objective test) and insufficient economic substance (subjective test)
- Draft guidance will be developed in consultation with stakeholders.
All interested parties should review this consultation paper, and provide comments to the ATO for potential changes. It is interesting to see that transactions failing the effective mismatch test will be left exclusively with subjective determinations for possible assessments by the ATO without the benefit of dual transparency. Additionally, the philosophy of assess now and discuss later will not be a mechanism to effectively provide more trust by taxpayers as UK, Australia and other jurisdictions are creating unilateral laws to capture taxes payable on income in other jurisdictions, potentially without the right to access treaties, claim an offset in the other jurisdictions and have access to the full process of appeals prior to payment. As a result, the incidence of double taxation will increase.
It is hopeful the ATO will consider the comments received, and include changes to the current proposal to enhance transparency and mutuality by all parties.
The Senate Economics References Committee has published its interim report entitled “Corporate tax avoidance.” Part I, “You cannot tax what you cannot see” provides an excellent frame of reference for the discussions therein.
It is worthwhile noting that there is a section “Government Senators’ Dissenting Report” expressing concerns about some recommendations therein; this should be a additional warning sign of the recommendations put forth. Conversely, there are “Additional Comments from the Australian Greens” fully supporting the report in its entirety.
The final report is due in November 2015, although this interim release provides an indication of the thought trends currently in process by the Australian Tax Office (AT0). A link to the report is provided for reference:
- 17 recommendations provided addressing (1) evidence of, and multilateral efforts to combat, tax avoidance and aggressive minimization, (2) multilateral actions to protect Australia’s revenue base, and (3) capacity of Australian government agencies to collect corporate taxes.
- Australian government to work with other countries having significant marketing hubs to improve the transparency of information
- Australian government continues to take the load re: OECD BEPS initiatives; international collaboration should not prevent the Australian Government from taking unilateral action
- Mandatory tax reporting (transparency) code
- Existing transparency laws to be identical for private and public companies
- Public register of tax avoidance settlements reached with the ATO
- Public excerpts from the Country-by-Country OECD reports, based on the EU’s standards
- Annual public report on aggressive tax minimization and avoidance activities
- Section 3.95 discusses a novel concept: “Effective tax borne” effective tax rate formula, a metric that seeks to reflect all of the channel profit derived from business activities involving Australia and the Australian and global tax paid on that channel profit. Appendix 3 provides additional rules for application of this formula, noting that there has not yet been a consultation with taxpayers or other stakeholders. The metric envisions that the entire supply chain profit is a profit of the economic group arising from Australian business activities (i.e. intercompany purchases of goods and services from offshore related parties). Numerator is either the Australian tax paid on business activities by the economic group, or the global tax paid by such group. Denominator is the total economic profit from business activities which are linked to Australia. Withholding taxes of economic group profit are includable, whereas royalties and excises are not. Numerous rules apply for intercompany adjustments.
Australia is still recognized as a leader in the pursuit of the BEPS objectives, using transparency as a weapon to fight ensuing battles.
This report not only extends the strong cry for public disclosure of tax information, it suggests a new concept to examine the effective tax rate of jurisdictions having activities with an Australian related party. However, it is hopeful the envisaged complexity, cost/benefit and technical nuances of the “effective tax borne” concept are presented to stakeholders with enough time to review, plan and adjust/eliminate the final recommendation accordingly.
As Australia leads, many others follow. This report is required reading for all interested parties, as the ideas presented have a high probability of appearing in other jurisdictions in a similar form and formulating the same intent for transparency.
The Australian Tax Office (ATO) has issued a very interesting Practice Statement Law Administration. It is an informal policy document for which interested parties should submit comments by 25 September. The Statement is a lengthy document, citing case law, that is very worthwhile reading, as Australia continues its proactive efforts driving change in the international tax arena.
Although informal, taxpayers can rely on such guidance for protection from interest and penalties. A copy of the Statement is provided for reference:
- A general anti-avoidance rule (GAAR) cannot be applied before a determination by the Tax Counsel Network (TCN).
- A GAAR decision is generally referred to a GAAR Panel (an independent advisory body) before a final decision is made.
- The taxpayer may be invited to attend a Panel meeting to assist the deliberative process.
- Concepts of a tax scheme and a tax benefit are discussed. A tax benefit inclusive in Part IVA, the GAAR provision relates to: an amount not included in income, an allowable deduction, a capital loss, a tax loss carry back, a foreign income tax offset or withholding tax.
