17 September 2015 EY Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: http://www.ey.com/gl/en/ Services/Tax/International- Tax/Tax-alert-library#date Australian multinational antiavoidance law, country-bycountry reporting and increased penalties Wide-ranging impact requires action by multinationals On 16 September 2015, the Australian Treasurer introduced a Bill to implement the previously announced: Multinational anti-avoidance law (MAAL) to apply to foreign multinationals generating certain profits earned from Australia without an Australian permanent establishment Country-by-country (CbC) reporting to the Australian Taxation Office (ATO) Increased penalties for certain large company transactions The MAAL is to apply in respect of tax benefits arising on or after 1 January 2016. The Bill amends the Part IVA anti-avoidance law, to target multinationals that implement arrangements to avoid having a taxable presence in Australia. The Treasurer s Second Reading Speech states that the Bill further strengthens the draft legislation that was announced in the 2015 budget by removing the condition for multinationals to operate in a no or low tax jurisdiction All significant global entities with revenues over AU$1 billion who book their revenue offshore will need to consider these rules and may need to review their structures. With over 1,000 multinational entities operating in Australia with revenues greater than AU$1 billion, this means these rules will have far reaching effect and ensure multinationals do not inappropriately slip through Australia s tax net. While the Explanatory Memorandum (EM) states the MAAL is to apply to about 30 foreign multinationals and about 100 need to review their positions, the Treasurer s speech confirms concerns that the rules are broader in scope than previously announced.
It is disappointing that the MAAL has been significantly broadened in scope with potential application to arrangements involving high tax jurisdictions, as well as being based on a subjective and low threshold principal purpose test. Further, insufficient guidance is provided to allow a proper risk determination by multinational groups that will need to publicly report on uncertain foreign tax positions for Q1 in 2016. In addition, the Bill implements additional CbC reporting requirements arising from the global Organisation for Economic Co-operation and Development s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, including local file, master file and CbC reporting, with application to income years commencing on or after 1 January 2016. The Bill also doubles tax penalties for larger companies in various situations, with application to income years commencing on or after 1 July 2015. MAAL with potential impact where foreign groups generate Australian revenues with no Australian permanent establishments The new rules are significantly broadened from the exposure draft (ED) released in May. It s disappointing that Australia has introduced the rules ahead of the planned 5 October 2015 release of the OECD total package of recommendations to counter BEPS. Schemes The new rules will apply to a scheme, in connection with which: A foreign entity supplies goods or services to its Australian customers Activities are undertaken in Australia directly in connection with the supply Some or all of those direct activities are undertaken by an associate or commercially dependent entity The foreign entity derives ordinary or statutory income from the supply Some or all of that income is not attributable to an Australian permanent establishment of the foreign entity The foreign entity is a significant global entity for the year of income (i.e., it is a global parent entity or a member of a consolidated accounting group that has annual global income exceeding AU$1 billion in the year (based on accounting principles)) and One of the principal purposes of the scheme is to obtain a tax benefit or both to obtain a tax benefit and reduce a tax liability under a foreign law. Purpose The new rules apply where it would be concluded that one or more of the relevant persons entered into the scheme for a principal purpose (which may be only one of the principal purposes) of: Obtaining a (Australian) tax benefit or Obtaining both a (Australian) tax benefit and a reduction (including a deferral) to one or more other tax liabilities arising under foreign law. The Government has retained the principal purpose threshold test for the MAAL, which represents an extension of the regular Part IVA provisions which are limited to schemes that have the sole or dominant purpose of obtaining an Australian tax benefit. The principal purpose rules are stated to be consistent with the language of the OECD 2014 report to counter obtaining tax treaty benefits in inappropriate circumstances. The new measures do not limit the application of the existing Part IVA provisions. Low tax foreign jurisdictions no longer necessary The Bill, unlike the ED is not limited to a low tax jurisdiction with a carve-out for substantial operations in that country. Instead, the Commissioner is to have regard, in its consideration of principal purpose, to the extent to which the activities that contribute to bringing about the contract for the supply are performed, and are able to be performed by relevant companies. Examples in the EM cover: A significant operation of a foreign company in a low tax jurisdiction, with a conclusion that there will be no relevant tax avoidance purpose 2
