Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015

Bills Digest no. 45 2015–16

PDF version  [898KB]

WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Jola Olender and Les Nielson
Economics Section
10 November 2015

 

Contents

The Bills Digest at a glance
Structure and purpose of the Bill
Background
Policy position of non-government parties and independents
Committee consideration
Financial implications
Schedule 1 – significant global entity
Schedule 2 – anti-avoidance measures
Key issues
Key provisions
Schedule 3 – increased penalties
Schedule 4 – Country-by-Country reporting
Concluding comments

 

Date introduced:  16 September 2015
House:  House of Representatives
Portfolio:  Treasury
Commencement:  The day of Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

The Bills Digest at a glance

The Bill amends the Income Tax Assessment Act 1997, the Taxation Administration Act 1953 and the Income Tax Assessment Act 1936 to strengthen the tax avoidance law for certain multinational entities.

The Bill introduces new concepts including ‘significant global entity’, being an entity with annual global income exceeding $A1 billion (Schedule 1). The anti-avoidance measures in other schedules to the Bill affect ‘significant global entities’.

The Bill introduces anti-avoidance measures to deal with ‘significant global entities’ that put in place schemes to avoid having a taxable presence in Australia (Schedule 2).

The Bill doubles the existing maximum penalties for ‘significant global entities’ that avoid taxation in Australia (Schedule 3), including under the changes made by Schedule 2. Penalties are not doubled for those entities that adopt a tax position that is ‘reasonably arguable’.

The Bill requires ‘significant global entities’ to provide transfer pricing documentation including financial reports on a country-by-country basis. This is in line with international country-by-country reporting recommendations recently made by the OECD and G20.

Abbreviations used in this Bills Digest

Table 1 Abbreviations

ITAA 1997 Income Tax Assessment Act 1997
ITAA 1936 Income Tax Assessment Act 1936
TAA 1953 Taxation Administration Act 1953
OECD Organisation for Economic Co-operation and Development
G20 Group of 20

Structure and purpose of the Bill

The Bill has four Schedules:

Schedule 1 amends the ITAA 1997 to introduce the concepts of a ‘significant global entity’, ‘global parent entity’, ‘annual global income’ and ‘global financial statements’. These concepts are relevant in the substantive amendments made by the other schedules.

A ‘significant global entity’ is either a ‘global parent entity’ with an ‘annual global income’ of $1 billion or more; or an entity that is part of a group where there is a global parent entity with an annual global income of $1 billion or more; or any entity determined to be a significant global entity by the Commissioner of Taxation.

A ‘global parent entity’ is an entity that is not controlled by another entity.

‘Annual global income’ is the total annual income, translated into Australian currency, of all members of a group of entities, or where there is not a group of entities, the total annual income of the entity.

The TAA 1953 is amended to limit the ability of an affected taxpayer to make a taxation objection where the Commissioner of Taxation has made a determination that an entity is a significant global entity.

Schedule 2 amends the ITAA 1936 and the TAA 1953 to expand the scope of the anti-avoidance provisions in Part IVA of the ITAA 1936. The new anti- avoidance provisions deal with ‘significant global entities’ that enter into schemes to limit their taxable presence in Australia for the principal purpose or a principal purpose of obtaining a tax benefit.

Schedule 3 amends the TAA 1953 to double the maximum penalty faced by ‘significant global entities’ that enter tax avoidance or profit shifting schemes under the anti-avoidance provisions in Part IVA of the ITAA 1936. However, double penalties will not apply where the arrangements adopted by the taxpayer can be reasonably argued to be a non-avoidance arrangement.

Schedule 4 amends the ITAA 1997 to require ‘significant global entities’ to provide certain information about their financial arrangements, including in other countries. These entities are required to provide to the Commissioner of Taxation three statements that are reflective of documents recommended by the OECD and the G20.

Background

Media attention

This Bill aims to address multinational corporate tax avoidance, an issue which has attracted considerable attention in recent years, particularly for Google and Apple.[1]

A 2014 report of the Tax Justice Network alleged that the 200 largest publically listed entities in Australia had an effective tax rate of 23 per cent over the last decade.[2] Further, the report alleged that 29 per cent of these entities had an effective tax rate of 10 per cent or less, and 14 per cent had an effective tax rate of 0 per cent.[3]

Unilateral measures implemented in the United Kingdom, known as the ‘diverted profits tax’—often referred to as the ‘Google tax’—have led some media outlets to ask whether Australia should implement similar measures.[4]

There has been media criticism that the measures in the first three schedules of the Bill are pre-empting, and thereby undermining, OECD efforts to reach international agreement on multinational tax avoidance.[5] The OECD has been working since 2013 to develop domestic and international instruments that aim to address corporate tax avoidance as part of its Base Erosion and Profit Shifting (BEPS) package.[6] Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD, says:

These measures were not helpful ... and may not happen to [the] extent that they will be superseded by BEPS measures.

BEPS is more consistent with what's been agreed internationally, than what Australia currently has.

What do you do if you have existing domestic legislation is a matter for your government, but you might find that such domestic measures might not be useful any more.[7]

The Government maintains that the measures proposed in the Bill are entirely consistent with the OECD’s BEPS package.[8]

US Government Official’s reaction

Robert Stack, Deputy Assistant Secretary (International Tax Affairs) of the US Treasury, is quoted in The Sydney Morning Herald as stating that unilateral measures by the UK and Australia are heading ‘in a disturbing direction’.[9] The report states:

Stack says 2015 will be a year in which the OECD will engage in “horse-trading”. Or more unilateral moves.

Stack has condemned Britain's Google tax, and Australia's multinational tax avoidance legislation, saying they had “shone a spotlight on the degree to which political pressure can trump policy”.

...

As Stack said: If “two of our closest friends are going their own way”, then “how soon until others follow”?[10]

Consultation paper, issues paper and scoping paper

In November 2011, the Treasury released a consultation paper, Income tax: cross border profit allocation - Review of transfer pricing rules.[11] The Treasury notes:

This Consultation Paper outlines the history of the transfer pricing rules, as well as a number of suggested areas for change. These include the introduction of an arm's length standard that reflects the international norms, interpretation of new rules in a manner that best secures consistency with OECD guidance and application of the new rules on a self-assessment basis.

The Consultation Paper further discusses other related issues including methodologies for determining an arm's length outcome (as well as criteria for their selection), comparability standards, and documentation and penalty provisions.[12]

In December 2012, the Assistant Treasurer announced a specialist reference group to examine tax minimisation by multinational entities.[13] The Treasury released an issues paper for public consultation in May 2013 which sought to outline the challenges facing the international tax system regarding tax avoidance and implications for Australia.[14]

In July 2013, the Treasury released a scoping paper which assessed the risks to the sustainability of Australia’s corporate tax base in light of the issues paper.[15] The scoping paper concluded that ‘there are unlikely to be substantial additional policy reforms that Australia could enact unilaterally in the short term to address base erosion and profit shifting’.[16] The scoping paper made four recommendations in relation to:

  • public release of tax statistics
  • review of bilateral tax treaties
  • communication between tax authorities and
  • endorsement of the OECD and Group of Twenty (G20) Base Erosion and Profit Shifting (BEPS) Action Plan.[17]

2012–2013 measures

The Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No. 1) 2012 introduced the first stage of reform of the cross-border transfer pricing rules.[18]

The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 introduced changes to the transfer pricing rules and changes to the Part IVA anti-avoidance regime.[19] The anti-avoidance regime was amended to remedy problems identified by judicial interpretation.[20] This Act also brought the transfer pricing tax regime into line with international standard tax administration practice.[21]

OECD and G20 measures

The Australian Government has been involved in the G20 forum which has been seeking to address multinational corporate tax avoidance. At the request of the G20, the OECD published its Action Plan on Base Erosion and Profit Shifting (Action Plan) in July 2013.[22] The Action Plan concluded that there was a serious risk of erosion of corporate tax bases internationally, noting that ‘current international tax standards may not have kept pace with changes in global business practices’ and ‘the tax practices of some multinational companies’.[23]

The Action Plan includes 15 action items and sets deadlines to develop guidance on each, which the Labor Government agreed to in 2013.[24] Of these actions, seven had deliverables that were due for completion in September 2014 with the remaining deliverables to be completed by December 2015.[25] The remaining BEPS measures were released on 5 October 2015.[26]

At the G20 Summit in Brisbane in November 2014, Australia committed to the G20 and OECD’s BEPS Action Plan which is designed to ‘modernise international tax rules’ and address multinational corporate tax evasion.[27] In early September 2015, the Treasurer met with the G20 finance ministers, recommitting to working with the other G20 nations to reduce multinational tax avoidance and profit shifting and notifying the G20 of the proposed measures in the Bill.[28]

Senate Inquiry

On 2 October 2014, the Senate referred the issue of corporate tax avoidance for inquiry by the Senate Economics References Committee.[29] The Senate granted an extension to the Committee which was due to report by 13 August 2015.[30] The Committee’s final report is due by 30 November 2015.[31] The Committee released an interim report, You cannot tax what you cannot see, which was released on 18 August 2015. It made 17 recommendations over four areas:[32]

  • potential areas of unilateral action to combat corporate tax avoidance
  • multilateral efforts to address tax avoidance and aggressive minimisation
  • evidence of tax avoidance and aggressive minimisation and
  • capacity of Australian Government agencies to collect corporate taxes.[33]

2015–16 Budget

The Bill covers three measures that were announced by the Government in the 2015–16 Budget as part of the ‘Combating Multinational Tax Avoidance’ package:

  • an anti-avoidance measure that aims to ensure that multinationals entering into arrangements for a principal purpose of avoiding having a taxable presence in Australia are still taxed in Australia[34]
  • transfer pricing documentation standards which were developed by the OECD. Under these standards the Australian Taxation Office (ATO) will receive information from multinationals about their global activities, including country-by-country reporting of income and tax paid in every country of operation[35] and
  • doubling the maximum penalty for multinationals that enter into schemes for tax avoidance and profit shifting.[36]

Each of the above measures will apply to entities with global revenue over $1 billion.[37] Other elements in the 2015–16 Budget relating to multinational tax avoidance included:

  • developing a public tax transparency code to complement country-by-country reporting, which is being developed by the Board of Taxation
  • implementing treaty abuse rules developed by the OECD which aim to address the exploitation of tax treaty rules by multinationals to avoid taxation
  • anti-hybrids rules developed by the OECD to address the issue of multinationals claiming a tax deduction in one country but not paying tax in another because of different tax rules
  • exchanging information with other countries about harmful tax practices and preferential tax deals[38] and
  • a GST on digital products and services imported by Australian consumers to ‘help level the playing field between domestic and international suppliers and ensure that all suppliers pay a fair share of tax.’[39]

Exposure drafts

The Treasury released exposure drafts of the legislation on 12 May 2015 and 6 August 2015.[40] Twenty submissions were received for the multinational anti-avoidance exposure draft and fifteen submissions were received for both the country-by-country reporting and tax avoidance penalties exposure drafts.[41] The Bill differs considerably from the exposure drafts.

