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:
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.
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:
- 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.