An operation of a foreign company in a low tax jurisdiction, with royalties to another entity in a low tax jurisdiction, with no substantial activities in either, with a suggestion that there will be a relevant tax avoidance purpose The impact of this rule is not clear in a group with a complex supply chain that does not fit easily into the examples. It is important to consider that the removal of the low tax foreign jurisdiction qualification could result in the imposition of tax administrative penalties in circumstances where a double tax treaty limits Australia s taxing rights where the income is otherwise returned in a high tax jurisdiction such as the United States. In such a case, the application of the MAAL could be seen to be dependent solely on the principal purpose test and not on treaty provisions. Tax benefits in Australia or other countries The tax benefit for the purpose of the MAAL is broadly the Australian tax which would have been attributable to an Australian permanent establishment. Tax benefits encompass both income taxes and other Australian tax obligations such as royalty and interest withholding tax. The concept also includes reducing, for one or more foreign taxpayers, their liabilities to tax under a foreign law, in connection with that scheme. This also includes a deferral of tax liability unless there are reasonable commercial grounds for the deferral. The phrase reasonable commercial grounds is not explained. Application The new rules will apply on or after 1 January 2016 in connection with a scheme, whether or not the scheme was entered into, or was commenced to be carried out, before that day. This means that entities have until 1 January 2016 to review their arrangements and determine whether any restructuring is required. Further, the measure does not apply in relation to tax benefits that a taxpayer derives before 1 January 2016. The Commissioner can issue an assessment to cancel a relevant tax benefit and impose penalties on significant global entities of up to 100% of the increased tax assessment (or 120% where aggravating factors apply, such as obstructing information from the Commissioner). Many unresolved issues require ATO clarification, and financial reporting impact for foreign multinationals There are numerous open questions including how the deemed profit of the permanent establishment will be calculated in these circumstances. Potentially it should be calculated having regard to the assets, functions and risks that are deployed in Australia. Combined with the application of arm s length principles under the double tax treaty or Australian tax law, this may represent a relatively modest component of the overall value chain. EY participated in highlighting to the ATO and Treasury that the guidance needed to be resolved speedily, given that foreign multinationals might have financial reporting requirements in relation to tax risks generated by the MAAL, pending resolution of all the risk issues. The ATO and Treasury had an initial meeting in September but noted that ATO guidance will not be issued in final form until after the law is passed by Parliament. The ATO guidance, once issued, does not represent the law and it is unclear whether the guidance will provide sufficient certainty for multinationals with Q1, 2016 reporting requirements. Next steps for foreign multinationals All foreign enterprises with global turnover over AU$1 billion making direct supplies to Australian customers (which may include supplies of services and licensing revenues such as royalty arrangements, but excludes a supply of an equity or debt interest) and having any form of dependent or associate representative presence in Australia will need to review their structure and how their business model is applied in practice. The Treasurer s speech identifies that over 1,000 groups might be affected. The changes create tax risk that could require a financial statement disclosure if not properly addressed. 3
Direct cross-border sales to Australian customers without any Australian presence or through an independent broker or agent should not be subject to these changes, provided the broker/ agent s revenue from one foreign supplier does not make them commercially dependent for these purposes. Australian buy/sell entities or limited risk distributors should not be caught by the rules but taxpayers should review their model to ensure that there are not also direct cross-border sales that could taint the business model. Similarly commission agent structures may be sustainable: however it is likely that an Advance Pricing Arrangement may be necessary to provide a level of assurance around tax risk. For foreign enterprises which form the view that a marketing and sales operation needs to convert to a buy/sell, limited risk distributorship or some other form of commission agent structure: This will involve significant change management and as the rules are proposed to take effect from 1 January 2016 the need for change should be assessed urgently Planning for any restructure may require early engagement with the ATO to resolve tax risks Transfer pricing documentation and CbC reporting The Bill implements additional transfer pricing documentation requirements and CbC reporting into Australian domestic law, with application to income years commencing on or after 1 January 2016. There are some changes and further clarifications compared to the earlier draft law but the approach continues of not specifying the compliance obligations at length in the law, instead leaving the implementation to hinge on the Commissioner s administration of the law. The Commissioner will provide in due course more comprehensive guidance around how exemption powers will be applied. Significant global entities as defined with an Australian presence will need to provide the following three statements to the Commissioner unless specifically exempted: A CbC report containing information on the location of the economic activity undertaken by the multinational group (includes revenue, headcount, main