The Commissioner of Taxation has, in a recent Australian Senate Estimates hearing, expressed frustration that companies potentially subject to Australia's cross-border anti-avoidance laws (including the new Multinational Anti-Avoidance Law or MAAL) which have documents offshore, outside the reach of his access powers, are not providing him with relevant information – either at all, or in what he regards as a timely manner. He has threatened to raise assessments, which would force these companies to object against those assessments and provide further information if they wish to prove the assessments are excessive. Although affected non resident entities may not have assets in Australia, this does not mean the Commissioner will be unable to enforce the tax debts which would arise on such assessments. Partner Toby Knight and Senior Associate Igor Golshtein discuss the implications for potentially affected companies, focusing particularly on those for overseas entities at which the new MAAL is targeted.
- The Australian Taxation Office (ATO) is reviewing the structures adopted and transactions undertaken by many large multinational corporate groups operating in Australia, to which Australia's cross-border and general anti-avoidance rules may apply. If applicable, those rules (which include the old and recently reformed thin capitalisation and transfer pricing rules, and Part IVA including the new MAAL) may result in Australian or offshore companies being liable to pay significant Australian tax.
- Documents and information relevant to these structures and transactions may be created and held offshore, outside the reach of the Commissioner's statutory access powers. The Commissioner's remarks at the Senate hearing suggest that some affected companies are reluctant to or have delayed in providing relevant information in response to ATO information requests. The Commissioner has said that, the ATO is 'ruling the line under these protracted negotiations' and proceeding to 'raise assessments and creating liabilities in these cases, potentially taking them all the way to the court if necessary'.1
- The Commissioner also remarked that whereas previously, the ATO's lawyers have insisted on 'dotting every i and crossing every t, a hundred percent of every piece of information'2, the ATO is now intending to adopt a different approach which will involve it relying on the information that it does have to issue assessments erring 'on the higher side'3. This will result in companies wishing to dispute the assessment having to provide relevant and previously undisclosed information and engaging in a formal objection process, which may ultimately end up in Court. Further, the Commissioner has also indicated that going forward the ATO will take a more rigorous approach to settlement by engaging a former Federal Court judge to act as independent assurer and assess the appropriateness of settlements4.
- The issue of an assessment will create a tax debt due to the Commonwealth. Where the assessment is issued to an overseas entity, even though it may not have assets in Australia, it will enable the Commissioner to avail himself of his substantial enforcement powers, both domestically through garnishee notices and ultimately in enforcing the tax debt in the foreign jurisdiction.
- Companies affected will need to consider, ahead of this occurring, the changed dynamic under Australia's tax laws should the ATO issue such assessments, given the Commissioner's recovery powers and that the taxpayer would bear the onus of proving that any such assessment was excessive. Consideration would need to be given to the effect on penalties and the legal steps involved in challenging such an assessment.
- Steps would need to be taken to deal with the ATO so that enforcement action is not taken by the Commissioner that involves reputational or business disruption issues and to ensure the taxpayer is placed in the best evidentiary position to challenge an assessment.
- Set out below are some key issues relevant to the ATO's information gathering and assessment enforcement powers in the context of the MAAL. However, many of these issues could also be relevant in the context of other cross-border tax disputes, including where the Commissioner assesses an offshore company making supplies to Australian customers on the basis that it has a taxable presence in Australia in the period prior to the MAAL applying, despite such presence not being intended.
The new MAAL5 applies from 1 January 2016:
- to foreign entities with annual group turnover of A$1 billion or more;
- where the foreign entity makes supplies to customers in Australia and activities are undertaken in Australia directly in connection with those supplies by an Australian entity that is an associate of, or commercially dependent on, the foreign entity;
- the income derived by the foreign entity is not attributable to a permanent establishment (PE) of it in Australia; and
- a principal purpose test is met.
- The principal purpose test is met if a person who entered into or carried out the scheme did so for a principal purpose of, or for more than one principal purpose that includes a purpose of, enabling a taxpayer to obtain a tax benefit in Australia, or to obtain an Australian tax benefit and reduce one or more of its foreign tax liabilities.
- Where the MAAL applies, the Commissioner may make a determination to tax the foreign resident as if it had a deemed PE in Australia (with income and withholding tax payable). An assessment under the MAAL would involve a calculation as to how much profit would have been attributable to the deemed PE and what interest or, more particularly, royalties the taxpayer would have paid to other non-residents through that PE. The Commissioner requires financial and other information to be able to assess this, and is at a disadvantage where that information is held offshore.
- In addition to the primary tax imposed, the taxpayer would be liable for interest and also a penalty. The maximum applicable penalty for entities with annual global revenue of A$1 billion or more that enter into a tax avoidance or profit shifting scheme (including those to which the MAAL applies) where the taxpayer does not have a reasonably arguable position is now generally 100% of the tax shortfall (but can be higher where aggravating factors apply). Lower penalties may apply if there is voluntary disclosure before or during an ATO examination.
