The Government has announced as part of the Budget that it will introduce a new multinational anti-avoidance law into Part IVA of the Income Tax Assessment Act 1936. The new law will apply to tax benefits obtained on or after 1 January 2016. It is aimed at 30 identified multinationals with Australian sales agency arrangements that the Government claims may artificially avoid having a taxable presence in Australia – and will seek to subject them to income tax, withholding tax and penalties as if they did have such a presence. An exposure draft of the new Multinational Anti-Avoidance Law (MAAL) legislation and Explanatory Material has been released (with submissions due by 9 June 2015). Partner Toby Knight and Senior Associate Jennifer Richards outline the proposed new measure and explore its implications.
How does it affect you?
- The application of the new law will be dependent on the statutory construction of its complex provisions, but will also be heavily dependent upon the particular factual circumstances and commercial arrangements of the multinational group concerned.
- Foreign multinationals with global revenue exceeding A$1 billion (with group entities in low tax jurisdictions) making supplies to non-associated Australian residents, where activities are undertaken by Australian employees of associated or commercially dependent entities in connection with those Australian sales, will need to review their structures to determine whether the new measure will apply to them and if so, consider any steps that might be taken before 1 January 2016.
- The new measure gives rise to particular tax compliance issues as to how the risk of its application in conjunction with 100 per cent penalties can be managed and/or challenged if structures remain in place as at 1 January 2016.
- If the new provision does apply, a question will remain as to the profit properly to be regarded as attributable to the fictional permanent establishment.
The Federal Government has announced that it is concerned that up to 30 identified large multinational companies are diverting profits earned in Australia to no or low tax jurisdictions. The ATO has embedded audit teams in these multinationals (largely technology, digital and e-commerce companies) to understand their businesses and their use of arrangements such as the 'Double Irish Dutch Sandwich'. Initially, the Government explored the possibility of introducing a UK-style Diverted Profits Tax to counter such arrangements after political pressure to move ahead of the consensus position of multilateral action under the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. The Government has decided to still act unilaterally but to do so instead by strengthening the General Anti-Avoidance Rule in Part IVA. Part of the reason for taking this approach is that Part IVA is not overridden by Australia's tax treaties with other nations. The new measure will apply to tax benefits obtained on or after 1 January 2016, whether or not the relevant scheme was entered into or commenced before that day. The enhanced Part IVA provisions will apply together with an announced new 100 per cent penalty regime.
A new section 177DA will be added to Part IVA1 so that, in addition to its normal application, Part IVA will apply to a scheme if certain conditions are met:
- A non-resident makes a supply to an unrelated Australian resident;
- Income the non-resident derives from the supply is not attributable to an Australian permanent establishment of the non-resident;
- Activities are undertaken in Australia in connection with the supply, some or all of which are undertaken by an Australian resident, or through the Australian permanent establishment of another entity that is an associate of, or commercially dependent on, the non-resident;
- It would be reasonable to conclude (having regard to certain objective factors2) that the scheme was designed to avoid the non-resident deriving income from supplies that would be attributable to an Australian permanent establishment of the non-resident;
- It would be concluded (having regard to the same objective factors) that the person or one of the persons who entered into or carried out the scheme or any part of it did so for a 'principal purpose', or for more than one principal purpose that includes a purpose, of enabling a taxpayer to obtain a tax benefit or to both obtain a tax benefit and reduce one or more foreign tax liabilities or Australian tax liabilities other than income tax (or to enable the relevant taxpayer and another taxpayer or taxpayers to obtain the same).
- The non-resident's, or its group's, annual global revenue in relation to the relevant income year exceeds $1 billion (in Australian dollars).
- The non-resident is connected with a no or low tax jurisdiction, in that activities of the non-resident or a member of its global group (ie with which it is consolidated for accounting purposes) give rise to income that is subject to no or low tax in a foreign country.
The new measure will not apply if:
- The activity of the non-resident or members of its group in the no or low tax jurisdiction is not related, directly or indirectly, to the supply into Australia; or
- The entity undertaking the activity in the no or low tax jurisdiction undertakes substantial economic activity relating to the supplies into Australia, in the foreign no or low tax jurisdiction.
