The OECD released a 15 point action plan in 2013 aimed at combatting multinational tax avoidance. As an OECD member Australia has progressively implemented measures to address most of the 15 action points. Below is a summary of just four of the most commonly applied measures. They are relevant for any Australian business involved in cross-border activities.
Transfer Pricing – Actions 8, 9 & 10
Australia has for many years had transfer rules in place. This allows the ATO to make adjustments where it is not satisfied that the consideration paid for any cross-border related party transactions reflects an appropriate arm’s length amount, taking into account all of the relevant terms and conditions of the transaction and other related factors.
The onus is on Australian taxpayers to hold appropriate transfer pricing documentation in the required form, being documentation that demonstrates that pricing is equivalent to the outcomes that would arise in arm’s length dealings, and there are substantial reporting requirements as part of the International Dealings Schedule (IDS) that is lodged with the entity’s annual tax return.
Consistent with the approach taken by the OECD, Australia’s transfer pricing rules have been expanded and the requirements and associated penalties strengthened in recent years. As a result, the current Division 815 complies with OECD recommendations under actions 8, 9 & 10.
Country-By-Country (CbC) Reporting – Action 13
The CbC reporting rules, which Australia has adopted in line with OECD recommendations, are among several additional requirements that apply to Significant Global Entities (SGE’s), which in Australia are defined as those multinational groups with aggregated annual global revenue exceeding $AU1 billion, and apply to income years starting on or after 1 January 2016.
Under CbC there are three reports that must be lodged within 12 months of each year end:
1. CbC Report
Discloses all transactions between each member of the global group, the profits reported in each group and the total tax paid by each entity. The report is usually prepared and lodged by the head parent entity with its tax authority, and this information will in turn be shared with the ATO as appropriate. If the head parent is in a country that has not yet implemented CbC reporting, it is possible to apply to the ATO for an exemption from this requirement.
2. Master File
The Master File gives a high-level view of the group’s global business operations, including an outline of its organisation structure and use of intangibles and intercompany financial activities. As with the CbC Report this is usually prepared and lodged by the parent with its tax authority, may be shared with the ATO, and the same exemption rules may apply.
3. Local File
The Local File provides information about a local entity’s management structure and business strategy, specific cross-border related party transactional data. It includes details of:
- the way in which transfer pricing decisions have been made; and
- financial information, including the local entity’s annual financial accounts.
Regardless of whether the Australian entity is exempt from lodging a CbC report and Master File, it is still required to lodge the Local File with the ATO.
While the Local File follows the OECD’s recommendations, there are changes that have been made to the format to satisfy the ATO’s specific requirements. The Local File is in a similar format to the IDS that is attached the tax return, and replicates much of the information that would already be contained in the Australian transfer pricing documentation.
It is still important to be aware, however, that all of the CbC reporting requirements are in addition to, and not a substitute for, the preparation of transfer pricing documentation and the annual lodgement of an IDS.
Neutralising the effects of Hybrid Mismatches – Action 2
The Australian Government has recently introduced into Parliament legislation to implement the OECD BEPS Action Plan Item 2 ‘Neutralising the effects of hybrid mismatches’, which may come into effect from as early as October 2018. These rules are aimed at preventing the use of financial arrangements that exploit the differences in the tax treatment of an equity or debt instrument under the laws of two or more tax jurisdictions, giving multinationals an unfair competitive advantage by avoiding income tax or obtaining double tax benefits.
The practical implication of these rules is that Australian taxpayers that belong to a multinational group may not be able to claim a tax deduction for interest paid to an overseas related party, unless the interest is declared as income in the lender’s tax jurisdiction.
Multinational Anti-Avoidance Legislation (MAAL) – Action 7
As recommended by the OECD, Australia introduced specially targeted anti-avoidance legislation effective 1 January 2016. The MAAL can be applied to transactions by SGE’s where the ATO believes that they are engaging in global profit-shifting such as the provision of services in the Australian market without attributing the appropriate level of profits to an Australian permanent establishment (PE), i.e. Australia is missing out on its fair share of tax on these profits.
MAAL can operate as an extension of the general anti-avoidance rules in Part IVA where:
- a foreign entity (being an SGE) makes supplies to customers in Australia;
- 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; and
- the foreign entity derives income from those supplies, some or all of which, is not attributable to a permanent establishment in Australia of the foreign entity.
These points shared are only four of the most commonly applied measures. Further details of these measures, and other issues relevant to corporate taxpayers transacting internationally, can be found in the HLB International publication “Doing Business in Australia”.