Transfer Pricing Insights

Multinational groups face additional tax avoidance measures

2015-10-08

Large multinational groups may soon face additional anti-avoidance measures and compulsory documentation requirements as proposed in The Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 (the “Bill”).

In light of this significant and historic legislative change, overseas parent companies need to be prepared as the proposed measures may compel them to disclose commercially sensitive information.

Tax avoidance measures for multinational groups have received significant media attention over the past few months. In June 2015, we published an article on the draft legislation and welcome you to read our brief on the exposure draft legislation, click here.

Who will be affected?

An entity that is part of a global group with consolidated global accounting revenue of AUD$1 billion or more (referred to as a “significant global entity”) will be caught by the proposed measures.

Whilst these measures are aimed at multinational groups, a strict reading of the Bill suggests that Australian taxpayers with no overseas operations (but breach the income threshold) will also meet the definition of a significant global entity. As these taxpayers only pay tax in Australia, Treasury should clarify that the doubling of penalties and country-by-country (“CbC”) reporting requirements do not apply to such taxpayers.

It also appears that unless exempt by the Commissioner or excluded by regulations, foreign airlines and shippers whose income is protected from Australian taxes under international agreements will nevertheless be required to submit transfer pricing and CbC reports to the ATO.

Furthermore, the proposed rules will apply to Australian entities with consolidated revenue exceeding AUD$1 billion but have immaterial overseas operations. A de minimis exemption, similar to that contained in the thin capitalisation provisions, is strongly recommended. An exception of this nature will significantly reduce the unnecessary administrative burden for both taxpayers and the ATO.

What are the key implications arising from the proposed measures?

The key implications arising from the proposed Bill are as follows:

  • Foreign residents who: 
    • are deriving sales from Australian customers; and
    • part or all of that income is not subject to Australian tax (on the basis that there is no Australian taxable presence), will now need to consider whether the new anti-avoidance measures apply to them.
  • Transfer pricing documentation including a master file, local file and CbC reporting will be compulsory for affected taxpayers.
  • The penalties will be doubled for a significant global entity.

When do the changes apply?

The commencement date for the proposed changes are summarised as follows: 

 Table1

What are the new anti-avoidance measures?

The new anti-avoidance measures are designed to counter the splitting or fragmentation of activities to avoid the triggering of a permanent establishment or taxable presence in Australia. The proposed Bill has changed from the original exposure draft. In particular, the requirement for a member of the multinational group to be located in a low tax jurisdiction has been removed. However, the quantum of tax paid overseas on the Australian sales remains a relevant consideration.

The new anti-avoidance measures broadly apply where the below conditions are satisfied:

Table2

Where the rules are triggered, the Commissioner has the power to look through the scheme, and in accordance with paragraph 3.14 of the explanatory memorandum, apply the tax rules as if the foreign entity had been making a supply through an Australian permanent establishment (or some variation of this). One question to consider; is the postulation of an Australian permanent establishment the only reasonable alternate postulate that the courts could/should consider?

Once the Bill is passed administrative penalties are doubled for significant global entities that enter into tax avoidance or profit shifting/transfer pricing schemes. This can broadly be up to 120% of the tax avoided plus penalty interest charges. This particularly harsh penalty may be mitigated by ensuring that the taxpayer has a reasonably arguable position (“RAP”). It is important to note that where no transfer pricing documentation is prepared by lodgement date of the income tax return for the relevant period, the taxpayer will be deemed not to have a RAP. It is noteworthy that the due date to submit the required reports to the ATO falls after the due date for lodgement of the income tax return (generally 7.5 months after year end) for the relevant income year.

Compulsory lodgement of documentation

For a significant global entity, the lodgement of transfer pricing documentation and CbC reporting will be a compulsory annual obligation unless exempt by the Commissioner. Specifically, affected taxpayers (the local subsidiary or parent) will be required to submit:

  • A master transfer pricing file which provides a high level description of the global operations of the group;
  • A local file which describes the Australian operations of the group. The local file should be consistent with the 5 questions approached prescribed in Taxation Ruling TR 2014/8;
  • A CbC report which may set out the following information by jurisdiction:
    • Revenue (split between related and unrelated parties)
    • Profit before tax
    • Income tax paid and accrued
    • Accumulated earnings
    • Number of employees
    • Tangible assets held
    • Activities undertaken by each constituent entities in the tax jurisdiction
    • Any further information which may assist with understanding the CbC report submitted.

The proposed law implements Action 13 of the G20 and Organisation for Economic Co-operation and Development’s (OECD’s) Action Plan on Base Erosion and Profit Shifting. It is expected that other OECD member countries will implement similar rules. Non-OECD countries may have no choice but to comply if they have operations in OECD jurisdictions.

The Commissioner may exclude certain taxpayers from reporting.

Paragraph 5.19 of the EM states that the Commissioner may take the following factors into account in deciding on providing an exemption from reporting:

  1. the risk profile of the local entity, including, for example, the amount of its overseas dealings;
  2. the compliance burden imposed on the entity; and
  3. whether the Commissioner will receive the relevant reports by alternative means e.g. via exchange of information between countries.

It is unclear whether all 3 conditions must exist before the Commissioner grants an exemption.

As mentioned above, there should be a de minimis exemption for taxpayers with immaterial offshore operations.

What should affected groups do?

Affected taxpayers should consider the following:

  • Taxpayers that could potentially be affected by the anti-avoidance measures should document their business model and highlight the commercial reasons, drivers and benefits supporting the use of particular models. For greater certainty, taxpayers may consider seeking a private binding ruling or where relevant, enter into an advanced pricing agreement with the ATO.
  • Local subsidiaries that may be required to lodge transfer pricing documentation and CbC reports with the ATO, should advise their parent company of the requirement. Preparatory steps should be initiated to prepare the documentation and the arm’s length nature of the group structure and profit outcomes should be documented.

If you have any queries in relation to this article, please contact Daren Yeoh or your ShineWing Australia relationship partner.