Bourke Place 600 Bourke Street Melbourne VIC 3000 GPO Box 9925 VIC 3001 Tel (03) 9672 3000 Fax (03) 9672 3010 www.corrs.com.au Sydney Melbourne Brisbane Perth Annual International Bar Association Conference 2014 Tokyo, Japan Open for business? Recent Developments in International Taxation in Australia June 2013 May 2014 30 May 2014 Reynah Tang Partner Corrs Chambers Westgarth +61 3 96723535 Reynah.Tang@corrs.com.au 11059678/11
Report The period from June 2013 to May 2014 has seen significant changes on the international tax front with the election of a new conservative government in September 2013 focused on ensuring Australia is open for business and cutting red tape, while at the same time leading the charge as chair of the G20 on issues associated with base erosion and profit shifting (BEPS). Below, we address the key legislative and regulatory developments in the international tax space, some of the cases that touch on critical cross-border issues and further international tax issues that are on the horizon. 1 Recent legislative and regulatory developments 1.1 Reform to Australia s domestic transfer pricing rules On 29 June 2013, the existing transfer pricing rules in Australia were entirely replaced by a new transfer pricing regime. In particular, Division 13 of the Income Tax Assessment Act 1936 (Cth) and Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) were replaced with new Subdivisions 815-B, 815-C and 815-D of the Income Tax Assessment Act 1997 (Cth), which commenced operation from 29 June 2013. The new regime purports to align Australia s transfer pricing rules with international practice, and includes a requirement that Australia s transfer pricing rules be interpreted consistently with OECD guidance. The new rules apply to entities that engage in related party or non-related party transactions, and to both tax treaty and non-tax treaty cases, ensuring greater alignment between outcomes for international arrangements irrespective of whether or not they involve jurisdictions forming part of Australia s tax treaty network. Key changes include (1) introduction of a self-assessment regime; (2) creation of a penalty regime linked with a requirement for contemporaneous documentation to establish a reasonably arguable position; (3) the grant of extensive powers to the Australian Taxation Office (ATO) to reconstruct transactions to conform to arm s length conditions (see http://bit.ly/1rbo5e0); and (4) introduction of a 7-year amendment time limit for the ATO to amend a taxpayer s assessment. 1.2 Reform to Australia s general anti avoidance rule Amendments to the Australian general anti avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (Cth) (Part IVA) were passed by the Australian Parliament on 25 June 2013. The amendments will apply to schemes that were entered into or carried out on or after 16 November 2012. The provisions of Part IVA allow the Australian Commissioner of Taxation (Commissioner) to cancel a tax benefit obtained by a taxpayer under an arrangement carried out for the purpose of enabling the taxpayer to obtain the tax benefit. The amendments are intended to target perceived deficiencies in the operation of section 177C, used to determine if there is a tax benefit for the purposes of Part IVA, and are a response to various major litigation losses suffered by the Commissioner in Part IVA cases (see http://bit.ly/1jwl6ex). The amendments do not otherwise change the overall operation of Part IVA. 1.3 Changes to the foreign resident capital gains tax regime Removal of the capital gains tax (CGT) discount Pursuant to the Tax Laws Amendment (2013 Measures No. 2) Act 2013 (Cth), which came into effect on 29 June 2013, foreign residents who dispose of their directly or indirectly held real property assets will no longer be able to access the 50% CGT discount on gains accruing after 8 May 2012. 11059678/11 page 2
Changes to the foreign resident CGT Principal Asset Test On 14 May 2013, the former government announced amendments to the foreign resident CGT principal asset test in Subdivision 855-A of the Income Tax Assessment Act 1997 (Cth). This test considers whether the value of assets held by an entity which are taxable Australian real property (TARP) exceeds the value of the entity s non-tarp assets, in which case dealings with an interest in the entity may be subject to CGT in Australia. The effect of the proposed amendments is two-fold: First, to remove the ability of entities to use transactions between members of the same group to create and duplicate assets, diluting the true asset value of the group. Second, to ensure that in determining the value of TARP assets, mining, quarrying or prospecting information and goodwill are valued together with the mining rights to which they relate. The new government has confirmed that it will proceed with the measures (see http://bit.ly/1jwllwf) and an exposure draft of the amending legislation was released on 13 May 2014 with comments due by 9 June 2014. 1.4 Debt / Equity tax rules On 25 March 2014, the Board of Taxation released a discussion paper on the debt / equity rules in Division 974 of the Income Tax Assessment Act 1997 (Cth) as part of a combined post-implementation review and future review for improving arrangements within the Australian tax system. Major areas highlighted by the Board as being problematic include the operation of the effectively non-contingent obligation requirement of the debt test, the administration of related scheme provisions, and the Commissioner s ability to re-characterise an interest as an equity interest under a specific anti-avoidance rule. The Board is expected to report to the Government by March 2015. 