Policy position of non-government parties and independents

Australian Labor Party

In his second reading speech, the Shadow Assistant Treasurer Dr Andrew Leigh stated that ‘Labor’s position is to support the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’ although he suggested that the measures did not go far enough.[42] Kelvin Thomson stated that multinational tax avoidance is a global issue that will require further measures such as tackling debt shifting, closing tax loopholes and further resourcing the ATO to fight tax evasion.[43] Tony Zappia said that addressing multinational tax avoidance ‘is not a case of closing the loopholes in one particular country and that solving the problem; we will only solve the problem if we are able to do it across the world.’[44] A common concern raised in Labor’s second reading speeches is that better transparency measures are needed to improve scrutiny of tax paid by multinationals. In response to the introduction of this Bill the Shadow Assistant Treasurer stated that Labor has put together a plan that:

...is inspired by work done by the OECD; it is costed by the Parliamentary Budget Office; and it raises $7.2 billion over the course of the next decade. Crucially, it deals with the issue of debt deductions.[45]

The Shadow Assistant Treasurer stated that Labor’s plan addressed different issues on multinational taxation to the Bill.[46] In March 2015, the Labor Party announced its plan to ‘shut down loopholes which allow big multinational companies to send profits overseas, ensuring they pay their fair share of tax, just like everyone else has to’.[47] The package included:

  • changes to the arrangements for how multinational companies claim tax deductions
  • greater compliance work by the ATO to track down and tackle corporate tax avoidance
  • cracking down on multinational companies using hybrid structures to reduce tax and
  • improved transparency and data matching[48]

A second reading amendment was moved by Dr Andrew Leigh for the Government to adopt Labor’s multinational tax plan in addition to the Bill.[49] This proposal was negatived.[50]

In relation to country-by-country reporting the Labor Party says:

Labor will support efforts to establish an international agreement to require tax authorities to share information about individuals and corporations suspect of tax evasion or money laundering. Labor supports the growing global trend of requiring oil, gas and extractive industry companies to report publicly on their revenue, profits as well as taxes and royalties paid on a country-by-country basis.[51]

Australian Greens

Adam Bandt considers that the Bill does not go far enough. He says that the public scrutiny of multinationals through transparency measures should be the Government’s priority, as transparency changes ‘are unilateral measures that Australia can take straight away without disrupting... multilateral discussions, while also showing that Australia is serious about confronting this global blight on governments.’[52]

The Greens advocate for action on tax avoidance, stating ‘we must ensure we do everything we can domestically to ensure everyone–big companies included–pay their share of tax’.[53] One of the proposals put forward by the Greens was:

[r]equiring country-by-country and project-by-project reporting of payments.... Consolidated annual reports would need to include revenues, profits, staffing levels and taxes paid in each country in which they operate or have subsidiaries. These reports should be made public for the benefit of investors, those that need to do business with multinational enterprises and to ensure the confidence of the general public that profits of multinational enterprises are being taxed where the economic activities deriving the profits are performed and where value is created.[54]

Committee consideration

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills commented on the Bill on 14 October 2015.[55] The scrutiny issue outlined was that of the retrospective commencement of Schedule 3.[56] The Senate Standing Committee notes that the justification for retrospective commencement is not addressed by the Explanatory Memorandum to the Bill beyond noting that it was announced in the Budget.[57]

Senate Economics Legislation Committee

The Bill was referred to the Senate Economics Legislation Committee on 16 September 2015.[58] The Committee is due to report on 9 November 2015.[59] At the time of writing, 16 submissions had been published.

The major themes of these submissions are:

  • some submissions considered that the Bill is a step in the right direction, but that more needs to be done to ensure that the correct amount of tax is collected from multinational entities operating in Australia[60]
  • the majority of submissions noted that the most effective action in this area would be for all affected countries to act at the same time in accordance with the OECD’s recommendations arising from the BEPS Project. Consequently, some of the measures in this Bill were seen as unilateral action by Australia in advance of OECD recommendations. That said, all such submissions supported the country-by-country reporting provisions[61]
  • all submissions from professional accounting and industry bodies recommended substantial technical changes to the Bill’s provisions and
  • one submission considered that the Bill ‘merely tinkers at the edge of the law by proposing insignificant changes to an inherently obtuse and uncertain anti-avoidance provision’.[62]

Financial implications

The Explanatory Memorandum says that the financial impact of the measures are either nil or unquantifiable over the four years to 2018-19 (Table 2).

Table 2 Financial Impact of (i) the significant global entity definitions (ii) multinational anti-avoidance measures (iii) increased penalties and (iv) Country-by-Country reporting 2014-15 to 2018-19 ($ million)

 
2014–15
2015–16
2016–17
2017–18
2018–19
Significant global entity
Nil
Nil
Nil
Nil
Nil
Multinational anti-avoidance law
-
*
*
*
*
Stronger penalties
-
-
*
*
*
Transfer pricing documentation
-
-
*
*
*

Source: Explanatory Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, pp. 7–10.

The decision to record no estimate of the financial impact, which is unusual, likely reflects the difficulty of forecasting the effect of these measures rather than that they have nil impact. The Commissioner of Taxation, speaking on the introduction of these measures into parliament, said:

We know there are billions of dollars of sales revenue that are not being booked here in Australia. Now that is the gross element. Because of the nature of their point that they’re not subject to tax here, we don't have a lot of information around their cost structure. So these aren't the typical transfer pricing ones that book sales here and then back out a lot of the profit by the costs of goods. You would have seen some of that in the Senate inquiries, in some of the companies, and some of the industries. So we know there are billions of dollars. That’s gross. So we have to look at what the profit element of that is and have a much better understanding of their true cost of sales, not some inflated cost of sales with a lot of that going through to tax. So we would expect hundreds of millions of dollars’ worth of revenue at least, but it’s billions of dollars of sales. But you have to make sure you understand the difference between the gross sales figure and the profit figure which is subject to tax.[63]

The government is expecting that significant additional revenue will be collected as a result of the proposed changes, but the opaque nature of the sales revenues earned by affected entities makes the expected revenue difficult to calculate. The Prime Minister on 15 October 2015 stated:

In terms of the specific multinational measures, the base erosion and profit shifting measures, the Commissioner of Taxation himself has said that he expects them to raise hundreds of millions of dollars in additional revenue. Time will tell, but we are very comforted by the forecast he has given.[64]

Schedule 1 – significant global entity

Current law

Section 960-50 ITAA 1997 sets out the method of translating a ‘foreign currency’ into Australian currency.[65] Division 960 ITAA 1997 is in Part 6-1, entitled ‘Concepts and Topics’. The TAA 1953, ITAA 1936 and ITAA 1997 currently do not contain any references to a ‘significant global entity’, ‘global parent entity’, ‘annual global income’ or ‘global financial statements’.

History

Context of the Schedule

The concept of ‘significant global entity’ was not discussed prior to the introduction of the Bill. However the reforms were intended to apply to entities with global revenue over $1 billion.[66] The Assistant Treasurer stated on 18 May 2015:

Multinationals with revenue over $1 billion, which covers 90 per cent of all multinationals' revenue in Australia, will be subject to a new stronger anti-avoidance rule. This will capture artificial or contrived arrangements that are designed to avoid a taxable presence in Australia.[67]

Position of major interest groups

The concepts introduced by Schedule 1 of this Bill were not part of the exposure drafts.

Shine Wing Australia, an accountancy group, states that:

Whilst these measures are aimed at multinational groups, a strict reading of the Bill suggests that Australian taxpayers with no overseas operations (but breach the income threshold) will also meet the definition of a significant global entity.

...

Furthermore, the proposed rules will apply to Australian entities with consolidated revenue exceeding AUD$1 billion but have immaterial overseas operations. A de minimis exemption, similar to that contained in the thin capitalisation provisions, is strongly recommended. An exception of this nature will significantly reduce the unnecessary administrative burden for both taxpayers and the ATO.[68]

DLA Piper raised concern as to consistency of application of the Bill:

As meeting the definition of a 'significant global entity' is based on yearly financial reports, the same entity may fall in and out of this definition from year to year. This will mean that in some years the measures contained in the Bill will not apply to that entity, and in other years it will, creating a complex situation for some where different tax laws apply from one year to the next.[69]

Key issues

A number of issues have been raised in relation to the proposed amendments in Schedule 1:

  • the definition of ‘significant global entity’ does not require an entity to have operations in more than one country and as such it may catch wholly Australian entities operating only within Australia if they have an annual income of at least $1 billion.[70] The other side of this concern is that any implied exclusion of wholly Australian entities, operating in Australia, from the proposed measures may be seen as unfairly favouring such entities, at the expense of multinational companies. Such a situation may be seen as providing discriminatory tax treatment
  • there is no distinction between public and private entities. If there were a distinction, this may also raise objections of discriminatory tax treatment
  • the definition of ‘significant global entity’ is broad. Companies that have businesses in Australia quite separate to the rest of the group may be within the definition’s ambit. Also if an Australian supplier is a small part of the global activities of a multinational it would also be subject to the definition.[71] However, the Explanatory Memorandum addresses this by pointing out that, while an Australian business may only be a small part of a multinational enterprise, it is likely to contribute to the profits of that enterprise, even if its activity is unrelated to the group’s activities. It is the existence of such Australian businesses, with little apparent connection to the main activity of their multinational group, being used to unduly reduce the tax payable of the larger entity, which has prompted the proposed changes[72] and
  • as the definition of ‘significant global entity’ is based on financial reports, an entity may fall in or out of the definition from year to year as its income changes, meaning that the proposed provisions may apply one year but not the next. Complicated situations may possibly arise where different laws apply from one year to the next.[73]

Key provisions

Item 3 inserts proposed Subdivision 960-U into Part 6-1 (entitled Concepts and Topics) of the ITAA 1997 to define new terms that are used in the other Schedules of the Bill. The new terms are ‘annual global income’, ‘global financial statements’ ‘global parent entity’ and ‘significant global entity’.

Item 1 of Schedule 1 inserts proposed subsections 960-50(7A)-(7C) into section 960-50 ITAA 1997. The amendment requires that the ‘annual global income’ of a ‘global parent entity’, as shown in ‘global financial statements’ be translated into Australian dollars for the purpose of determining whether an entity is a ‘significant global entity’.

Significant global entity (proposed section 960-555)

There are two limbs to the definition of ‘significant global entity’, as defined in the Bill.

First, a ‘significant global entity’ is a ‘global parent entity’ with ‘annual global income’ for a period (usually a year) of at least $1 billion or that the Commissioner for Taxation has declared to be a ‘global parent entity’ under proposed subsection 960-555(3).

Second, a ‘significant global entity’ is an entity that is a member of a group of entities (determined by being a group consolidated for accounting purpose as a single group) where one of the members is a ‘global parent entity’ with ‘annual global income’ for the period of at least $1 billion or in relation to which the Commissioner has made a determination that it is a ‘global parent entity’ under the above proposed subsection.

A ‘significant global entity’ under this definition does not have to be the head entity of a group. Consequently, an Australian subsidiary of a group can be assessed as being a ‘significant global entity’, despite not being the head office of the group of entities of which it is a part. Nor do the activities of such an Australian subsidiary need to have any continuity with the activities of the rest of the group. It is enough that the Australian subsidiary is part of such a group.

Global parent entity (proposed section 960-560)

The definition of ‘significant global entity’ depends on the definition of a ‘global parent entity’. A ‘global parent entity’ is defined to be an entity that is not controlled by another entity. The assessment of control is to be made under accounting principles or, if accounting principles do not apply, under commercially accepted principles related to accounting.

