SESSION 11B: COVETING THY NEIGHBOUR S TAX BASE AUSTRALIA S CHANGING APPROACH TO INTERNATIONAL TAXATION

Transcription

1 SESSION 11B: COVETING THY NEIGHBOUR S TAX BASE AUSTRALIA S CHANGING APPROACH TO INTERNATIONAL TAXATION Peter Collins and Michael Bona Global Tax PwC Australia

2 Contents International tax environment Financing Unilateral measures MAAL DPT BEPS measures

3 International tax environment What is shaping international tax?

4 The international tax environment What has happened over last 12 months and forecast for next 6-12 months Senate first inquiry hearing into tax avoidance and aggressive minimisation by MNEs in Australia April 2015 Senate second inquiry hearing into investigation of corporate tax avoidance July 2015 OECD releases its final recommendations from phase 1 of its BEPS project Chevron transfer pricing decision in favour of Commissioner handed down Oct 2015 Announcement of tax focussed changes to FIRB approval process Announcement of Govt Task Force to stamp out MNE tax avoidance Feb 2016 May 2015 Announcement of Federal Budget and proposal of the following: The MNE anti-avoidance law (MAAL) Penalty increases Country-by-Country reporting (CbCR) Aug 2015 ATO finalises new APA program emphasising transparency and early engagement Dec 2015 MAAL, CbCR & stiffer TP penalties introduced Tax return data of companies with income over $100m published by the ATO Voluntary Tax Transparency Code Draft paper released by Board of Taxation May/June 2016 onwards Proposed anti-hybrid rules Six new countries added in specified countries list for reporting in IDS (e.g. Ireland, Singapore, etc.) Actions 8-10??

5 Financing transactions What has changed for the taxation of financing transactions?

6 Chevron What does it mean? Consider carefully evidence with supports the arm s length nature of the your financing arrangements - not just the rate of the loan as drafted! What is your pricing methodology and how do the following impact credit ratings, implicit parental support, security Div 815B overlay

7 Post-Chevron: what does my term sheet say? Type of Loan Principal Currency Interest rate Break fee Credit Rating Covenants Term Loan B ZAR 10 billion ZAR 8% None 2 notches below parent credit rating None Key takeaways: Consideration interest rate Importance of commercial rationale Security Currency Covenants Don t forget the law Security Term Senior unsecured 9 years

8 Australia s unilateral measures The multinational anti-avoidance law and the diverted profits tax

9 MAAL Artificial and contrived arrangements designed to avoid a PE in Australia Addition to Part IVA Criteria for application Satisfied The foreign entity is a significant global entity Foreign entity makes supplies to Australian customers. Activities are undertaken in Australia directly in connection with those supplies by an Australian entity who is associated or commercially dependent on the foreign entity. The foreign entity derives ordinary or statutory income from those supplies, some or all of which, is not attributable to a permanent establishment in Australia of the foreign entity. The scheme was entered into for the principal purpose of enabling the taxpayer to obtain a tax benefit in Australia, or to obtain a tax benefit and reduce one or more foreign tax liabilities Yes Yes Yes Yes Yes

10 MAAL ATO High Risk Scenario Cost contribution agreement ParentCo Licence Offshore Subsidiary A Subsidiary B Royalty Payment and contract Payment Services Australia Australian Customer s Sales functions that contribute to bringing about contracts AusCo

11 MAAL ATO Low Risk Scenario Offshore ParentCo Payment Contract and product Payment and contract Services Australia Australian Customers General marketing and post-contract support services AustCo

12 Restructuring out of the MAAL From 1 January 2016 Fees MNC Offshore MAAL Sales Pretend Co (No PE) Interest Royalties Purchases Introduced to capture the dirty 30 MNCs ATO recently indicated approx. 176 companies had been contacted to discuss their operations in the context of MAAL Deems Offshore Sales Co to have a PE and tax at 60% but no guidance on profit attribution or PE s activities ATO cautioned against certain restructuring designed to avoid the MAAL (TA 2016/2) If you ve done nothing and are within the scope of the MAAL, a voluntary disclosure may reduce penalties Local Sales Assistance Purchase of goods Customer