1.5 Legislative developments under the new Coalition government The new Coalition government s stated policy objectives include boosting private sector growth and employment through cutting red tape, and abolishing the carbon tax and mining tax introduced by the previous Labor government. The government has proposed replacing the carbon tax with a direct action plan (see http://bit.ly/1rbqizo). To implement these objectives, the new Government has introduced into Parliament the Omnibus Repeal Day (Autumn 2014) Bill 2014, which proposes to amend or repeal legislation across 10 portfolios in an effort to cut red tape. Attempts to repeal the mining and carbon taxes have been unsuccessful to date, with the Senate rejecting repeal bills introduced in March 2014. However, the composition of the Senate will change on 1 July 2014 to reflect the results of last year s Senate elections, and there will be an increase in the number of seats held by newly formed political parties. The Coalition government will require support from these parties in the new Senate if it is to succeed in repealing the mining and carbon taxes. 1.6 FATCA Intergovernmental Agreement On 28 April 2014, Australia and the United States of America (US) signed an intergovernmental agreement to facilitate compliance by Australian financial institutions with the US Foreign Account Tax Compliance Act (FATCA). From 1 July 2014, affected institutions will be required to review customer accounts to determine whether they are reportable US citizen or US tax resident accounts. These institutions will report to the ATO, that will in turn pass on information to the US Internal Revenue Service. Comments on draft legislation giving effect to Australia s obligations under the FATCA agreement closed on 9 May 2014. If the Bill is passed, the Taxation Administration Act 1953 (Cth) will be 11059678/11 page 3
amended to incorporate these changes. 1.7 Australian response to BEPS Australia has responded strongly to the issue of BEPS, with the Treasurer calling for a global and coordinated response to the problem (see http://bit.ly/1tiiuep). In a similar vein, in his address to the World Economic Forum in Davos, Prime Minister Tony Abbott stated that part of Australia s role in chairing the G20 during 2014 was to continue tackling businesses who engage in artificially generating profits to chase tax rather than market opportunities (see http://bit.ly/1ew9xod). As part of the G20 tax agenda, the Government will soon be releasing a discussion paper on implementation of a Common Reporting Standard (CRS), similar to that detailed in the OECD s February 2014 publication Standard for Automatic Exchange of Financial Information, in order to target tax evasion through cooperation and information sharing between different tax administrations. 1.8 Treaty developments Treaties The Australia-Mauritius tax treaty on the allocation of taxing rights and transfer pricing adjustments entered into force on 31 May 2013. The Australia-Turkey double tax agreement entered into force on 5 June 2013. On 30 July 2013, Australia and Switzerland signed a revised tax treaty to more closely align with the bilateral tax arrangements of the two countries and the international tax treaty policy setting, and to strengthen administrative assistance between the tax authorities. Determinations on treaty operation (i) Convention with the United States interest income On 1 November 2013, the Commissioner released interpretative decision ATO ID 2013/58, in which he determined that Article 11(3)(b) of the Australia-United States Double Taxation Convention (US DTA) applies to Australian interest income paid to a single owner US limited liability company (LLC) incorporated in the US such that the interest income is not taxable in Australia. (ii) Income of ship or aircraft operations On 28 August 2013, the Commissioner released draft taxation ruling TR 2013/D5 in which he states that, although Australia does not have the right to tax income derived by a shipowner or charterer that is a resident of a treaty partner, it does have the right under section 129 of the Income Tax Assessment Act 1936 (Cth) to tax at a rate of 5% income derived from ship or aircraft operations that are confined solely to places in Australia. 2 Case developments 2.1 Resource Capital Fund III LP v Commissioner of Taxation On 3 April 2014, the Full Federal Court of Australia handed down its decision in Commissioner of Tax v Resource Capital Fund III LP, 1 which was concerned with the disposal of shares in a gold mining enterprise in Australia (SBM) by Resource Capital Fund (RCF), an entity based in the Cayman Islands. Two issues arose at hearing. The first issue was whether RCF, as a foreign resident, was taxable on the capital gain. This required the court to determine whether the principal asset test had been satisfied. The second issue was whether RCF was assessable as a taxpayer under the US DTA. 1 [2014] FCAFC 37. 11059678/11 page 4
The Full Federal Court found that the value of SBM s assets should be ascertained as if they were being offered for sale as a bundle, not (as had been accepted at first instance) as if they were offered for sale separately. As such, it was found that the TARP assets exceeded the non-tarp assets allowing CGT to apply. In relation to the second issue, the Court found that as a limited partnership, RCF was neither a resident of the US or Australia, and therefore the US DTA did not apply to shield its income from tax (see http://bit.ly/1mddfyj). 2.2 Re AP Energy Investments Limited v Commissioner of Taxation In the case of Re AP Energy Investments Limited v Commissioner of Taxation, 2 the Administrative Appeals Tribunal of Australia (AAT) held that a Chinese company which made a capital gain of $4m in the 2007 income year from selling a majority of its shareholding in a mining exploration business was not liable for CGT in Australia because its intangible assets, such as mining information and mining rights, were not TARP assets, with the result that the principal asset test was not satisfied in this case and CGT did not apply. The Commissioner has appealed the decision of the AAT in the Federal Court and the tests have already been amended to capture mining rights and information going forward. 