The Australian government on September 16 moved forward with plans to address multinational tax avoidance, introducing a bill in the House of Representatives that targets large companies that avoid the permanent establishment rules. The bill also proposes new transfer pricing documentation and country-by-country reporting rules.
Both measures were announced in the government’s 2015-16 budget on May 12 and were released in draft form for public input in July. The bill submitted to the legislature contains a few changes from the drafts.
Australian Treasurer Joe Hockey said the antiavoidance law would cover all multinationals operating in Australia with global revenues above AU 1 billion (USD 719 million).
“These 1,000 companies will need to consider the new rules if they have economic activities in Australia but book their Australian sales revenue offshore,” he said.
The law targets foreign entities that derive income from supplies to Australian customers but do not pay tax on the income in Australia. For the law to apply, some activities must be undertaken by an Australian entity that is associated with or commercially dependent upon the foreign entity. Also, the law requires the foreign entity to have a principal purpose of obtaining a tax benefit in Australia or reducing their foreign tax liability
If the requirements are met, the government has the power to recoup any unpaid income taxes on the avoided profit and to collect any avoided withholding taxes on royalty and interest payments. Moreover, a penalty of an additional 100 percent of the unpaid taxes plus interest would be imposed.
The bill changes the draft by eliminating a requirement that the Australian income be diverted to jurisdiction that has a zero or low rate of tax. Also, the principal purpose test was rewritten, no longer requiring the foreign entity to have a purpose of avoiding an Australian permanent establishment.
The law also now states that a reduction of foreign income tax liability includes a deferral of income tax liability.
While the government did not change law’s proposed effective date of January 1, 2016, as requested by stakeholders, it did indicate that the Australian Taxation Office (ATO) will adopt a flexible approach to administering the law for companies that are in the process of restructuring but do not have the arrangements in place as of the effective date of the law.
The legislative proposal to introduce country-by-country reporting and transfer pricing documentation rules is consistent with OECD guidelines in under action 13 of the base erosion profit shifting plan.
Unlike the draft, the legislation allows the ATO to accept country-by-country and master file reports that relate to the income year of the parent company. The government said the ATO will provide guidance on the content of the reports.
Legislation implementing budget proposals to apply the goods and services tax (GST) to all digital products and services and to lower the GST low-value threshold to zero, will be released “imminently,” Hockey said.
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