Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘Australia GAAR’

ATO Practice Statement: Tax benefits/avoidance & GAAR

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:

http://law.ato.gov.au/atolaw/view.htm?docid=%22DPS%2FPSD200524%2FNAT%2FATO%2F00001%22

Key observations:

  • 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.

S. Africa: Draft notice on “reportable arrangements”

In an ever-increasing tidal wave of transparency proposals, the South African Revenue Service (SARS) issued a draft notice on Reportable Arrangements.

The proposals provides that a Reportable Arrangement must be reported to SARS with 45 business days if:

  • A nonresident renders technical, managerial or consultancy services (non-defined terms) to a resident, and
  • The nonresident, its employees, agents or representatives were or will be physically present in S. Africa in rendering such services, and
  • The expenditure will exceed R10M (approx. $823k) in the aggregate.

Penalties for non-disclosure are applicable, and SARS may use this new mechanism to determine if the non-resident company is registered for income tax or VAT in S. Africa and if there is a permanent establishment (PE) for profit attribution.

http://www.ey.com/Publication/vwLUAssets/South_Africa_issues_draft_notice_on_reportable_arrangements/$FILE/2015G_CM5521_South%20Africa%20issues%20draft%20notice%20on%20reportable%20arrangements.pdf

This proposal is important to monitor, as it highlights different methodologies for determining what services are being provided by non-resident companies, and if such activities could be designated as a PE with some profits subject to tax.  

The UK’s Diverted Profits Tax, Australia’s follow the leader implementation in its General Anti-Avoidance Rules (GAAR) and this disclosure present different processes that tax administrations are looking to capture additional taxes for fiscal growth, incentived by the OECD BEPS Guidelines and objectives, although such Guidelines are not yet finalized.

GAAR: India & International Perspective

http://www.pwc.in/assets/pdfs/publications-2012/pwc-white-paper-on-gaar.pdf

This publication provides a very interesting treatise on the development of GAAR in India, including an international perspective in Appendix B for the United States, S. Africa, Germany, China, Canada, United Kingdom and Australia.

Importantly, the publication sets forth the OECD definitions for tax evasion, tax avoidance and tax planning for clarity.

This concept is increasing in importance, and should be followed closely with ideas of forming Best Practices re: tax planning, tax documentation, etc.

Ideas for Best Practice consideration:

  • Address the concepts of GAAR, formal or informal, as part of every tax planning exercise.
  • Ensure the global tax team is informed about the latest GAAR developments to increase awareness and responsibility.
  • Brainstorm ideas about GAAR, forming Best Practices for the organization.
  • Proactively ask for input from external advisors to gain different perspectives on this evolving topic.
  • Share your ideas with your peers from other organizations for a win-win result.
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