13 Restructuring out of the MAAL MAAL encouraged onshoring and many did that MNC A new 40% tax on a company s diverted profits Applies to years commencing on or after 1 July 2017 Offshore Sales Co (No PE) Interest Royalties Purchases Purchase of stock DPT focuses on: Reasonable to conclude designed to achieve a tax benefit Comparison of the net tax benefits & non-tax financial benefits of transactions or economic contribution of staff Absent the net tax benefit, what would have happened on a just and reasonable basis The pay now and argue later approach designed to accelerate transfer pricing disputes Local Sales Assistance MAAL Pretend PE Purchase of Goods Customer

14 Introduction of the DPT A new 40% tax on a company s diverted profits The proposed rules are based on the 2 nd limb of the UK s DPT legislation (1 st limb is covered by the MAAL legislation). If a taxpayer falls within the scoping requirements, an arrangement with a related party may be subject to the DPT if the below 2 requirements apply. The proposed rules would apply to income years commencing on or after 1 July Scoping Requirements of the DPT: Australian resident or an Australian PE of a foreign resident Significant global entity (i.e. annual global turnover A$1billion or more) De Minimis threshold exempts entities with Australian turnover < A$25million Arrangements that involve dealings with offshore related parties The increased tax liability of your related party (as a result of the arrangement) Effective Tax Mismatch Requirement < 80% of the corresponding reduction in your Australian tax liability 1 Insufficient Economic Substance Test It is reasonable to conclude that the arrangement was designed to secure a tax reduction; and The financial benefit of the tax reduction > The non-tax financial benefits of the arrangement (note similar to the UK approach) 2

15 Insufficient Economic Substance Test The insufficient economic substance test will be met where there is a transaction, or series of transactions, or an entity s involvement in that transaction has insufficient economic substance. There is little detail on the application of this test but reference is made to the UK approach. The UK approach is as below (note inconsistency between UK law and guidance): Transaction based tests Will be met when the effective tax mismatch is referable to a single transaction or a series of one or more transactions and it is reasonable to assume that the transaction was designed to secure the tax reduction. This is unless at the time of the transaction or series of transactions, it was reasonable to assume that the non-tax financial benefit would exceed the financial benefits of the tax reduction. This takes into account what the parties anticipated at the outset. Entity based tests Will be met when an entity is party to a transaction and it is reasonable to assume that the transaction was designed to secure the tax reduction. This is unless either: it is reasonable to assume at the time of the transaction that the economic value of the contribution from the functions or activities of the staff would exceed the financial benefit of the tax reduction (for all accounting periods which the transaction(s) will have effect); or in a particular accounting period, the greater part of the income arising from the transaction is attributable to the ongoing functions or activities of the staff.

16 DPT Timeline Lodgement date - 7 years A provisional DPT assessment will be issued as soon as practical after the end of an income year and no later than 7 years after the income tax return is lodged 30 days The ATO will issue a final DPT assessment within 30 days of the end of the representation period. 12 months The ATO will have 12 months to review the final DPT assessment. If during this period, the ATO considers the amount of DPT charged to be insufficient, the ATO may issue a supplementary DPT assessment up to 30 days prior to the end of the review period to impose an additional charge of DPT. 30 June Year end 60 days 21 days 12 months + The taxpayer has 60 days to make representations to correct factual matters set out in the provisional DPT assessment (but not on TP matters). The taxpayer will have 21 days in which to pay the amount of the assessment. At the completion of the review period, the taxpayer has 30 days to lodge an appeal (through the court process).

17 Example of entities or transactions lacking economic substance Foreign Parent Co A Equity Background / Facts B needs to invest in a new asset (e.g. P&M) to carry on its trade in Australia. A injects equity into C. C in turn purchases the asset which it leases to B. B has annual lease payments to C for the use of the asset. C has no other activities (e.g. no full time staff and its only activities are to own and lease the asset). Australia Co B Right to use asset Lease payment Foreign Co (low tax) C DPT Commentary 1) Assume initial scoping requirements met - Australian resident significant global entity and an arrangement with offshore related parties 2) Effective tax mismatch test is met - lease payments are deductible in B but receipts not taxable in C. 3) Insufficient economic substance test is met - It is reasonable to conclude (based on the information available to the ATO), that the transaction was designed to secure the tax reduction and the non-tax financial benefits referable to the transaction (e.g. no employees of C to contribute economic value) do not exceed the financial benefit of the tax reduction.