However, in order for the Commissioner of Taxation to apply these carve-outs he must have been given information in relation to them and if he has not been, the carve-outs are taken not to apply. A key issue for consultation in relation to the draft legislation will be the time by which the information needs to be provided (eg before a Part IVA determination and consequent assessment, or subsequently in challenging such an assessment).
The new measure is inserted into Part IVA and so relies on the existing machinery of that provision to apply. Thus, it is still necessary for the taxpayer to have obtained a tax benefit under s177C in order for the new measure to apply, and it applies to the amount of that tax benefit. However, if a tax benefit or tax benefits were obtained, and s177DA applies, the ATO will seek to cancel tax benefits as if the non-resident had an Australian taxable presence by:
- Applying income tax to the non-resident as if it had derived income attributable to an Australian permanent establishment;
- Determining that withholding tax is taken to be payable on royalty and interest payments made by the non-resident to other parties, as if they were incurred by the non-resident in carrying on business in Australia through a permanent establishment; and
- Imposing penalties of up to 100 per cent of the tax alleged to be avoided.
The following points arise in relation to the Exposure Draft:
- The definition of 'supply' in s9-10 of the A New Tax System (Goods And Services Tax) Act 1999 (Cth) is adopted for the purpose of identifying supplies to Australian residents, capturing a potentially broad range of activity.
- There are multiple objective purpose tests in the new provision, applying different thresholds and relating to different objects, each heavily fact-dependent:
- The first component of the purpose test asks whether it is reasonable to conclude that the scheme is designed to avoid the non-resident deriving income from the making of supplies that would be attributable to an Australian permanent establishment. The answer to this will be very dependent upon the facts of each particular case, including the extent of the activities carried out in Australia, whether they are integral to the making of the supply to the non-resident and whether there has been an artificial splitting of certain activities as between resident and non-resident entities.
- The second component of the purpose test lowers the threshold from the 'sole or dominant' purpose test in the remainder of Part IVA (apart from section 177EA) and introduces a new 'principal purpose' test. It recognises that there may be more than one principal purpose and that this may be to obtain a tax benefit or both to obtain a tax benefit and to reduce a foreign tax liability (ie a principal purpose can relate to multiple combined outcomes). This is intended to address arguments that the taxpayer's dominant purpose was not to obtain an Australian tax benefit but to reduce foreign tax.3
- In the subsections concerning no or low tax jurisdictions, there is no definition of what is a 'low rate of tax'4 or what constitutes 'substantial economic activity'5 in order for the carve-outs to apply.
- In order for the new provision to apply, it is still necessary for there to be a tax benefit under s177C, requiring a comparison of what was actually done with what would or might reasonably be expected to have been done (an alternative postulate) in accordance with the methodology in s177CB, again emphasising the factually dependant nature of the new measures.
- Exposure Draft, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015.
- These are the matters specified in section 177D(2) together with any other matters the Minister determines by legislative instrument.
- The Explanatory Memorandum describes the new 'principal purpose' test as being borrowed from a draft OECD Model Treaty Article and draft Commentary set out in the OECD's report on BEPS Action Item 6 titled 'Preventing the Granting of Treaty Benefits in Inappropriate Circumstances'. That report indicates that the test there discussed would not be satisfied where the benefit 'was not a principal consideration and would not have justified entering into the arrangement' (or part of the arrangement) and is unlikely to be satisfied where the arrangement is 'inextricably linked to a core commercial activity' providing that the "form has not been driven by considerations of obtaining a benefit'.
- It is therefore unclear whether the draft legislation is only intended to catch income that is ultimately subject to a significantly lower rate than Australia's corporate tax rate (eg, Ireland's 12.5 per cent) or some other threshold. The OECD' BEPS Action 3: Strengthening CFC Rules' discusses different approaches to defining low tax and recommends that a low tax benchmark should be 'meaningfully lower than the tax rate in the country applying the rules'. Presumably the meaning of a 'low rate' will be further developed in consultation.
- The OECD 'BEPS Action 3: Strengthening CFC Rules' report also canvasses different approaches to formulating a substance test directed at identifying genuine economic activities including a substantial contribution analysis, a viable independent entity analysis and an employees and establishment analysis.