business activities, taxable income and tax paid in each tax jurisdiction globally) A master file, which provides a high-level description of the multinational group s business operations A local file, which describes the Australian entity s operations and cross border related party dealings The legislation clarifies that the form of those statements will correspond to Annexes I to III to Chapter V of the OECD Transfer Pricing Guidance to be published on 5 October 2015 in the final OECD Report on Action Item 13. The statements will be required to be given to the Commissioner within 12 months after the end of the period to which they relate unless: The entity did not exceed the AU$1 billion annual global revenue limit at any point in the year before the period to which the statement relates. Groups breaching the threshold for the first time are now given an additional year to get ready for reporting or The Commissioner has by written notice exempted an entity from giving statements or statements of a particular kind. A particular class of entity may be exempted by the Commissioner by legislative instrument. The EM states that the Commissioner may choose to take the following factors into account when making a decision to provide an exemption to a single entity or class of entities: The risk profile of the local entity, including for example the amount of its overseas dealings The compliance burden on the entity Whether the Commissioner will receive the relevant statements by alternative means For example, a local entity may only be required to provide the master file and local file to the Commissioner, if its global parent 4
entity has made a CbC report available to a tax authority in a jurisdiction with which Australia has an informationsharing arrangement in place and the ATO will receive the CbC from the other tax authority. Similarly, a local entity may not need to provide the master file if another member of its multinational group that is an Australian resident has provided the master file to the Commissioner. Late lodgement, or lodgement of these statements not in the approved form, may trigger administrative penalties. However, regardless of whether an entity fails to provide a statement on time, or in the approved form, it would still be eligible to have a reasonably arguable position (RAP) in relation to a transfer pricing matter if it meets the transfer pricing documentation requirements (in section 284-255 of Schedule 1 to the Tax Administration Act 1953). Entities must continue to lodge an International Dealings Schedule in their income tax returns and maintain specific transfer pricing documentation to maintain a RAP transfer pricing position. The doubling of scheme penalties for significant global entities without a RAP significantly increases the relative importance of having transfer pricing documentation. Doubling of tax avoidance scheme penalties for significant global entities The amount of the penalty imposed for entering into any tax avoidance or profit shifting scheme is doubled for significant global entities that do not have a RAP. Tax avoidance schemes include profit-shifting schemes where the taxpayer has a sole or dominant purpose of obtaining a transfer pricing benefit from the scheme. The increased penalties do not apply where the taxpayer has a RAP. Penalties are expressed as a percentage of the relevant scheme shortfall amount. These changes have significant impact on tax compliance strategies for larger affected companies. The EM summarizes the new penalties which apply to scheme benefits that an entity gets in relation to an income year commencing on or after 1 July 2015 (regardless of when the scheme was entered into or carried out). Base penalty (%) If aggravating factors (e.g., obstruction) apply (%) Voluntary Disclosure during examination (%) Voluntary Disclosure after examination (%) Tax avoidance scheme [and penalty where there is a RAP] 100 [25] 120 [30] 80 [20] 20 [5] Profit-shifting schemes [RAP] 50 [10] 60 [12] 40 [8] 10 [2] 5
For additional information with respect to this Alert, please contact the following: Ernst & Young (Australia), International Tax Services Daryn Moore, Sydney +61 2 9248 5538 daryn.moore@au.ey.com Mathew Chamberlain, Perth +61 8 9429 2368 mathew.chamberlain@au.ey.com Peter Janetzki, Melbourne +61 3 8650 7525 peter.janetzki@au.ey.com Michael Hennessey, Brisbane +61 7 3243 3691 michael.hennessey@au.ey.com Ernst & Young (Australia), Transfer Pricing Paul Balkus, Sydney +61 2 9248 4952 paul.balkus@au.ey.com Jesper Solgaard, Sydney +61 2 8295 6440 jesper.solgaard@au.ey.com Keir Cornish, Melbourne +61 3 9288 8051 keir.cornish@au.ey.com Julian Hine, Melbourne +61 3 9655 2923 julian.hine@au.ey.com Ernst & Young (Australia), Tax Controversy Glenn Williams, Sydney +61 2 9248 4920 glenn.williams@au.ey.com Sue Williamson, Melbourne +61 3 9288 8917 sue.williamson@au.ey.com Mark Mathews, Brisbane +61 7 3011 3475 mark.mathews@au.ey.com Craig Jackson, Sydney +61 2 9248 4905 craig.w.jackson@au.ey.com Martin Caplice, Perth +61 8 9429 2246 martin.caplice@au.ey.com Ernst & Young (Australia), Business Tax Services Andrew Lapa, Sydney +61 2 9248 4128 andrew.lapa@au.ey.com Basil Mistilis, Perth +61 8 9429 2258 basil.mistilis@au.ey.com Janet Finlay, Adelaide +61 7 8417 1717 janet.finlay@au.ey.com Andrew van Dinter, Melbourne +61 3 8650 7589 andrew.van.dinter@au.ey.com Michael Hennessey, Brisbane +61 7 3243 3691 michael.hennessey@au.ey.com Todd Wills, Canberra +61 2 6267 3876 todd.wills@au.ey.com Ernst & Young LLP, Australian Tax Desk, New York Andrew Nelson +1 212 773 5280 andrew.nelson@ey.com 6
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2015 EYGM Limited. All Rights Reserved. EYG No. CM5770 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com