Accounting principles

Section 955-1 ITAA 1997 specifies that accounting principles are either the accounting standards in the Corporations Act 2001 or ‘authoritative pronouncements of the Australian Accounting Standards Board (AASB) that apply to the preparation of financial statements’. According to the definition of ‘accounting standard’ in section 9 of the Corporations Act 2001, accounting standards refer to either an instrument in force under section 334 of the Corporations Act 2001, or a provision of such an instrument as it so has effect. [74] Neither the Explanatory Memorandum nor the second reading speech specifies which particular AASB standards or instruments would be relevant to defining when an entity is not controlled by another entity.[75]

Commissioner can determine that a ‘global parent entity’ is a ‘significant global entity’ (proposed subsection 960-555(3)

Item 3 of Schedule 1 introduces proposed subsection 960-555(3), which empowers the Commissioner for Taxation to declare an entity to be a ‘significant global entity’.

The conditions for such a determination to be made are that a ‘global financial statement’ for a given period has not been prepared and, on the basis of the available information, it is reasonable for the Commissioner to conclude that if such a statement had been prepared, that entity’s ‘annual global income’ would have been at least $A1 billion.

Under proposed subsection 960-555(4), if an entity is dissatisfied with the Commissioner’s determination under proposed subsection 960-555(3), it may object to it (that is, appeal it).

However, the basis for, and impact of, an objection under proposed subsection 960-555(4) are limited by proposed subsections 960-555(5) and (7).

Proposed subsection 960-555(5) relates to situations where there has been an objection made to a taxation assessment relating to the entity, and that assessment involved the application of proposed section 177DA of the ITAA 1936 (introduced by item 4, Schedule 2). Proposed section 177DA of the ITAA 1936 sets out when a scheme may be considered to have a principal purpose of obtaining a tax benefit. In such circumstances, the entity retains the right to object, under proposed subsection 960-555(4), to the Commissioner’s determination that it is a ‘significant global entity’, but the outcome of that objection has no impact on the taxation assessment or on the outcome of the objection to that assessment.

Annual global income (proposed section 960-565 ITAA 1997)

‘Annual global income’ of an entity is defined as follows:

  • if the entity is a member of a group of entities that are consolidated for accounting purposes as a single group—the total annual income of the group or
  • if the entity is a not member of a group of entities—the total annual income of the entity.

‘Total annual income’ is as shown in the latest ‘global financial statements’ for the entity for the period.

Under proposed subsection 960-50(7A) (Item 1), the amounts must be expressed in Australian dollars.

Global financial statements (proposed section 960-570)

‘Global financial statements’ is defined to be financial statements of a ‘global parent entity’, or that entity and other entities (presumably consolidated together for accounting purposes) that:

  • have been prepared in accordance with both accounting and auditing principles
  • if such principles do not apply—have been prepared in accordance with commercially accepted principles, relating to accounting and auditing, that ensure that these statements give a true and fair view of the financial position and performance of that entity; or that entity and another entity consolidated together for accounting purposes and
  • are for the most recent period ending no later than the end of the relevant period and no earlier than 12 months before the start of the relevant period.

These statements are to be prepared under both the relevant accounting standards (discussed above) and auditing standards. The Explanatory Memorandum notes:

Accounting principles’ and ‘auditing principles’ are linked to definitions of ‘accounting standards’ and ‘auditing standards’ in sections 334 and 336 of the Corporations Act 2001. These definitions refer to standards set by the Australian Accounting Standards Board and the Auditing and Assurance Standards Board.[76]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Schedule’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Schedule is compatible.[77]

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[78]

Schedule 2 – anti-avoidance measures

Schedule 2 adds a new kind of tax avoidance to the general anti-avoidance regime in Part IVA of the ITAA 1936.

Part IVA, in general terms, deals with schemes having the sole or dominant purpose of obtaining a tax benefit.

Schedule 2 targets a particular kind of tax avoidance: schemes entered into by ‘significant global entities’ for the principal purpose of limiting a taxable presence in Australia.

Current law

Currently, Part IVA of the ITAA 1936 contains the general anti-avoidance rules (GAARs) relating to income tax.[79] The Bill proposes to insert a new provision into Part IVA ITAA 1936 and amend some existing provisions.

General anti-avoidance rules have operated for many years in most other common law jurisdictions, including Hong Kong (sections 61 and 61A of the Inland Revenue Ordinance), Canada (section 245 of the Canadian Income Tax Act), New Zealand (sections BG1 and GB1 of the New Zealand Income Tax Act 1994), South Africa (sections 80A to 80L of the Income Tax Act 1962) and Australia, to name a few.[80]

Currently, the anti-avoidance provisions may be applied where:

  • a ‘scheme’ is identified[81]
  • a ‘tax benefit’ in connection with a scheme has been obtained[82]
  • the scheme has one of the effects specified in Part IVA ITAA 1936 and
  • the scheme has been, or was entered into, after 27 May 1981.[83]

The anti-avoidance provisions apply regardless of whether some or all of a scheme was set up inside or outside Australia.[84]

Sole or dominant purpose v principal purpose

The existing general anti-avoidance provisions in section 177D in Part IVA ITAA 1936 deal with schemes entered into for the sole or dominant purpose of obtaining a tax benefit. [85]

The ‘sole or dominant purpose’ test has been a difficult one for the administration of Part IVA ITAA 1936, as the following comments from the Commissioner for Taxation suggest:

We have a lower standard, the existing anti-avoidance laws require the sole or dominant purpose test. Over the years that's been [inaudible] down somewhat by the courts and was a very difficult test for us to meet.[86]

That is, it has been difficult for the Commissioner to prove that an entity has undertaken a scheme, for the ‘sole or dominant purpose’ of obtaining a tax benefit.

The amendments made by this schedule of the Bill apply a different test—the principal purpose test—for ‘significant global entities’ that enter schemes to limit their taxable presence in Australia. That is, the new anti‑avoidance provisions for ‘significant global entities’ apply to schemes where the principal purpose is to obtain a tax benefit. If there is more than one principal purpose, it is sufficient if one of the purposes is to obtain a tax benefit (proposed paragraph 177DA(1)(b)).

Scheme

A scheme is broadly defined to be any agreement, arrangement, understanding, promise or undertaking, whether it was express or implied, or enforceable or intended to be enforceable.[87] Scheme also includes any scheme, plan, proposal, action, course of action or course of conduct.[88]

Tax benefit

There are a number of possible tax benefits (also referred to as tax effects), including:

  • an amount not being included in the assessable income of the taxpayer where that amount would have been included, or might reasonably be expected to have been included without the scheme
  • a deduction being allowable to the taxpayer where the whole or a part of that deduction would not have been allowable without the scheme
  • a capital loss being incurred by the taxpayer where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred without the scheme
  • a foreign income tax offset being allowable to the taxpayer where the whole or a part of that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, without the scheme
  • an exploration credit being issued to the taxpayer where the whole or a part of that exploration credit would not have been issued, or might reasonably be expected not to have been issued, without the scheme and
  • the taxpayer not being liable to pay withholding tax on an amount where the taxpayer either would have, or might reasonably be expected to have, been liable to pay withholding tax without the scheme.[89]

In assessing whether any of these tax benefits occurred in connection with a scheme, a comparison is made with a postulate.[90] When assessing whether a tax benefit would not have occurred without the scheme, the postulate can only comprise events or circumstances which actually happened or existed (except for those that are part of the scheme).[91] When assessing whether it would be reasonable to expect that a tax benefit would not have occurred without the scheme, the postulate must be a reasonable alternative to the scheme.[92]

Types of schemes

For the anti-avoidance measures to apply to a scheme, it must be concluded to have one of the following effects:

  • the scheme was set up for the purpose of obtaining a tax benefit in connection with the scheme and a tax benefit was obtained[93]
  • stripping of a company’s profits[94]
  • creation of franking debit or cancellation of franking credits[95] or
  • cancellation of franking credits in a consolidated group[96]

Determinations by the Commissioner of Taxation

Where a scheme in connection with a tax benefit is concluded to have occurred, the Commissioner of Taxation is able to make a number of determinations.[97] Generally, determinations can be made for:

  • an amount that is to be included in the assessable income of a taxpayer
  • a taxpayer to be subject to an amount of withholding tax
  • an amount not to be included in the assessable income of a taxpayer[98]
  • a deduction of a taxpayer should have been or should have not been allowed[99]
  • a capital loss that should be incurred by a taxpayer
  • all or some of a foreign income tax offset should have been or should have not been allowed[100] or
  • some or all of a franking credit in relation to an exploration credit not be allowed.[101]

History

History of Part IVA ITAA 1936

The predecessor to Part IVA was section 260 of the ITAA 1936, a comparatively short section which provided that ‘every contract, agreement or arrangement was absolutely void as against the Commissioner of Taxation insofar as it had, or purported to have, a certain purpose or effect.’[102] That purpose or effect was one of the following:

(a) altering the incidence of any income tax;

(b) relieving any person from liability to pay any income tax or make any return;

(c) defeating, evading or avoiding any duty or liability imposed on any person by this Act; or

(d) preventing the operation of this Act in any respect.[103]

The provision is thought to have antecedents dating back to 1915, or possibly even 1895.[104] Part IVA replaced section 260 in 1981 by way of the Income Tax Laws Amendment Act (No. 2) 1981.[105] A number of decisions by the High Court of Australia found limits to the operation of section 260, which resulted in the provision being largely ineffective.[106] The introduction of Part IVA was designed to overcome these limitations.[107] The Explanatory Memorandum to the Bill stated that the purpose of Part IVA was to be:

...an effective general measure against those tax avoidance arrangements that... are blatant, artificial or contrived. In other words, the new provisions are designed to apply where, on an objective view of the particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of obtaining a tax deduction or having an amount left out of assessable income.[108]

When first legislated, Part IVA applied where a determination by the Commissioner of Taxation was made under section 177F of the ITAA 1936. There were two express thresholds in making a determination; first, that a ‘tax benefit’ had been or would have been obtained if not for the application of Part IVA itself and second, that the tax benefit was obtained in connection to a ‘scheme’ to which Part IVA applied.[109]

Part IVA, as legislated in 1981, listed two types of tax benefits: deductions allowed because of the scheme, and amounts not included in assessable income because of the scheme.[110] Avoidance of withholding tax was added to the list of tax benefits in 1998,[111] capital losses[112] and foreign tax credits were added to the list in 1999[113] and exploration credits were added in 2015.[114] In 2013, amendments were made to Part IVA to clarify the definition of ‘tax benefit’ in response to issues identified by the courts.[115]

Part IVA ITAA 1936 is designed to counter arrangements that are entered into for the dominant purpose of avoiding tax.[116] There are also specific provisions in Division 815 of the ITAA 1997 that govern multinational intra‑company dealings, such as transfer pricing, thin capitalisation and the arm’s length principle. Legislative reform in 2012–13 aimed to strengthen and clarify the general anti-avoidance rules in ITAA 1936, and to tighten the cross-border transfer pricing regime in the ITAA 1997 to bring it into line with international standards.[117]

Context of the changes made by Schedule 2

On the day before the Budget announcement of these measures, the Treasurer announced that the proposed multinational anti-avoidance provisions were designed to address ‘the activities of 30 identified multinational companies’.[118] The Treasurer noted that the proposed measures were consistent with OECD directions.