- The Commissioner has sought to engage with these entities, currently communicating with 26 companies he claims are affected. He has also issued a 'MAAL client experience roadmap' and signalled that the ATO will write to a further 60 potentially affected companies by 31 March 2016, although Australia's Assistant Treasurer has recently indicated that the ATO is focusing on almost 400 companies potentially affected by the MAAL6. The Commissioner's aim is to encourage those companies to transition to the new law, principally by restructuring, with the ATO highlighting that increased penalties may apply should affected companies not make relevant disclosure.
- The Commissioner's access and information gathering powers under the Taxation Administration Act 1953 (Cth) (TAA)7 do not have extra-territorial reach and so will not apply where the information is held offshore and an Australian entity or person does not have the information in its, his or her custody or control. The Commissioner may, however, if the absence of information is an impediment to raising an assessment, seek to use the exchange of information powers under Australia's Double Tax Agreements to obtain it.
- Once an assessment is issued, the taxpayer will need to lodge an objection to dispute it and has the burden of proving that the assessment is excessive 8. Furthermore, under Australian domestic tax law, payment of the assessed tax is not deferred merely because the taxpayer objects to the assessment or later lodges an appeal or review9, unless an alternative arrangement is negotiated with the Commissioner (eg the 50/50 arrangement described below).
- As discussed in a previous Allens' Focus article10, from 1 December 2012, the Commissioner's authority to recover tax claims from other jurisdictions was enhanced by the Commonwealth Government's ratification of the OECD Convention on Mutual Administrative Assistance in Tax Matters (Convention), Article 11 of which provides the Commissioner with the power to seek enforcement of Australian tax debts in foreign jurisdictions. However, the Commissioner cannot seek recovery through other jurisdictions under the Convention if the assessment is being contested by the taxpayer by objection or appeal, until the dispute is finally resolved (although this would not preclude the Commissioner taking enforcement action in Australia).
- Article 12 of the Convention enables the Commissioner to seek, and imposes on him an obligation to take, conservancy measures, ie through garnishee or freezing orders (if available), even in cases where the tax claim is contested. Article 21 of the Convention provides that a jurisdiction is not obliged to provide assistance to another jurisdiction in the recovery of a tax claim if the applicant has not exhausted all of its domestic measures, except where recourse to such measures would give rise to disproportionate difficulty.11
- The Commissioner can issue a written garnishee notice to an entity that owes or may later owe the tax debtor money, requiring the third party to pay that money to the Commissioner12. This risks interfering with the trading of the taxpayer's business, as well as potentially causing adverse publicity.
- A taxpayer should be able to prevent the Commissioner from exercising domestic enforcement measures while objecting to any assessment either by paying the tax in dispute, or paying 50% of it pending the resolution of the dispute if it can obtain the ATO's agreement to enter into a 50/50 arrangement (as described in Practice Statement Law Administration 2011/4). A benefit of a 50/50 arrangement is that the Commissioner will remit 50% of the interest that would otherwise accrue and will not pursue enforcement remedies, pending the outcome of the appeal process. The ATO will only enter into a 50/50 arrangement where the taxpayer agrees to pay all undisputed tax debts and 50% of the disputed tax debt pending resolution of the dispute, co-operates fully in providing any requested information necessary for the early determination of the objection and pays the whole of any subsequently arising tax liability not in dispute (unless deferral has been agreed). A 50/50 agreement will generally not be granted where the Commissioner considers the level of risk necessitates legal action to secure payment of the disputed debt before resolution of a dispute.
- As the taxpayer will bear the onus of proving that the assessment is excessive in any Tribunal review or Court appeal of a negative objection decision, careful consideration will need to be given to the evidence required to prove that. In order to do so, the taxpayer may need to rely on material which currently resides offshore. If that is the case, consideration should be given to providing that material at an earlier time, prior to the issue of an assessment.
- Senate Economics Legislation Committee hearing (10 February 2016, Canberra), transcript at pages 47.
- Senate Economics Legislation Committee hearing (10 February 2016, Canberra), transcript at page 49.
- Senate Economics Legislation Committee hearing (10 February 2016, Canberra), transcript at page 52.
- Senate Economics Legislation Committee hearing (10 February 2016, Canberra), transcript at page 47.
- Contained in section 177DA of Part IVA of the Income Tax Assessment Act 1936.
- The Hon. Kelly O'Dwyer MP, Address at the Heads of Tax Roundtable lunch, Melbourne (16 February 2016).
- Sections 353-10 and 353-15.
- Sections14ZZK and 14ZZO of the TAA.
- Sections 14ZZM and 14ZZR of the TAA.
- Allens Focus: International tax convention widens reciprocal enforcement, Larry Magid, Claire Nicholson and Jonathan Hoe, 17 October, 2012.
- Ibid. and Covention art. 21(2)(g).
- Section 260-5 of the TAA.