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 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.
EY’s Global Tax Alert of 13 April 2015 sets forth the latest summary of OECD BEPS developments, including the recent discussion drafts under BEPS Actions 3 and 12.
Additionally, the Alert also notes the copycat tactics of Australia re: the UK Diverted Profits Tax (DPT) that went into effect 1 April 2015. More news on this development should be forthcoming in the 2015-16 Australian Budget expected mid-May.
Click to access 2015G_CM5365_The%20Latest%20on%20BEPS%20-%2013%20April%202015.pdf
The recent BEPS discussion drafts, Action 3 re: CFC rules and Action 12 re: Aggressive tax planning arrangements, are of paramount importance for all MNE’s and tax administrations.
Australia’s tactics re: a UK DPT mechanism also highlights the controversial manner in which each jurisdiction is fighting for its fisc to the detriment of other tax administrations. However, what is not transparent in the rules provided to date for the UK DPT is the intent to avoid double taxation. It is hopeful that Australia will provide a balanced approach to this newfound mechanism for gaining tax revenues in a scheme that asks for full payment by a MNE prior to relevant appeals being filed and discussed.
The KPMG guidance herein provides background for the new transfer pricing recharacterisation/reconstruction provisions that enable the tax administration to conform the transaction in accordance with its substance, versus form.
Global- KPMG- Research
March 2: The Australian Taxation Office (ATO) in late February 2015 issued a practice statement that offers some guidance when an ATO transfer pricing audit team looks to apply reconstruction provisions.
While the ATO audit team may take a position that the reconstruction provisions in Australia’s new transfer pricing rules would apply—because the substance of the commercial or financial relations between the related parties is different to the form of those relations—the practice statement (PS LA 2015/3, issued 26 February 2015) sets out a new internal approval process for application of the reconstruction provisions.
Amongst other things, the practice statement requires ATO personnel to:
Seek approval from an Assistant Commissioner within their business line or from a Senior Tax Counsel in the Tax Counsel Network prior to the ATO’s adoption of any view that one of the reconstruction provisions applies, and provide the Assistant Commissioner with a position paper setting out the views proposed in relation to the application of any of the reconstruction provisions, including a clear explanation of the reasons for the application of the reconstruction provisions.
Although the ATO has new processes in place for this methodology, this practice should be limited to the most egregious transfer pricing transactions. Accordingly, it should not be interpreted as expanding/circumventing the arm’s length principle.
Other countries may lack adequate resources and processes enabling the formalities and diligence of the ATO, thus this transfer pricing mechanism should not become the norm for international transfer pricing legislation. Additionally, equal weight should be conferred upon appeal mechanisms and corresponding adjustments to avoid double taxation.
Australia’s new transfer pricing rules require that officers signing the corporate tax return must sign off for transfer pricing arrangements on a self-assessment basis. The self-assessment process would affirm that the transfer pricing is pursuant to arm’s length consideration that would be transacted between unrelated parties. Details of the new self-assessment regime are referenced at the attached link:
Additional review of transfer pricing documentation may be required for self-assessment consideration. The OECD BEPS proposals may also impact such reporting in the future.
The referenced PwC Alert highlights the proactive efforts by the Australian Tax Office (ATO) to initiate dispute resolution mechanisms in the audit process, as well as focus on relevant internal training to successfully accomplish these objectives.
Click to access TaxTalk-Alert-Tax-Controversy-01Feb14.pdf
The ATO is committed to the following objectives:
- Early engagement and direct negotiation with taxpayers
- Improving all dispute resolution processes starting with the assessment
- ADR utilization at every stage of the dispute resolution process
- Independent review of the audit position prior to conclusion of the audit aimed to narrow / reconsider the issues
- Internal ADR training
- Focused “risk-focused” approach to managing disputes
The ATO’s initiatives are timely, relevant and a welcome effort to adopt Best Practices to resolve disputes prior to costly and time-consuming formal unilateral, bilateral or multilateral appeal avenues via domestic legislation and/or double tax treaty relief.