On August 10, 2016 the Australian Taxation Office (ATO) issued 3 Taxpayer Alerts cautioning large companies and multinationals seeking to avoid their tax obligations through certain contrived arrangements.
The Taxpayer Alerts regard the following topics:
· Arrangements involving offshore permanent establishments (TA 2016/7);
· GST implications of arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL) (TA 2016/8);
· Thin capitalisation - Incorrect calculation of the value of 'debt capital' treated wholly or partly as equity for accounting purposes (TA 2016/9).
TA 2016/7 – Arrangements involving offshore permanent establishments
According to the Taxpayer Alert the ATO is currently reviewing arrangements involving Australian income tax consolidated groups (the consolidated group) with subsidiaries using offshore permanent establishments (PE) that have entered into intra-group transactions.
According to the Taxpayer Alert such arrangements involve the taxpayer effectively asserting for Australian income tax purposes there is no substantive contribution from Australia to the business carried on, at or through the Offshore PE. However, they also involve the Offshore PE asserting the amount of the deduction it is entitled to in the foreign jurisdiction for the goods or services provided to its business by Australia is substantive, and consistent with transfer pricing principles.
According to the Alert the ATO is concerned that, under these arrangements, the right amount of taxable income is not being returned by the consolidated group in Australia. In particular, that the amount of taxable income returned does not reflect the economic substance and significance of the operations carried on in and between Australia and the offshore jurisdiction consistent with the arm's length principle in our transfer pricing rules.
For further information click here to be forwarded to TA 2016/7 - Arrangements involving offshore permanent establishments.
TA 2016/8 – GST implications of arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL)
According to the alert the ATO is currently reviewing arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL). As part of this review, the ATO is considering the Goods and Services Tax (GST) consequences of the arrangements involving the distribution of intangible products and services into Australia.
It is also stated that the ATO has encountered arrangements which involve foreign and Australian entities swapping their roles via contracts. According to the ATO these contracts purport to make the Australian entity the distributor of the intangible products or services and the foreign entity an agent of the Australian entity, collecting the sales revenue from customers on its behalf.
Under this arrangement it is purported that while an Australian entity contracts with Australian customers to avoid the application of the MAAL, no GST is payable on the supplies. It is argued that no GST is payable on the basis the supplies are not made through an enterprise carried on in the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
In the alert the ATO cautions companies to take care that structures or arrangements used in response to the MAAL consider the appropriate GST outcomes. The ATO also cautions companies to ensure that these structures or arrangements do not themselves amount to schemes to avoid GST. Additionally, the ATO cautions intermediaries to make sure they are not promoting a scheme to avoid GST.
For further information click here to be forwarded to TA 2016/8 - GST implications of arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL).
TA 2016/7 – Thin capitalisation - Incorrect calculation of the value of 'debt capital' treated wholly or partly as equity for accounting purposes
According to the alert the ATO is reviewing arrangements where taxpayers have taken the view that their 'debt capital' for the purposes of the thin capitalisation rules (under Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997)) does not include the value of a 'debt interest' that has been treated wholly or partly as equity for accounting purposes. This has the effect of reducing what would otherwise have been the taxpayer's 'adjusted average debt' and may consequently reduce the amount of debt deductions disallowed under the thin capitalisation regime.
The ATO states that the arrangements it is reviewing typically have the following features:
· A taxpayer enters into a financial arrangement that is a 'debt interest' under Division 974 of the ITAA 1997.
· The financial arrangement is treated wholly or partly as equity in accordance with AASB 132 Financial Instruments: Presentation.
· On that basis, the taxpayer does not include the value of the accounting equity component of the financial arrangement in its 'debt capital' for thin capitalisation purposes.
· The taxpayer claims all debt deductions associated with the financial arrangement.
For further information click here to be forwarded to TA 2016/7 – Thin capitalisation - Incorrect calculation of the value of 'debt capital' treated wholly or partly as equity for accounting purposes.
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