2.3 Intoll Management Pty Ltd v Commissioner of Taxation In the case of Intoll Management Pty Ltd v Commissioner of Taxation, 3 the Full Federal Court found that dividends of $183m paid to the taxpayer by companies incorporated in Luxembourg were excluded from the taxpayer s Australian assessable income by virtue of being non-assessable, nonexempt income pursuant to section 23AJ of the Income Tax Assessment Act 1936 (Cth). The relevant issue was whether Intoll s election to consolidate for tax purposes affected the application of section 23AJ, and of section 44 of the Income Tax Assessment Act 1936 (Cth) which provides that the assessable income of a resident shareholder includes dividends paid to the shareholder by the company out of profits derived by the company from any source, unless the shareholder is a trustee, in which case the dividend is not received beneficially. In this case, the taxpayer was a trust, but as part of the consolidated regime had elected to be taxed as if it was a company. The Court found that the consolidation provisions made it clear that the trust should be assessed as having derived the dividends as head company of the consolidated group, not as a trustee. It held that this characterisation should apply equally for the purposes of section 23AJ and section 44, meaning that the dividends were properly classified as non-assessable, non-exempt income. 2.4 Commissioner of Taxation v Resource Capital Fund IV LP & Ors The decision in Commissioner of Taxation v Resource Capital Fund IV LP & Ors 4 concerned the operation of a notice issued under section 255 of the Income Tax Assessment Act 1936 (Cth). The taxpayers in this case were limited partnerships formed in the Cayman Islands. They owned shares in an Australian company (Talison), which were sold to a third party in Canadian dollars. The Commissioner issued notices of assessment to the taxpayers in Australian currency and section 255 notices to Talison requiring that it withhold and pay the assessable sums to the Commissioner. The Full Federal Court determined that the fact a controller (such as Talison) retains money in foreign currency does not affect the operation of section 255. The controller simply has to retain so much of the foreign currency that is sufficient to pay the tax debt in Australian dollars. 2.5 Task Technology Pty Ltd v Commissioner of Taxation In Task Technology Pty Ltd v Commissioner of Taxation, 5 the Federal Court held that annual licensing payments made by an Australian distributor (the taxpayer) to a Canadian software supplier were 2 (2013) 138 ALD 339. 3 (2012) 208 FCR 115. 4 (2013) 215 FCR 1. 5 [2014] FCA 38. 11059678/11 page 5
royalties under article 12 of the Australian-Canadian double tax agreement (Canadian DTA) and were therefore subject to withholding tax. The taxpayer contended that the royalty payments were excluded by Article 12(7) of the Canadian DTA as they only gave it the right to use the Canadian company s software, not the right to modify the source code. The Court found that the payments were not excluded by Article 12(7) from the definition of royalties in the Canadian DTA because they were made not for the mere use or effective operation of the software, but rather for the commercial exploitation of that software through the taxpayer s right to copy the software for sale to end users and to use the copyright for developing its own templates. The taxpayer has appealed to the Full Federal Court. 3 Future developments 3.1 Tightening of thin cap rules On 6 November 2013, the Government announced that it would tighten the existing thin capitalisation rules. Draft legislation was released on 8 May 2014, which proposes the following changes: tightening the debt limit settings in the thin capitalisation regime from a 3:1 to a 1.5:1 debt to equity ratio; increasing the de minimis threshold from $250,000 to $2 million to minimise compliance costs for small businesses; introducing a test for inbound investors to allow gearing of Australian operations up to the level of gearing of the worldwide group; and reforming the exemption for foreign non-portfolio dividends to address integrity issues. Comments on the draft legislation are due by 6 June 2014. 3.2 Project DO IT On 27 March 2014, the Commissioner announced the Project DO IT: disclose offshore income today initiative ahead of a global crackdown on the use of international tax havens. This is a last chance opportunity for those who have not declared their overseas assets and income to come back into the system before 19 December 2014 and avoid steep penalties or criminal prosecution for tax avoidance. 3.3 Investment Manager Regime A further exposure draft for the third and final element of the Investment Manager Regime (IMR) designed to facilitate Australia s role as an investment management hub was released on 31 January 2014 and submissions closed on 14 February 2014. The exposure draft built on industry consultation and submissions received in response to previous drafts. This draft has been significantly rewritten in certain sections. 3.4 2014-15 Budget implementation On 13 May 2014, the Treasurer announced the Coalition government s first budget since it came to power in September 2013. The extensive revenue and welfare savings measures, designed to restore the Budget to surplus in the medium term, have been largely unpopular with the electorate (see http://bit.ly/1tgnnmv). It includes a cut to the company tax rate by 1.5% to 28.5% by 1 July 2015, offset by an additional levy of 1.5% (to fund a paid parental leave scheme) for companies with taxable income exceeding $5 million. 11059678/11 page 6