The Assistant Treasurer stated on 18 May 2015:

Unlike the existing Part IV(A) (sic) of the Tax Act which only applies to an arrangement where the sole or dominant purpose is the avoidance of Australian tax obligations, the new rule applies to a broader set of circumstances based on a principle (sic) purpose test.[119]

A 2014 OECD report, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances,[120] was developed under action item six of BEPS (preventing treaty abuse) and recommends the use of a ‘principal purpose test’ for assessing whether transactions or arrangements constitute treaty abuse.[121] In particular, the OECD recommended that:

...the benefits of a tax convention should not be available where one of the principal purposes of certain transactions or arrangements is to secure a benefit under a tax treaty and obtaining that benefit in these circumstances would be contrary to the object and purpose of the relevant provisions of the tax convention.[122]

Position of major interest groups

Reactions to exposure draft

The Tax Institute

The Tax Institute was supportive of Australia addressing issues in international tax law but considered that the ‘Exposure Draft seeks to move ahead of the OECD process which has better prospects of effectively addressing deficiencies as it involves multilateral cooperation.’[123] Further, the Tax Institute stated that ‘[t]he proposed measure could garner a negative reaction from other countries jeopardising the likelihood of a consistent approach to these issues globally.’[124] The Tax Institute also raised the following concern:

By deeming a permanent establishment to exist in Australia, the proposed rule sits contrary to our permanent establishment/business profit articles in our treaties, where marketing activities are insufficient to create a taxable presence in Australia. The OECD, through its work on Action 7 of its BEPS Action Plan, have recognised that the definition of permanent establishment in our treaties may be deficient and are working to modernise the definition by September 2015. Further OECD work is also planned to provide additional guidance on how profits should be allocated to those newly defined permanent establishments before the end of 2016.[125]

The Tax Institute considered that the ‘principal purpose’ test in the exposure draft’s proposed subsection 177DA(1) was inconsistent with the ‘sole or dominant purpose’ requirement in Part IVA.[126] It stated that ‘[o]n its face, “principal” would appear to be equally if not more strict than “dominant”’ and considered this to be inconsistent with the Explanatory Memorandum which suggested that the proposed threshold was lower than the existing Part IVA threshold.[127]

Ernst & Young

Ernst & Young (EY) submitted that the proposals in the Exposure Draft should not be enacted as:

it will have a negative impact on foreign investment into Australia by creating uncertainty and the arrangements targeted by the Exposure Draft should be dealt with on a multi-lateral basis in accordance with the outcomes of the OECD Action Plan on Base Erosion and Profit Shifting [BEPS].[128]

EY also submitted that:

The proposed law increases the risk of double taxation and therefore has the capacity to deter foreign investment.

Existing structures should be grand-fathered and not be subject to retrospective law change, alternatively taxpayers with such structures should not be subjected to punitive tax penalties.

In line with GST changes for the Digital Economy announced in the Federal Budget, the proposed start date for the new rules should be deferred until 1 July 2017 to give both taxpayers and the ATO adequate time to prepare for the operation of the new rules.[129]

Law Council of Australia

The Law Council of Australia stated that the exposure draft ‘does not accord with, and in many respects derogates from, key design principles for a fair and effective tax and transfer system.’[130] It said that ‘[i]t is not appropriate’ for the exposure draft ‘to tax non-resident taxpayers on a fiction of its supplies to Australian customers being made through an Australian PE [permanent establishment].’[131] It also expressed concern that ‘the proposed provisions... have retrospective application’.[132] Further, the Law Council of Australia was of the view that the proposed provisions in the exposure draft were ‘complex and difficult to understand’ and that they:

...may apply where the person or persons entering into or carrying out the scheme has / have no or only an incidental purpose of enabling the taxpayer to obtain an Australian income tax benefit.[133]

The Tax Justice Network

The Tax Justice Network says that the proposed measures in the exposure draft did not go far enough, stating that:

...TJN-Aus [Tax Justice Network Australia] does not believe this draft legislation on its own is enough to address the problem and encourages the government to continue to develop legislation, regulation and enforcement tools

...

Under subsection 177DA (1d), TJN-Aus [Tax Justice Network Australia] believes the amendment should apply to MNES [multinational enterprises] that meet the ATO definition of a large business in terms of their global revenue, which would mean applying it to a non-resident with global revenue in any particular year of $250 million instead of the current threshold of $1 billion.[134]

Reactions to the Bill

Minter Ellison

Minter Ellison states:

It is notable that a number of the... requirements [which need to be met before the proposed provisions are applicable] contain terms that are either currently defined in Australian tax law (such as ordinary income or statutory income), or are not defined (such as commercially dependent) and will be subject to interpretation by the Commissioner, and eventually, no doubt, the courts. This requires multinational Boards to seek advice and carefully navigate the proposed provisions when assessing risk in Australia.

...

It is also notable that foreign taxes are taken into consideration, but interestingly 'only so far as information relevant to foreign tax is available to the Commissioner' and the Commissioner is not required to make inquiries. This places a burden on a taxpayer to provide evidence to the Commissioner about tax paid under foreign law.[135]

Further, Minter Ellison anticipates that the construction of an Australian permanent establishment for some or all of the activities undertaken by a foreign entity will ‘be the source of controversy and dispute’.[136]

Institute of Chartered Accounts of Scotland

Donald Drysdale of the Institute of Chartered Accounts of Scotland notes:

Although this Australian measure is not a separate diverted profits tax along the lines of the UK's DPT [diverted profits tax], the proposal reflects some of the thinking behind the first limb of the UK legislation, namely, the avoidance of a permanent establishment in the country.[137]

DLA Piper

DLA Piper states that ‘[t]he Bill casts a decidedly wider net over multinationals than the Exposure Draft and ‘[t]he amount of companies to which the new anti-avoidance rules will likely apply has increased from 30, as announced during the Budget, to a reported 1,000 companies under the tougher legislation.’[138] DLA Piper further states:

Australia’s current general anti-avoidance rule in Part IVA only applies to schemes that have been entered into for the sole or dominant purpose of obtaining a tax benefit. The multinational anti-avoidance law, however, has a lower threshold test. The new rules only require that the tax benefit obtained was ‘one or more of the principal purposes'. Further it allows foreign tax purposes to be included in that consideration.

This wider ambit may be problematic for some multinational companies where the Australian supplies and any subsequent tax benefit obtained only form a relatively small part of their global business, but will still be caught under the new rules.

...

When determining the alternative postulate for the purposes of the multinational anti-avoidance rules the ATO would be expected to consider a notional Australian permanent establishment with which to compare the scheme undertaken by the entity. Given the wide array of structures, options and permutations of a large multinational entity, determining the right alternative postulate may be an exceptionally challenging and potentially costly activity for the ATO especially given the various contractual structures that are regularly adopted by third parties that may be available to the multinational.[139]

Baker & McKenzie

Baker & McKenzie outlines the following issue which it considers will create high compliance costs:

...whether a foreign tax is reduced (which includes deferring foreign tax liability without "reasonable commercial grounds") is also a specific factor that the Commissioner must have regard to in determining whether there is the requisite "principal purpose" of obtaining an Australian tax benefit, or obtaining an Australian tax benefit and reducing a foreign tax liability.

Multinationals need to know how each member in the entity's global accounting consolidated group is taxed in Australia and in any relevant foreign jurisdictions, as these factors will be specifically relevant in finding or disproving the "principal purpose" of tax avoidance.[140]

Key issues

The amendments proposed in Schedule 2 are intended to ensure that the profits derived by multinationals from their activities in Australia are taxed in Australia. The Explanatory Memorandum states that the proposed measures target those multinational entities that:

  • avoid tax in Australia by booking their revenue offshore even though significant work is carried out in Australia in relation to the sales from which that revenue is derived and
  • such arrangements are made with a principal purpose of avoiding tax in Australia or reducing their foreign tax liability.[141]

The summary of the Regulation Impact Statement states that the multinational anti-avoidance law proposed in the Bill is targeted at 30 large multinational companies and that up to 100 companies may need to review their arrangements to make sure they comply with the new law.[142]

Key provisions

Proposed definitions

Item 1 of Schedule 2 amends subsections 177A(1) and (5) ITAA 1936. The amendments to subsection 177A(1) insert a number of definitions into Part IVA of the ITAA 1936. New definitions to Australian tax law include:

  • ‘Australian customer’ of a foreign entity
  • ‘Australian permanent establishment’
  • ‘significant global entity’, defined in Item 2 of Schedule 1 and
  • ‘global group’.

An ‘Australian customer’ of a foreign entity means an entity who is in Australia or is an Australian entity and if the foreign entity is a member of a global group–is not a member of that global group.

For these purposes an entity is defined in section 960-100 ITAA 1997 to be, amongst other things, any of the following:

  • an individual
  • a body corporate
  • a body politic
  • a partnership
  • any other unincorporated association or body of persons or
  • a trust.[143]

In turn, an Australian entity is defined in section 336 ITAA 1936 to be:

  • an Australian partnership
  • an Australian trust
  • an entity (other than a partnership or trust) that is a Part X Australian resident.[144]

Thus an Australian customer of a foreign entity can be an individual (for instance, a person buying computer equipment or software from a foreign entity) or various other types of incorporated or unincorporated bodies. This definition is important for the functioning of proposed section 177DA in Item 4 of Schedule 2 below.

Item 1, Schedule 2 also inserts a definition of ‘Australian permanent establishment’ of an entity, which briefly, is defined to mean:

  • where the country in which the relevant entity is resident has an international tax agreement with Australia (often known as a Double Tax Agreement), the meaning in that agreement[145] or
  • if there is not tax agreement, a permanent establishment of a person in Australia, where ‘permanent establishment’ is as defined at section 6 of the ITAA 1936.

The term ‘global group’ is defined to be a group of entities, at least one of which is a foreign entity, which are consolidated together for accounting purposes. As previously mentioned these definitions do not depend on who actually owns the entity in question.

The definition of ‘supply’ for the purposes of Part IVA ITAA 1936 is taken from section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999, but is modified to exclude the supply of equity or debt or an option on either of these two asset classes or a combination thereof, for the purposes of this Part.[146] That is, it refers to the supply of physical goods as well as services for the purposes of Part IVA. But it does not include the supply of capital to an entity in any shape or form.

The definitions of ‘foreign entity’ and ‘foreign law’ specifically applied to the operation of Part IVA by this item, are taken from subsection 955-(1) ITAA 1997.

Amendments to subsection 177A(5) made by Item 2 of Schedule 2 make consequential changes to reflect that the anti-avoidance provisions for ‘significant global entities’, in proposed section 177DA use a principal purpose test and not the sole or dominant purpose test that continues to be used in Part IVA generally.

Comments on Item 4 of Schedule 2 below provide further details on this matter.

Consideration of effect of foreign tax laws in assessing alternative postulate

The existing test for determining whether a tax benefit has been derived due to a scheme entered into by the taxpayer is to ask whether the benefit would have been derived without the scheme (the alternative postulate). Existing subsections 177CB(2) to (4) ITAA 1936 are relevant and provide that:

(2) A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

(3) A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

(4) In determining for the purposes of subsection (3) whether a postulate is such a reasonable alternative:

(a) have particular regard to:

(i) the substance of the scheme; and

(ii) any result or consequence for the taxpayer that is or would be achieved by the scheme (other than a result in relation to the operation of this Act); but

(b) disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme).