- An alternative hypothesis” or “alternative postulate” identification is discussed; what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.
- It is for the court to determine objectively what alternative would have occurred if the scheme had not been carried out.
- Arguably, there is no longer a test of reasonable exception, based on Parliament’s intention in enacting the Amendments.
- Warning signs that GAAR may apply (which ATO must consider) are established:
- Arrangement is out of step ordinarily used to achieve the commercial objective,
- Arrangement seems more complex than necessary,
- Tax result does not conform to the commercial or economic result,
- Arrangement is low risk where significant risks would normally apply,
- Parties are operating in a non-arm’s length manner, or
- Gap between substance and legal form.
- Penalties are applicable.
- Division 165 (a GST GAAR rule) is discussed, including permanent and timing differences.
- A “dominant purpose” test is applicable for the GAAR and the GST provisions, with different factors includable in each.
The above provisions attempt to conceptualize objective factors for an inherently subjective GAAR determination. As additional GAAR’s are introduced around the world, each applying a different level of subjectivity, the Statement is helpful in understanding the rationale and intent of the ATO.
Tax planning post-BEPS will require additional GAAR documentation for significant transactions, thereby requiring tax to be involved early in the discussions to understand the business intent and alternatives considered.
The Australian Treasury announced its draft law encompassing country-by-country reporting (CBCR) and transfer pricing documentation.
EY’s tax publication provides relevant details in the referenced Global Tax Alert:
Click to access 2015G_CM5672_Australia%20releases%20draft%20law%20implementing%20CbC%20reporting%20and%20increasing%20penalties%20for%20TA%20and%20TP.pdf
- Conforms to OECD’s recommended 3-tier transfer pricing approach, CBCR, master file and local file. The master file and local file will need to provided, whereas the CBCR may not be necessary if the group’s parent entity jurisdiction has an information sharing agreement.
- It is expected the Australian Taxation Office (ATO) will release additional guidance for the CBCR, hopefully by year-end 2015.
- Increases penalties for tax avoidance and transfer pricing where there is not a reasonably arguable position by the taxpayer.
Australia has been a leader in following the BEPS Actions and putting such intent into their domestic legislation. As Australia continues to take this lead position, it is expected many other countries will follow similarly. All multinationals should continue to monitor these developments, while accelerating planning and execution for the new CBCR and transfer pricing documentation regime.
The Australian Tax Office (ATO) has issued comprehensive and detailed rules addressing requirements for a formal tax risk framework, from which a taxpayer’s risk will be measured. The guidance includes a tax risk management and governance review guide, in addition to appendices for control testing and directorship responsibilities. The risk guide is focused upon Board and Managerial level responsibilities. EY’s Global Alert and ATO’s tax risk guide and appendices are provided for reference:
Click to access 2015G_CM5625_AU%20TO%20issues%20new%20guidelines%20on%20tax%20corporate%20governance.pdf
- Express requirements for Directors
- Mandatory self-assurance processes for tax governance for which the ATO may rely in assessing risk
- A lack of requisite tax controls will affect the risk rating
- Board controls:
- Formalized tax control framework (Tax strategy document and policies endorsed by Board of Directors)
- Formalises company director roles / responsibilities for tax risk management
- Formal evidence of tax risk review and familiarity with tax risk matters
- Periodic internal control testing, including senior management’s attestation / formal board review of the testing results
- Managerial level responsibilities:
- Clearly defined and documented tax compliance and risk management roles / responsibilities
- Senior management’s active role and governance with objective criteria to demonstrate Best Practices
- Identification of significant transactions via a policy, process, risk rating
- Ensuring data controls are in place
- Record-keeping policies, including a formal tax record-retention policy
- Documented internal control framework
- Documented procedures explaining significant differences between accounting disclosures, financial statements and the tax return
- Complete and accurate tax disclosures, including compliance risk review and tax return review
- Tax governance policies addressing legal and administrative changes
- A: Testing of controls to test control design effectiveness, with a (comprehensive) example of a walk-through scenario
- B: Directorship responsibilities, including a penalty regime, and an appointed public officer
The ATO has set forth new expectations and Best Practices for multinational organisations. The Board of Directors for all MNE’s, not only those operating in Australia, should review the new guidelines, as they set the standard for the future to regulate tax risk management.