18 Example of entities or transactions lacking economic substance (continued) Australia Co B Foreign Parent Co Right to use asset A Equity Foreign Co (low tax) C Conclusion ATO considers issuing a provisional DPT assessment as they consider the arrangement artificial and contrived. The relevant alternative scenario would have been that A would have provided equity to B to purchase the asset for its own use. (i.e. on the basis that C has not incurred financing costs). The diverted profits would have been calculated as if B held the asset, so no deduction for lease payments is allowed, but B would have received a deduction for Australian capital allowances. Lease payment Further Considerations Debt/equity financing choice Financing costs (i.e. bank borrowings/banking relationships) Substance Other transactions/entities leasing, financing, insurance, rent, management fees, royalty payments (i.e. IP, brands), captive insurance, hybrids

19 Inflated Expenditure Example Background / Facts: Foreign Co (a foreign resident) provides marketing and administrative services to Australia Co and charges a fee of A$50million. The fee is deductible in Australia, providing a 30% reduction in tax, and is taxable in Foreign Co s home jurisdiction at 17%. DPT Commentary: The ATO considers that the fee is inflated compared to an arm s length amount. Australia Co does not provide any further information to support the pricing of the fee. The ATO considers issuing a DPT assessment. The effective tax mismatch test is met as the 17% rate in Foreign Co is less than the 80% of Australia s 30% corporate tax rate. The insufficient economic substance test is met as it is reasonable to conclude, (based on the information available to the ATO), that the transaction was designed to secure the tax reduction and the non-tax financial benefits referable to the transaction do not exceed the financial benefit of the tax reduction. As this is an inflated expenditure case, the DPT assessment is based on 30% of the relevant expenses. Therefore, the DPT assessment is A$6million calculated as: 1. Diverted Profits Amount = A$15million (A$50 million inflated expenses x 30%) 2. DPT Assessment = A$6million plus interest (Diverted Profits Amount x 40% = A$15million x 40%) 17% 30% Foreign Co $50m fee Aus Co 30%

20 Inflated Expenditure Example (continued) Additional Facts: During the 12month review period, based on information provided by Australia Co, the ATO determines the correct arm s length price for the marketing and administration services is A$45million i.e. the deduction was overstated by A$5million. This A$5million becomes the Diverted Profits Amount. The revised DPT assessment is calculated as: 1. Diverted Profits Amount = A$15million (A$50 million inflated expenses x 30%) 2. DPT Assessment = A$6million plus interest (A$5million x 40%) The ATO refunds the residual A$4million DPT amount previously collected. 17% 30% Foreign Co $50m fee Aus Co 30%

21 Transfer of IP to Low Tax Jurisdiction Example Background / Facts: C (Australia Co) contractually transfers an IP asset is has developed to A (Foreign Co in a low tax jurisdiction) for a nominal amount. C continues to develop and maintain the IP. A only pays a small amount for this service and does not contribute in any other meaningful way to the further development or maintenance. A charges annual royalties to B (another foreign Co) for the right to use the IP. Foreign Co (Low Tax) Transfer of IP Royalty payment Right to use asset Australia Co DPT Commentary: ATO reviews the transfer pricing and royalty arrangements. The ATO considers that there is insufficient economic substance to the transfer of the IP and the relevant alternative scenario would have been for C (Australia Co) to retain ownership of the IP. The ATO considers issuing a DPT assessment. The effective tax mismatch test is met as royalty income is subject to 12.5% tax in A, which is less than 80% of Australia s 30% corporate tax rate. The insufficient economic substance test is met as it is reasonable to conclude (based on the information available to the ATO), that the transaction was designed to secure the tax reduction and that the non-financial benefits referable to the transaction do not exceed the financial benefit of the tax reduction. A charge to DPT will be calculated on the additional profits which would have arisen if C (Australia Co) had retained ownership of the IP and not made payments to IP Co ( alternative provision ) The understated income would be the royalty income C (Australia Co) would have received from B (other foreign company). A C Foreign Co B

22 BEPS measures The hybrid mismatch rules

23 Hybrid mismatches and imported mismatch rule Hybrid rules apply from 1 January 2018 (or 6 months after enactment DPT apply from 1 July 2017

24 Imported Mismatch Rule Questions to consider Parent Co - Do you make related party payments? Hybrid payment Imported mismatch payment $98 Royalty $99 Royalty $10 license/ goods payment A Co 1 A Co 2 C Co Aust LRD / Op Co $100 license/goods payment Rest of World LRDs - Does your group structure have a hybrid (entity, branch, or payment)? - Does Australia fund in anyway that hybrid (based on specific tracing rules)? - Is my license / loan / cost of goods payment non-deductible?

25 Bona and Collins 2016 Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.