Item 3 of Schedule 2 inserts proposed subsection 177CB(5) after these provisions. The effect of the amendment is that, when assessing whether there is an anti-avoidance scheme under new section 177DA, all references to ‘the Act’ in subsection 177CB(4) should be read as ‘the Act and any foreign law relating to taxation’.

The Explanatory Memorandum explains the amendments as follows:

Subparagraph 177CB(4)(a)(ii) and paragraph 177CB(4)(b) have the effect that certain tax liabilities are not to be taken into account in assessing the likelihood or reasonableness of any alternative postulate.

These provisions are intended to make clear that alternative postulates should not be rejected as unreasonable postulates on the grounds that the tax costs involved in undertaking those postulates would have caused the parties to either abandon or indefinitely defer the schemes and/or the wider transactions of which they were a part. However, these provisions currently only apply in relation to Australian income tax consequences.

The multinational anti-avoidance law is capable of capturing schemes that have a purpose of reducing a foreign tax liability. Unlike the general anti-avoidance rule purpose test in section 177D, the purpose test under this measure can be satisfied by a purpose of both obtaining a tax benefit and reducing one or more taxpayers’ liabilities to tax under a foreign law.

As a consequence, this measure extends subparagraph 177CB(4)(a)(ii) and paragraph 177CB(4)(b), for the purposes of schemes captured under the multinational anti‑avoidance law, so that results in relation to the operation of any foreign law relating to taxation are also disregarded (and not just Australian income tax consequences). [147]

Multinational schemes

Item 4 of Schedule 2 inserts proposed section 177DA ITAA 1936 entitled ‘Schemes that limit a taxable presence in Australia’. Proposed section 177DA targets particular schemes of multinationals that intend to achieve a tax benefit in Australia or outside of Australia. The result of proposed section 177DA is that Part IVA ITAA 1936 will apply in circumstances where a foreign entity[148] makes a supply to an Australian customer and:

  • activities are undertaken in Australia directly connected to that supply
  • some or all of those activities are undertaken at or through an Australian permanent establishment of an entity who is an associate of, or is commercial dependent on, the foreign entity
  • the foreign entity derives income from that supply
  • some or all of that income is not attributable to an Australian permanent establishment of that foreign entity
  • a person or one of the persons who entered into or carried out a scheme (or any part thereof) did so for the principal purpose of, or for more than one principal purpose of, enabling the relevant taxpayer, and any other taxpayer, to obtain a tax benefit or reduce a tax liability under a foreign law in connection with the scheme and
  • the foreign entity is a ‘significant global entity’.

As already discussed, a principal purpose test sets a lower threshold than a sole or dominant purpose test.

Proposed subsection 177DA(6) applies the whole of proposed section 177DA to schemes both inside and outside Australia, or partly inside and partly outside Australia.

The clear target of proposed section 177DA is situations where a significant global entity makes a supply of non‑financial goods and services (see the amended definition of ‘supply’ discussed above) to an Australian customer (broadly defined), and

  • the resulting sales revenue does not pass through the Australian arm of that significant global entity and
  • the Australian arm of that significant global entity provides services in relation to that supply.

Significantly, proposed section 177DA cannot be applied where a significant global entity sells goods and services to an Australian customer, but otherwise has no presence in Australia and provides no additional services in relation to that supply.

Administrative penalties

Item 5 of Schedule 2 inserts proposed subparagraph 284-145(1)(b)(ia) into Schedule 1 of the TAA 1953. This new provision applies the administrative penalty provisions of the TAA 1953 to assessments made under proposed section 177DA discussed above. It does this by applying the ‘principal purpose’ test consequential upon the changes described above.[149]

Item 6 of Schedule 2 amends paragraph 284-145(2A)(b) of Schedule 1 of the TAA 1953 so that a liability for an administrative penalty still applies if the entity involved would have received a benefit from the scheme and either:

  • subparagraph 284-145(1)(b)(i) TAA 1953 (the sole or dominant purpose test for obtaining a tax benefit) or
  • proposed subparagraph 284-145(1)(b)(ia) TAA 1953 (the principal purpose test)

are not satisfied.

That is, if neither test is satisfied in relation to the application of administrative penalties in particular (or for the purposes of Part IVA ITAA 1936 in general), any administrative penalties calculated under Subdivision 284-C Schedule 1 TAA 1953 apply.

Item 7 of Schedule 2 applies the changes in Schedule 2 on or after 1 January 2016, whether or not the scheme was entered into before that date. Thus existing arrangements may be caught by the proposed changes if they are not changed before 1 January 2016. As such Schedule 2 may have retrospective application. That is not unusual for amendments to tax legislation.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed this Schedule’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Schedule is compatible.[150]

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[151]

Schedule 3 – increased penalties

Schedule 3 amends the Taxation Administration Act 1953 (TAA 1953) to double the usual amount of administrative penalty that may be incurred by a ‘significant global entity’ (see Item 2, Schedule 1) where they either obtain a ‘scheme benefit’ by reducing their tax liability or increase the amount that is paid by the Commissioner for Taxation to them.

The Explanatory Memorandum notes that the maximum penalty is usually 50 per cent of the amount of tax avoided under a scheme, but can be as higher as 60 per cent where aggravating factors apply.[152] A lower penalty applies if the taxpayer has a reasonably arguable position with regard to its tax arrangements.[153]

The Commissioner has the power to reduce the amount of the administrative penalty but is not compelled to do so. The Explanatory Memorandum observes:

The Commissioner of Taxation has broad discretion to remit an administrative penalty in whole or in part so that penalties are not often imposed at the rate provided for in the Taxation Administration Act. This discretion would remain.[154]

History

Context of the Schedule

As already noted, from April 2015, the United Kingdom introduced the Diverted Profits Tax, otherwise known as the ‘Google tax’.[155] This tax seeks to deter entities operating in the UK from diverting profits from that jurisdiction. Where a taxable diverted profit is identified the tax levied is between 25 and 55 per cent of that amount.[156] The entity is still liable for the ordinary company income tax on the diverted profit.

In relation to the ‘Google tax’, the Treasurer stated that ‘[a]fter consultation with the United Kingdom it is clear that Australia does not need to replicate the UK’s ‘Diverted Profits Tax’.[157] The Treasurer stated that:

Our penalties for diverted profits will go further than the United Kingdom.

The Tax Commissioner will have the power to recover unpaid taxes and issue a fine of an additional 100% of unpaid taxes plus interest.[158]

The Assistant Treasurer noted that the increased penalties were aimed at deterrence:

The government will double penalties for profit shifting and tax avoidance where the company does not have a reasonably argued position. Currently the sanction is the tax owed plus a penalty of 50 per cent. That now increases to 100 per cent.

In judging whether a multinational has a reasonably arguable position about a related party transaction, attention will be given to factors like whether the transaction is at a genuine arms-length price and were appropriate processes followed?[159]

The imposition of tax avoidance penalties was not part of the BEPS project.[160]

Position of major interest groups

Reactions to Exposure Draft

Deloitte

Deloitte noted that the penalties in the Exposure Draft applied to a scheme entered prior to 1 July 2015, and in respect of ‘any scheme benefit that an entity gets on or after 1 July 2015’.[161] Deloitte stated that ‘[i]t is not clear when an entity “gets” a tax benefit – eg, date of entry into scheme, lodgement of tax return, issue of amended assessment, or some other date.’[162]

The Tax Justice Network Australia and Publish What You Pay Australia

The Tax Justice Network Australia and Publish What You Pay Australia were supportive of the increased administrative penalties, and stated that ‘[t]he organisations would prefer if the increased penalties applied to the large company threshold of businesses with global revenue of $250 million and more, rather than a global revenue of $1 billion.’[163]

Reactions to the Bill

DLA Piper notes that:

The increased penalties apply for the entire scope of application of Part IVA capturing both the multinational anti‑avoidance rules as well as the existing general anti-avoidance rules. In some instances (where there are aggravating factors), the penalty applied can be up to 120%. As a result of the definition of significant global entities, this means that Australian entities that are part of large multinational groups are now subject to increased penalties where any component of Part IVA applies.

Given the wide definition of significant global entity, many companies with separate and distinct Australian businesses from their global parents may fall under the new penalty regime.[164]

Key issues and provisions

Item 1 of Schedule 3 inserts proposed subsection 284-155(3) into Schedule 1 TAA 1953. Subsections 284-155(1) and (2) in Schedule 1 TAA 1953 specify how the above mentioned administrative penalty is calculated. Proposed subsection 284-155(3) requires that where a ‘significant global entity’ (as defined in Schedule 1) incurs a scheme shortfall, the amount of the penalty is twice that worked out under existing subsections 284-155(1) and (2) in Schedule 1 TAA 1953.[165]

If the taxpayer’s position is a reasonably arguable position the penalty is not doubled (proposed subsection 284-155(3)).

What is a reasonably argued position?

Subsection 284-15(1) in Schedule 1 TAA 1953 provides that a taxpayer’s position is reasonably arguable ‘if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect’.[166]

A reasonably arguable position in relation to transfer pricing issues is specified in subdivision 284-E Schedule 1 TAA 1953 and centres around the quality and the coverage of the related transfer pricing arrangement documentation. Subdivision 284-E Schedule 1 TAA 1953 states that undocumented transfer pricing arrangements are not reasonably arguable and specifies what matters are required to be covered in the documentation to have a reasonably arguably position.[167]

Item 2 of Schedule 3 applies the changes in Schedule 3 from 1 July 2015, irrespective of the date on which a scheme commences. Schedule 3 is retrospective as it proposes to apply to schemes that commenced before the Bill is passed. Retrospective tax legislation is not unusual.

The new penalty rates

The following table outlines the new penalties that are proposed to apply to ‘significant global entities’ that enter into tax avoidance or profit-shifting schemes. Penalties are expressed as percentages of the relevant scheme shortfall amount:[168]

Table 3 Penalties proposed by Schedule 3 of the Bill for Significant Global Entities

Culpable behaviour
Base penalty amount %
Aggravating factors apply %
Disclosure during examination %
Disclosure before examination %
Tax avoidance schemes[169]
100
120
80
20
[if position is reasonably argued]
[25]
[30]
[20]
[5]
Profit-shifting schemes
50
60
40
10
[if position is reasonably argued]
[10]
[12]
[8]
[2]

Source: Explanatory Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, op. cit., p. 56.

The Explanatory Memorandum does not further define what ‘aggravating factors’ may be. Such factors could include a deliberate attempt to conceal the scheme entered into. The above table shows that there is an incentive for revealing these schemes before or during an examination of the entity’s affairs by the ATO.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed this Schedule’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that this Schedule is compatible.[170]

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[171]

Schedule 4 – Country-by-Country reporting

Current law

Reasonably arguable position in relation to application transfer pricing laws

As previously discussed in relation to Schedule 3 of the Bill, there are documentation requirements in Subdivision 284-E Schedule 1 TAA 1953 which, if met, affect whether an entity has a ‘reasonably arguable’ position about whether the transfer pricing provisions in subdivisions 815-B and 815-C ITAA 1997 apply to the entity or not.[172] The requirements for these records are:

  • that they be prepared before the income tax return was lodged
  • that they be in English or easily translated into English
  • that they explain how the transfer pricing provisions do or do not apply, and explain how this conclusion best achieves the consistency requirement
  • that they allow the arm’s length conditions to be readily ascertained
  • that they identify the method used and comparable circumstances that are relevant to the arm’s length conditions
  • that they outline the actual conditions relevant to the transfer pricing matter(s)
  • that they show the actual profits and arm’s length profits and
  • that they show the actual expenditure and income of the entity and its permanent establishment.[173]

As already noted, a matter is reasonably arguable where it is concluded that it is roughly as likely, or more likely, to be correct than it is to be incorrect.[174] If an entity is successful in claiming a reasonably arguable position, its administrative liability may be lessened or administrative liability may not be attracted.

