The Australian Taxation Office (ATO) has intensified its efforts to crack down on multinational corporation tax avoidance, launching a consultation on the aggressive use of offshore hub structures, and issuing taxpayer alerts on offshore permanent establishments, on the application of Australia’s multinational anti-avoidance law (MAAL) to the GST, and on the inappropriate calculation of debt capital for thin capitalization purposes.
Offshore hubs
The consultation on offshore hubs, launched August 9, provides guidance on whether a hub arrangement will be viewed by the ATO a posing a tax and transfer pricing risk and how multinationals can work with the ATO to mitigate that risk. The guidance follows contentious Senate hearings last year which focused on large multinationals’ use of marketing hubs located in low-tax nations such as Singapore to lower their Australian tax bills.
In the draft guidance, the ATO lists the factors it will use to place taxpayers into risk categories, ranging from a low-risk green zone to a very high-risk red zone and the consequences of such placement. For example, the ATO states that companies in the red zone will not be permitted to use Australia’s advance pricing agreement program and will face an increased likelihood of litigation.
The draft guidance particularly focuses on offshore marketing hubs, stating that groups that record profits in such hubs that are greater than 100% of the hub costs or that fail a to-be-developed “commercial realism” test will not qualify for low-risk “green zone” treatment.
The risk level is further increased, the paper states, as the “net tax impact” of an arrangement increases, and if the taxpayer does not maintain transfer pricing documentation, does not voluntarily engage with the ATO, fails to disclose material facts in a timely manner, or fails to provide primary supporting evidence of its assertions.
The ATO also offers to relieve penalties and interest for some taxpayers’ prior years if the taxpayer makes voluntarily disclosures relating to the back years and agrees to adjust its pricing to come within the green zone.
Feedback on the draft proposal is requested by September 30.
GST avoidance
The ATO is also reviewing structures developed by companies in response to the MAAL which are designed to reduce the amount of GST payable, an August 10 alert states.
The arrangements involve foreign and Australian entities swapping their roles via contracts which purport to make the Australian entity the distributor of intangible products or services and the foreign entity an agent of the Australian entity, collecting the sales revenue from customers on its behalf.
“We’re concerned some of these structures have been set up to avoid GST, which is clearly inconsistent with the underlying policy intent of MAAL and the GST Act,” Deputy Commissioner Mark Konza said.
“Companies found to have established these types of contrived arrangements will have to pay back liabilities and may face penalties of up to 75% of tax owed,” Konza said.
Konza also said that the ATO is considering whether intermediaries who encourage these arrangements should be viewed as promoters of tax exploitation schemes.
Offshore PEs
Another alert, also issued August 10, describes particular arrangements where Australian consolidated groups use offshore permanent establishments that have entered into intragroup transactions. The ATO is already investigating some of these cases, applying the general anti-avoidance rule.
“Through these arrangements, groups may be understating their true Australian income and claiming deductions incorrectly. The end result is double non-taxation, and in some cases, groups are even claiming further tax relief they’re not entitled to,” Deputy Commissioner Jeremy Hirschhorn said.
“Taxpayers need to ensure the taxable income returned properly reflects the economic substance and significance of operations carried on, consistent with the arm’s length principle,” Hirschhorn said.
Thin cap debt
Another alert cautions against the intentional miscalculation of debt capital for the purposes of thin capitalization rules.
“In some cases, taxpayers are failing to include the value of a debt interest that’s been treated as equity for accounting purposes in their debt capital. As a result, the taxpayer’s adjusted average debt is understated, allowing them to claim more debt deductions than they’re entitled to,” Konza explained.
“Taxpayers need to consider the debt capital values used in thin capitalisation calculations carefully. If we think a taxpayer has undervalued debt capital then we will pursue compliance action. Taxpayers may be liable to penalties in addition to paying back any tax owed,” he said.
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