Astute Boards will be acting proactively to ensure all controls are in place to effectively manage global tax risk in this brave new world of post-BEPS introspection.
Other countries will surely follow, limited only by current resources.
Accordingly, the concept of a Tax Risk Officer and additional focus on tax risk management / governance policies (supported by objective testing) are becoming the new norm for which all MNE’s should embrace.
The Australian government has released Terms of Reference in preparation for anti-hybrid legislation, expected to be announced 12 May, 2016 in the federal budget. Effective dates may be set as of 1 July, 2016 or 1 January, 2017 for calendar year taxpayers.
Specific rules are under consideration, including:
- Objectives for eliminating double non-taxation
- Economic costs for Australia
- Taxpayer compliance costs
- Interactions of domestic legislation, tax treaties and new anti-hybrid rules, expected to be announced by the OECD in October 2015.
A PwC Tax Insight summary is included for reference:
Click to access pwc-australia-announces-plans-beps-anti-hybrid-legislation.pdf
Australia, recently following the lead of the UK for diverted profits tax initiatives, has shown its proactive stance for adoption of the new OECD guidelines.
It is important to note that Australia will wait for the final OECD guidelines to pass matching legislation. This legislative trend, and steps to initiate BEPS proposals quickly, will be a trend to watch for the rest of world countries.
Australia continues to lead the way after its completion of cloaking new PE rules within its GAAR legislation, thereby avoiding the protection of the double tax treaty network.
A voluntary tax disclosure code concept is in deliberation by the Australian administration for its 2105-16 Budget. This disclosure would be in addition to other disclosures, such as country-by-country (CbC) reporting.
KPMG’s commentary herein provides a snapshot of this potential new trend that should be monitored by multinationals, as countries around the world are also watching this recent development for perceived benefits.
Corporate tax disclosure code: next big thing in tax transparency?
by Stephen Callahan, Director, and James Gordon, Senior Manager, Corporate Tax
The 2015-16 Budget proposals to introduce a multinational (MNE) anti-avoidance rule and to levy GST on cross-border digital services grabbed the immediate headlines in the large business market.
However, arguably the more far reaching tax integrity proposal is the Board of Taxation review into the development of a voluntary code for greater public disclosure of tax information by large corporates.
There is the obvious, and as yet, unanswered question as to exactly which businesses the proposal is directed towards. Nevertheless, some initial thoughts on possible influences in this review include:
The controversy and confusion surrounding tax performance analytics based on financial statement tax
The tension between community expectations on disclosures covering tax, related party transactions and investment in subsidiaries as against the need for concise reporting for capital market purposes.
Debates surrounding what comprises a business’ tax contribution to a country and the measurement of effective tax rates.
Global developments on alternate models for improved tax transparency.
Tax contribution reporting by an increasing number of multinationals.
The relationship, if any, between a voluntary disclosure code and an involuntary tax transparency publications by the ATO.
We await with interest to see the terms of reference of the Board of Taxation review.
Australia’s Budget reveals its intent on becoming a leader in tax transparency and implementation of tools to address anti-avoidance initiatives. The provisions cite OECD BEPS initiatives, while deciding to act unilaterally on draft guidelines and introducing new transparency standards within its various proposals.
This Budget may set the stage for others to follow similar trends and timelines; accordingly such actions should be monitored in Australia as well as the rest of the world. The Public Tax Transparency Code is another signal that reporting of economic and tax activity will be used as a public measure to assess reasonableness for determining payment of a “fair share of tax.”
MNE’s have now fully realized the impending complexity, documentation demands and transparency standards that it will be judged by. Internal education, communication and alignment are now vital in establishing a MNE’s global tax risk framework.
A link to the Budget actions is provided for reference:
Key Corporate Tax provisions:
- Multinational Anti-Avoidance Law
- Economic Australian activities = Australian taxation income
- Penalties up to 100%, plus interest
- Country-by-Country (CbC) reporting effective as of 1/1/2016, consistent with OECD Guidelines
- OECD recommendations re: treaty abuse / non-taxation to be incorporated into tax treaties
- Draft OECD anti-hybrid rules to be implemented
- Public Tax Transparency Code to supplement CbC reporting
- Serious Financial Crime Taskforce to target serious financial crimes and tax evasion
- Common Reporting Standard to be adopted from 1/1/2017
- GST Compliance programme extended 3 years