International dealings schedule (IDS)

The IDS forms part of an entity’s financial year income tax return if it has engaged in international transactions or relationships.[175] Generally, entities are required to submit the IDS if:

  • the aggregate amount of an entity’s transactions or dealing with international related parties is greater than $2 million[176]
  • an entity has an overseas branch or
  • an entity has a direct or indirect interest in a foreign trust, foreign company, controlled foreign entity, transferor trust, foreign investment fund or foreign life policy.[177]

The IDS requires detailed information on international related party transactions and the transfer pricing method applied to each transaction, as well as the level of transfer pricing documentation held for international transactions or dealings.[178]

History

Context of the Schedule

The Assistant Treasurer noted that the purpose of the transfer pricing documentation measures is to facilitate detection:

...the ATO will use this information to assess the risk to revenue of a global group with a multi-billion dollar turnover which may disclose 50 per cent of its profits being earned in a tax haven where they have an office with just a few employees.[179]

Schedule 4 of the Bill implements the OECD’s measures relating to transfer pricing documentation and country‑by-country reporting. These measures are part of the BEPS plan which is an initiative of the OECD, endorsed by the G20.

BEPS Plan

The BEPS plan aims to develop policy options that address multinational corporate tax avoidance.[180] The OECD says ‘BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.’[181]

Schedule 4 of the Bill proposes to implement BEPS action item 13, which aims to re-examine transfer pricing documentation rules to develop new rules that enhance transparency for tax administration.[182] The Guidance on Transfer Pricing Documentation and Country-by-Country Reporting is the deliverable of action item 13 and was delivered in September 2014.[183] The guidance recommends a three‑tiered approach to transfer pricing documentation, made up of:

  • a master file which provides an overview of the multinational enterprise group as a whole, including ‘the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity’. Lists of important agreements, intangibles and transactions’ are also recommended[184]
  • a local file that provides ‘more detailed information relating to specific intercompany transactions’ such as ‘financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method’[185] and
  • a Country-by-Country report which is made up of information relating to the allocation of income and taxes paid globally. The report is also recommended to include a ‘listing of all the Constituent Entities for which financial information is reported, including the tax jurisdiction of incorporation’ and the main business activities carried out by listed constituent entities.[186]

Position of major interest groups

Reactions to exposure draft

Australian Bankers’ Association

The Australian Bankers’ Association (ABA) was of the view that the information outlined in the Explanatory Memorandum to the exposure draft ‘is likely to be in excess of or different to information required to meet the OECD transfer pricing documentation standards’.[187] That Explanatory Memorandum noted that ‘[t]he approved form may require information to be provided that is relevant to the Commissioner making a decision under Division 815 of the ITAA 1997 as to whether an entity has received a transfer pricing benefit.’[188]

The ABA notes the overlap between the exposure draft and existing documentation requirement for having a reasonably arguable position for transfer pricing matters. The ABA recommended that the documentation should ‘enable taxpayers to use the local file as support for reasonably arguable positions’.[189] It was also stated that there was overlap with the international dealings schedule (IDS) required of taxpayers with international related party deals of over $2 million, and recommended that taxpayers required to produce documents under the Exposure Draft should be exempted from lodging an IDS.

Association of Superannuation Funds of Australia

The Association of Superannuation Funds of Australia (ASFA) was supportive of the Exposure Draft’s objectives.[190] The ASFA raised concern that the documentation obligations could apply to Australian superannuation entities and submitted that such entities should be excluded from the application of the documentation requirements as they are ‘low risk’ taxpayers and do not have the capacity to shift profits between jurisdictions.[191]

Chartered Accountants Australia and New Zealand

Chartered Accountants Australia and New Zealand also supported the introduction of the transfer pricing documentation requirements.[192] Chartered Accountants Australia and New Zealand identified implementation of the Exposure Draft’s proposed measures as the major challenge, noting that it will be crucial ‘that the ATO develops strong, clear and practical guidance before the CbC [Country-by-Country] reporting regime commences on 1 January 2016.’[193] It also noted possible duplication with IDS requirements and documentation requirements for having a reasonably arguable position.[194]

Deloitte

Deloitte was of the view that the documentation requirements would be particularly onerous where an Australian entity’s foreign parent was not required to file a Country-by-Country report in its jurisdiction of incorporation.[195] Deloitte suggested an exemption for taxpayers in this situation.[196]

Reactions to the Bill

Minter Ellison

Minter Ellison is of the view that the documentation requirements will have potentially high compliance costs:

The proposal also represents a potentially compliance cost intensive process for taxpayers. It seems that the Government is assuming that similar proposals will be adopted in other countries to reduce global compliance costs for taxpayers – that remains to be seen.[197]

However it is likely the BEPS recommendations will be implemented in a number of countries meaning that a master file and country-by-country report will only need to be prepared once for all the countries. Where the country-by-country report and/or the master file is provided to a revenue authority outside Australia, this can be submitted to the ATO provided that each country implements the BEPS as recommended by the OECD and G20. A separate local file will need to be prepared for each country.

Key issues and provisions

Item 1 of Schedule 4 of the Bill will amend the ITAA 1997 to insert proposed Subdivision 815-E – Reporting obligations for significant global entities.[198] The Subdivision requires particular entities to provide transfer pricing documentation to the Commissioner of Taxation.

Under proposed subsection 815-355(1) the documentation requirements under Schedule 4 apply to significant global entities, as defined in Schedule 1, who are any of the following:

  • an Australian resident
  • a resident trust estate
  • a partnership with at least one partner who is an Australia resident
  • a foreign resident operating an Australian permanent establishment
  • a non-resident trust estate operating an Australian permanent establishment or
  • a partnership operating as a Australian permanent resident.

Such entities will be required under proposed subsection 815-355(3) to provide three statements to the ATO pertaining to:

  • the entity’s, or if part of a group, the group’s, global operations and activities as well as transfer pricing policies
  • the entity’s operations, activities, dealings and transactions and
  • how income, activities and taxes paid are allocated by the entity and members of the entity’s group if it is part of a group.

The note following proposed subsection 815-355(3) indicates that these statements correspond to the three‑tiered transfer pricing documentation recommended by BEPS. Item 2 of Schedule 4 provides that these statements will be required for income years after 1 January 2016.

Proposed section 815-365 provides for the Commissioner of Taxation to determine that particular entities are not required to give statements under proposed section 815-355.

Definitions

The term ‘permanent establishment’ is defined in subsection 6(1) ITAA 1936. The ATO summarises this definition as including:

    • business operations carried on by an Australian resident entity at or through a fixed place of business in another country
    • business operations carried on by a foreign resident entity at or through a fixed place of business in Australia.[199]

The ATO also states that trusts, other than unit trusts, are considered Australian residents if:

    • a trustee of the trust estate was a resident at any time during the income year
    • the central management and control of the trust estate was in Australia at any time during the income year.[200]

Overlap with existing requirements

While there is overlap between Schedule 4 and the documentation requirement in Subdivision 284-E Schedule 1 TAA 1953 for a taxpayer to have a reasonably arguable position regarding the transfer pricing provisions, the proposed measures are separate requirements.

Proposed subsection 815-355(3) ITAA 1997 requires greater detail about overall transfer pricing policies of a taxpayer than the existing measures in Subdivision 284-E Schedule 1 TAA 1953 which require specific information regarding whether the transfer pricing provisions apply to particular transfer pricing matter(s).

Interaction with existing measures

Statements made under Schedule 4 are required to be in the approved form. The requirements of an approved form are detailed in subsection 388-50(1) Schedule 1 TAA 1953. The ATO summarises these requirements to be:

    • it is in the form approved in writing by the Commissioner for that kind of document
    • it contains a declaration signed by a person or persons as the form requires
    • it contains the information that the form requires, and any further information, statement or document as the Commissioner requires, whether in the document or otherwise, and
    • if it is to be given to the Commissioner, it must be given in the manner that the Commissioner requires.[201]

Under proposed subsection 815-355(2) the statements must be given to the Commissioner of Taxation within 12 months after the end of the period the statement relates to. However the ATO will have discretion under section 388-55 Schedule 1 TAA 1953 to defer the time within which the statements are due. Further, proposed section 815-360 allows the ATO to determine that the statements under proposed section 815-355 are required for a specific 12-month period rather than an income year.

Schedule 4 will be subject to the existing penalties in subdivision 286-C Schedule 1 TAA 1953.[202] Under section 286-75 TAA 1953, a penalty may be imposed on taxpayers required to give a document to the Commissioner of Taxation by a particular day where they failed to do so. The base penalty amount is one penalty unit per 28 day period from the day that the document was due, for up to five periods.[203] The base penalty may be increased by up to five times if particular circumstances outlined in section 286-80 Schedule 1 TAA 1953 are met.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed this Schedule’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that this Schedule is compatible.[204]

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[205]

Concluding comments

The proposed measures in this Bill are just one part of the Government’s overall response to problems in collecting the right amount of tax from multinational entities. Further government action in this area can be expected.[206]

 

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.



[1].         See for example J Mather, J Hutchinson and N Khadem, ‘Backlash over Apple’s low taxes’, Australian Financial Review, 7 March 2014, pp. 1, 7; J Dagge, ‘Google pays 16pc tax rate’, Herald Sun, 2 May 2015, p. 53, both accessed 7 November 2015.

[2].         United Voice and the Tax Justice Network, Who pays for our common wealth?: tax practices of the ASX 200, Tax Justice Network, Melbourne, September 2014, p.3, accessed 7 November 2015.

[3].         Ibid., pp. 3, 21.

[4].         See for example H Aston and N Khadem, ‘Hockey in talks with Britain over planned ‘Google Tax’’, Sydney Morning Herald, 5 December 2014, p. 6; A Ting, ‘Amazon shows Google tax can work, despite arguments against it’, The Conversation, (online edition), 23 June 2015, both accessed 7 November 2015.

[5].         See for example N Khadem, ‘Profit-shifting fight gets down to details’, Australian Financial Review, 6 October 2015, p. 4, accessed 8 November 2015.

[6].         Organisation for Economic Co-operation and Development (OECD), ‘About base erosion and profit shifting (BEPS)’, OECD website, accessed 7 November 2015.

[7].         N Khadem, ‘OECD will ‘supersede’ Hockey plan’, The Sydney Morning Herald, 6 October 2015, p. 21, accessed 7 November 2015.

[8].         S Morrison (Treasurer), OECD report supports Australian Government action on multinational tax avoidance, media release, 6 October 2015, accessed 7 November 2015.

[9].         N Khadem, ‘Opinion: why the US hates our ‘Google Tax’’, The Sydney Morning Herald, 25 June 2015, p. 28, accessed 7 November 2015.

[10].      Ibid.

[11].      The Treasury, Income Tax: cross border profit allocation – review of transfer pricing rules, consultation paper, Treasury, Canberra, 2 November 2011, accessed 7 November 2015.

[12].      Ibid.

[13].      D Bradbury (Assistant Treasurer, Minister Assisting for Deregulation), Specialist reference group on ways to address tax minimisation of multinational enterprises, media release, 10 December 2012, accessed 7 November 2015.

[14].      D Bradbury (Assistant Treasurer, Minister Assisting for Deregulation), Issues paper on multinational profit shifting, press release, 3 May 2013, accessed 7 November 2015.

[15].      D Bradbury (Assistant Treasurer, Minister Assisting for Deregulation), Tackling base erosion and profit shifting, press release, 24 July 2013, accessed 7 November 2015.

[16].      Treasury, Risks to sustainability of Australia’s corporate tax base, scoping paper, Treasury website, July 2013, p. 33, accessed 7 November 2015.

[17].      Ibid., pp. 33-35.

[18].      Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No. 1) 2012 (Cth); B Pulle, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, Bills digest, 160, 2011–12, Parliamentary Library, Canberra, 2012, p. 8, accessed 7 November 2015.

[19].      Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth), accessed 9 November 2015.

[20].      L Nielson, Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013, Bills digest, 91, 2012–13, Parliamentary Library, Canberra, 2013, p. 3, accessed 7 November 2015.

[21].      Ibid., p. 4.

[22].      OECD, Action plan on base erosion and profit shifting (Action Plan), OECD Publishing, 2013, accessed 7 November 2015.

[23].      Ibid., pp. 6–7.

[24].      D Bradbury (Assistant Treasurer, Minister Assisting for Deregulation), Supporting better tax policy for a stronger, smarter, fairer society: address at the launch of the Tax and Transfer Policy Institute, Canberra, speech, 27 June 2013, accessed 7 November 2015.

[25].      OECD, Action Plan, op. cit., pp. 29–40.

[26].      OECD, ‘Aggressive tax planning’, OECD website, accessed 7 November 2015.

[27].      Group of Twenty (G20), G20 Leaders’ Communique Brisbane Summit, communique, 15–16 November 2014, accessed 7 November 2015.

[28].      J Hockey (Treasurer) and C Jordan (Commissioner of Taxation), Joint press conference: multinational tax avoidance [etc.], press release, 16 September 2015, accessed 7 November 2015; J Hockey, ‘Second reading speech: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, House of Representatives, Debates, 16 September 2015, pp. 10323, accessed 7 November 2015.

[29].      C Milne, Greens secure inquiry into corporate tax evasion, press release, 2 October 2014, accessed 7 November 2015.

[30].      Australia, Senate, Journals, 95, 2013–15, 15 June 2015, p. 2644, accessed 9 November 2015.

[31].      Australia, Senate, Journals, 105, 2013-15, 12 August 2015, p. 2921, accessed 10 November 2015.

[32].      Senate Standing Committee on Economics, Corporate tax avoidance: you cannot tax what you cannot see (part 1), The Senate, Canberra, 18 August 2015, accessed 9 November 2015.

[33].      Ibid., pp. viii–x.

[34].      Australian Government, Budget measures: Budget paper no. 2: 2015–16, pp. 14–15, accessed 7 November 2015.

[35].      Ibid., p. 15.

[36].      Ibid., p. 16.

[37].      Ibid., pp. 14–16.

[38].      Australian Government, ‘Leading the global fight against tax avoidance’, Budget 2015-16 website, accessed 7 November 2015.

[39].      Australian Government, ‘Closing the digital tax loophole’, Budget 2015-16 website, accessed 7 November 2015.

[40].      Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015—Exposure Draft, [12 May 2015], accessed 7 November 2015; Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Country by country reporting—Exposure Draft, [6 August 2015]; Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Scheme penalties for large companies—Exposure Draft, [6 August 2015], all accessed 7 November 2015.

[41].      Ibid.

[42].      A Leigh, ‘Second reading speech: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, House of Representatives, Debates, (proof), 19 October 2015, p. 27, accessed 7 November 2015.

[43].      K Thomson, ‘Second reading speech: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, House of Representatives, Debates, (proof), 19 October 2015, p. 34, accessed 7 November 2015.

[44].      T Zappia, ‘Second reading speech: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, House of Representatives, Debates, (proof), 19 October 2015, p. 74, accessed 7 November 2015.

[45].      A Leigh (Shadow Assistant Treasurer and Shadow Minister for Competition), Joe Hockey’s uncosted multinational tax plan; tax transparency; effects test, press release, 16 September 2015, accessed 16 October 2015.

[46].      A Leigh, ‘Second reading speech: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, op. cit., p. 27.

[47].      B Shorten (Leader of the Opposition), C Bowen (Shadow Treasurer), A Leigh (Shadow Assistant Treasurer), Big multinationals to pay fair share under Labor, media release, 2 March 2015, accessed 7 November 2015.

[48].      Ibid.

[49].      A Leigh, ‘Second reading speech: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, op. cit., p. 27.

[50].      Australia, House of Representatives, ‘Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, Votes and proceedings, HVP 151, 19 October 2015, accessed 9 November 2015.

[51].      Australian Labor Party, Labor national platform: a smart, modern, fair Australia, p. 31, Australian Labor Party policy document, issued 18 August 2015, accessed 7 November 2015.

[52].      A Bandt, ‘Second reading Speech: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, House of Representatives, Debates, (proof), 19 October 2015, p. 37, accessed 9 November 2015.

[53].      Australian Greens, Stopping corporate tax avoidance discussion paper, Australian Greens policy document, issued 17 April 2015, p. 1, accessed 7 November 2015.

[54].      Ibid., p. 2.

[55].      Senate Standing Committee for the Scrutiny of Bills, Alert Digest, 11, 2015, The Senate, Canberra, 14 October 2015, p.37, accessed 10 November 2015.

[56].      Ibid., p. 38.

[57].      Ibid., p. 37.

[58].      Senate Standing Committee for the Selection of Bills, Report, 12, 2015, The Senate, 16 September 2015, accessed 7 November 2015.

[59].      Senate Economics Legislation Committee, Inquiry into the Provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, The Senate, Canberra, 2015, accessed 7 November2015.

[60].      Greenpeace Australia Pacific, Submission to Senate Economics Legislation Committee, Inquiry into the Provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 13 October 2015, p. 1; Community and Public Sector Union, Submission to Senate Economics Legislation Committee, Inquiry into the Provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 13 October 2015, p. 1; Tax Justice Network Australia, Submission to Senate Economics Legislation Committee, Inquiry into the Provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 13 October 2015, p. 1, all submissions accessed 7 November 2015.

[61].      KPMG, Submission to Senate Economics Legislation Committee, Inquiry into the provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 13 October 2015, p. 1; Australian Financial Markets Association, Submission to Senate Economics Legislation Committee, Inquiry into the provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 13 October 2015, p. 2; GlaxoSmithKline Australia Pty Ltd, Submission to Senate Economics Legislation Committee, Inquiry into the provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 12 October 2015, p. 2; The Tax Institute, Submission to Senate Economics Legislation Committee, Inquiry into the provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 14 October 2015, p. 1; Corporate Tax Association, Submission to Senate Economics Legislation Committee, Inquiry into the provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015’, 15 October 2015, p. 3, all submissions accessed 7 November 2015.

[62].      M Lock (Former Profit Shifting Practice Adviser and Non-resident Withholding Tax Risk Manager, ATO), Submission to Senate Economics Legislation Committee, Inquiry into the provisions of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, 13 October 2015, accessed 7 November 2015.

[63].      J Hockey (Treasurer) and C Jordan (Commissioner of Taxation), Joint press conference: multinational tax avoidance [etc.], op. cit.

[64].      M Turnbull (Prime Minister), ‘Answer to Question without notice: Taxation’, [Questioner: C Bowen], House of Representatives, Debates, (proof), p. 56, 15 October 2015, accessed 7 November 2015.

[65].      Income Tax Assessment Act 1997, accessed 9 November 2015.

[66].      J Hockey (Treasurer), Strengthening our taxation system, press release, 11 May 2015, accessed 7 November 2015.

[67].      J Frydenberg (Assistant Treasurer), ‘Anti-avoidance measures add up to step change’, Australian Financial Review, 18 May 2015, p. 43, accessed 7 November 2015.

[68].      ShineWing Australia, ‘Transfer pricing insights: multinational groups face additional tax avoidance measures’, ShineWing Australia website, 8 October 2015, accessed 7 November 2015.

[69].      DLA Piper, Australian tax alert: Australia pursues multinational tax avoidance with the introduction of targeted tax avoidance measures and penalties – particularly income not attributable to an Australian permanent establishment of foreign entities, DLA Piper, September 2015, p. 2, accessed 7 November 2015.

[70].      ShineWing Australia, ‘Transfer pricing insights - multinational groups face additional tax avoidance measures’, op. cit.

[71].      DLA Piper, Australian tax alert, op. cit.

[72].      Explanatory Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, op. cit., p. 23.

[73].      DLA Piper, Australian tax alert, op. cit.

[74].      Corporations Act 2001 (Cth), section 9, accessed 7 November 2015.

[75].      Australian Accounting Standards Board (AASB), homepage, accessed 9 November 2014. A list of the Australian Accounting Standards is available through this home page.

[76].      Explanatory Memorandum, Tax Laws Amendment (Combating multinational Tax Avoidance) Bill 2015, p. 20, accessed 7 November 2015.

[77].      The Statement of Compatibility with Human Rights for this Schedule can be found at page 22 of the Explanatory Memorandum to the Bill.

[78].      Parliamentary Joint Committee on Human Rights, Twenty-ninth Report of the 44th Parliament, 13 October 2015, p. 2, accessed 9 November 2015.

[79].      Income Tax Assessment Act 1936, accessed 7 November 2015.

[80].      C Atkinson, ‘General anti-avoidance rules: exploring the balance between the taxpayer’s need for certainty and the government’s need to prevent tax avoidance’, Journal of Australian Taxation, 14(1), 2012, p. 32, accessed 7 November 2015.

[81].      Income Tax Assessment Act 1936 (Cth), subsection 177A(1) definition of ‘scheme’ and section 177D.

[82].      Ibid., sections 177C and 177CB, subsection 177D(3).

[83].      Ibid., subsection 177D(4).

[84].      Ibid., subsection 177D(5).

[85].      Ibid., subsection 177A(5), 177D(1).

[86].      J Hockey (Treasurer) and C Jordan (Commissioner of Taxation), Joint press conference: multinational tax avoidance [etc.], op. cit.

[87].      Income Tax Assessment Act 1936 (Cth), definition of ‘scheme’ at subsection 177A(1).

[88].      Ibid.

[89].      Ibid., paragraphs 177C(1)(a) – 177C(1)(bc).

[90].      Ibid., section 177CB.

[91].      Ibid., subsection 177CB(2).

[92].      Ibid., subsection 177CB(3).

[93].      Ibid., subsection 177D(1) and subsection 177D(3).

[94].      Ibid., section 177E.

[95].      Ibid., section 177EA.

[96].      Ibid., section 177EB.

[97].      Ibid., section 177F.

[98].      Ibid., paragraph 177F(3)(a)

[99].      Ibid., paragraphs 177F(1)(b) and 177F(3)(b).

[100].   Ibid., paragraphs 177F(1)(d) and 177F(3)(d).

[101].   For all the determinations that can be made by the Commissioner of Taxation, see ibid., section 177F.

[102].   G Pagone, ‘Part IVA: the general anti-avoidance provisions in Australian taxation law’, Melbourne University Law Review, 27(3), 2003, p. 771, accessed 12 October 2015. See also Explanatory Memorandum, Income Tax Laws Amendment Bill (No 2) 1981, p. 2, accessed 12 October 2015.

[103].   Ibid.

[104].   G Pagone, ‘Part IVA: the general anti-avoidance provisions in Australian taxation law’, op. cit., p. 771; G Cooper and T Russell, ‘The new ‘improved’ Part IVA – with extra tax benefit!’, Australian Tax Review, 42(4), November 2013, p. 234, both accessed 7 November 2015.

[105].   Income Tax Laws Amendment Act (No. 2) 1981 (Cth), accessed 7 November 2015.

[106].   Department of the Parliamentary Library (DPL), Income Tax Laws Amendment Bill (No 2) 1981, Bills digest, 96, 1981, DPL, Canberra, 1981, p. 1, accessed 7 November 2015. For an overview of the major High Court of Australia decisions, see G Pagone, ‘Part IVA: the general anti-avoidance provisions in Australian taxation law’, op. cit.

[107].   Explanatory Memorandum, Income Tax Laws Amendment Bill (No 2) 1981, p.1, accessed 7 November 2015.

[108].   Ibid., p. 2.

[109].   DPL, Income Tax Laws Amendment Bill (No 2) 1981, Bills digest, op. cit., pp. 1–2.

[110].   Ibid., p. 2.

[111]Taxation Laws Amendment Act (No. 2) 1997 (Cth), introduced section 177CA into Income Tax Assessment Act 1936 (Cth), accessed 10 November 2015.

[112].   Taxation Laws Amendment Act (No. 1) 1999 (Cth), introduced paragraph 177C(1)(ba) into Income Tax Assessment Act 1936 (Cth),accessed 10 November 2015.

[113].   Taxation Laws Amendment Act (No. 3) 1999 (Cth), introduced paragraph 177C(1)(bb) into Income Tax Assessment Act 1936 (Cth), accessed 10 November 2015.

[114].   Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 (Cth), introduced paragraph 177C(1)(bba) into Income Tax Assessment Act 1936 (Cth), accessed 7 November 2015.

[115].   Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth), accessed 7 November 2015. See also L Nielson, Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013, op. cit.

[116].   Income Tax Assessment Act 1936 (Cth) subsection 177A(5), sections 177C and 177D.

[117].   For an overview of these reforms, see L Nielson, Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013, op. cit.; B Pulle, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, op. cit.

[118].   J Hockey (Treasurer), Strengthening our taxation system, op. cit.

[119].   J Frydenberg (Assistant Treasurer), ‘Anti-avoidance measures add up to step change’, op. cit.

[120].   OECD, ‘Preventing the Granting of Treaty Benefits in Inappropriate Circumstances’, OECD Publishing, 16 September 2014, accessed 7 November 2015.

[121].   Ibid., p. 11.

[122].   Ibid., p. 66.

[123].   The Tax Institute, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015—Exposure draft, 10 June 2015, p. 1, accessed 7 November 2015.

[124].   Ibid.

[125].   Ibid., pp. 1-2.

[126].   Ibid., p. 3.

[127].   Ibid.

[128].   Ernst & Young (EY), Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015—Exposure draft, 9 June 2015, p. 1, accessed 7 November 2015.

[129].   Ibid.

[130].   Law Council of Australia, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015—Exposure draft, 10 June 2015, p. 2, accessed 7 November 2015.

[131].   Ibid., p. 4.

[132].   Ibid.

[133].   Ibid., pp. 8–9.

[134].   Tax Justice Network Australia, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015—Exposure draft, 9 June 2015, p. 1, accessed 7 November 2015.

[135].   J Dunne, ‘Australian tax brief: Multinational anti-avoidance law and country-by-country reporting introduced’, Minter Ellison website, 25 September 2015, accessed 7 November 2015.

[136].   Ibid.

[137].   D Drysdale, ‘Australia’s new multinational anti-avoidance law’, ICAS website, 28 September 2015, accessed 7 November 2015.

[138].   DLA Piper, Australian tax alert, op. cit., p. 2.

[139].   Ibid., pp. 2–3.

[140].   Baker & McKenzie, ‘Going it alone: Australia broadens its multinational anti-avoidance law’, Baker & McKenzie website, 17 September 2015, accessed 7 November 2015.

[141].   Explanatory Memorandum, Tax Laws Amendment (Combating multinational Tax Avoidance) Bill 2015, op. cit., p. 23.

[142].   Ibid., p. 9.

[143].   Income Tax Assessment Act 1997, accessed 9 November 2015.

[144].   Income Tax Assessment Act 1936 (Cth), section 336, accessed 7 November 2015.

[145].   The most relevant definition of the term permanent establishment is contained in Article 5, Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, done at Sydney on 6 August 1982, [1983] ATS 16 (entered into force for Australia 31 October 1983), accessed 7 November 2015.

[146].   A New Tax System (Goods and Services Tax) Act 1999, accessed 10 November 2015.

[147].   Explanatory Memorandum, p. 44-45

[148].   Foreign entity is defined in subsection 995-1 Income Tax Assessment Act 1997 (Cth) to mean an entity that is not an Australian entity. Item 1 of Schedule 2 applies this definition specifically to Part IVA Income Tax Assessment Act 1936 (Cth), accessed 19 October 2015.

[149].   Taxation Administration Act 1953, accessed 10 November 2015.

[150].   The Statement of Compatibility with Human Rights for this Schedule can be found at pages 51–52 of the Explanatory Memorandum to the Bill.

[151].   Parliamentary Joint Committee on Human Rights, Twenty-ninth Report of the 44th Parliament, 13 October 2015, p. 2, accessed 9 November 2015.

[152].   Explanatory Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, op. cit., p. 54.

[153].   Taxation Administration Act 1953 (Cth), Schedule 1, section 284-160, accessed 7 November 2015.

[154].   Explanatory Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, op. cit., p. 79.

[155].   Finance Act 2015 (UK), Part 3, accessed 7 November 2015.

[156].   Ibid., section 79.

[157].   J Hockey (Treasurer), Strengthening our taxation system, op. cit.

[158].   Ibid.

[159].   J Frydenberg (Assistant Treasurer), ‘Anti-avoidance measures add up to step change’, op. cit.

[160].   See for example OECD, ‘Action 13: Country-by-Country Reporting Implementation Package’, OECD website, 2015, p. 13, accessed 7 November 2015.

[161].   Deloitte, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Country by country reporting—Exposure draft and Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Scheme penalties for large companies—Exposure draft, 2 September 2015, p. 5, accessed 7 November 2015.

[162].   Ibid.

[163].   Tax Justice Network Australia and Publish What You Pay Australia, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Country by country reporting—Exposure draft and Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Scheme penalties for large companies—Exposure draft, 2 September 2015, p. 4, accessed 16 October 2015.

[164].   DLA Piper, Australian tax alert, op. cit., pp. 3–4.

[165].   ‘Scheme shortfall amount’ is defined at section 284-150 of Schedule 1 to the Taxation Administration Act 1953, accessed 10 November 2015.

[166].   Taxation Administration Act 1953 (Cth), accessed 7 November 2015.

[167].   Ibid., Schedule 1, sections 284–250 and 284–255.

[168].   Explanatory Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, op. cit., p. 55.

[169].   The Explanatory Memorandum notes that tax avoidance schemes include benefits that an entity gets in relation to an income tax year commencing on or after 1 July 2015 (regardless of when the scheme was entered into or carried out). Ibid., p. 56.

[170].   The Statement of Compatibility with Human Rights for this Schedule can be found at pages 56-57 of the Explanatory Memorandum to the Bill.

[171].   Parliamentary Joint Committee on Human Rights, Twenty-ninth Report of the 44th Parliament, 13 October 2015, p. 2, accessed 9 November 2015.

[172].   See Taxation Administration Act 1953 (Cth), section 284-255 and Income Tax Assessment Act 1997 (Cth), note 2 at subsection 815-115(1), accessed 7 November 2015.

[173].   Taxation Administration Act 1953 (Cth), section 284-255, accessed 7 November 2015.

[174].   Ibid., subsection 284-15(1).

[175].   ATO, ‘Who must complete the schedule’, ATO website, 14 September 2012, accessed 9 November 2015; for the list of transactions/relationships triggering the requirement to complete an IDS, see ATO, ‘International dealings schedule instructions 2015’, ATO website, 17 August 2015, accessed 19 October 2015.

[176].   ATO, ‘International dealings schedule’, form, ATO, 2014, accessed 9 November 2015.

[177].   See ATO, ‘International dealings schedule instructions 2015’, ATO website, 17 August 2015, accessed 10 November 2015.

[178].   ATO, ‘International dealings schedule’, op. cit.

[179].   J Frydenberg (Assistant Treasurer), ‘Anti-avoidance measures add up to step change’, op. cit.

[180].   OECD, ‘About base erosion and profit sharing’, OECD website, accessed 7 November 2015.

[181].   Ibid.

[182].   OECD, Action Plan, op. cit.,p. 23.

[183].   OECD, ‘BEPS 2014 Deliverables’, OECD website, accessed 9 November 2015.

[184].   OECD, Guidance on transfer pricing documentation and country-by-country reporting, OECD, pp. 17–18, accessed 7 November 2015.

[185].   Ibid., p. 19.

[186].   Ibid.

[187].   ABA, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Country by country reporting—Exposure draft and Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Scheme penalties for large companies—Exposure draft, 2 September 2015, p .1, accessed 7November 2015.

[188].   Ibid., p. 1.

[189].   Ibid., p. 2.

[190].   ASFA, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Country by country reporting—Exposure draft and Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Scheme penalties for large companies—Exposure draft, 2 September 2015, p. 1, accessed 7 November 2015.

[191].   Ibid., pp. 2–3.

[192].   Chartered Accountants Australia and New Zealand, Submission to Treasury, Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Country by country reporting—Exposure draft and Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Scheme penalties for large companies—Exposure draft, 4 September 2015, p. 2, accessed 7 November 2015.

[193].   Ibid., p. 3.

[194].   Ibid., p. 5.

[195].   Deloitte, Submission, op. cit., p. 2.

[196].   Ibid.

[197].   J Dunne, ‘Australian tax brief: Multinational anti-avoidance law and country-by-country reporting introduced’, op. cit.

[198].   Income Tax Assessment Act 1997, accessed 9 November 2015.

 

[199].   ATO, ‘Permanent establishments (branch operations)’, ATO website, 8 August 2014, accessed 9 November 2015.

[200].   ATO, ‘Trusts’, ATO website, 27 May 2013, accessed 9 November 2015.

[201].   ATO, ‘Approved forms – Overview’, ATO website, 27 February 2012, accessed 15 October 2015.

[202].   Taxation Administration Act 1953, op. cit.

[203].   Ibid., section 286-80(2)(a). Section 4AA of the Crimes Act 1914 (Cth), provides that a penalty unit is equal to $180, accessed 10 November 2015.

[204].   The Statement of Compatibility with Human Rights for this Schedule can be found at pages 67-68 of the Explanatory Memorandum to the Bill.

[205].   Parliamentary Joint Committee on Human Rights, Twenty-ninth Report of the 44th Parliament, 13 October 2015, p. 2, accessed 9 November 2015.

[206].   S Morrison (Treasurer), OECD report supports Australian Government action on multinational tax avoidance, op. cit.

 

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