Australian tax office warns about schemes to avoid multinational antiavoidance law, ’round robin’ financing

The Australian Taxation Office (ATO) has warned multinationals that it will contest a tax planning maneuver designed to thwart Australia’s new Multinational Anti Avoidance Law (MAAL) as well as ’round robin’ type intragroup financing arrangements that generate Australian tax deductions without corresponding income inclusions.

“We are being clear about the areas where we think taxpayers may be tempted to push the boundaries, because we prefer a ‘prevention before correction’ approach,” Deputy Commissioner Jeremy Hirschhorn said, announcing the new guidance.

In TA 2016/11, released September 15, the ATO says it has identified a new arrangement designed to avoid the MAAL,which is law designed to stop multinational groups operating in Australia from avoiding a taxable presence Australia by booking their profits offshore.

The scheme involves interposing an Australian partnership between a foreign company that makes supplies and its Australian customer. The partnership becomes the distributor of the products or services and the foreign entity becomes its agent.

The partnership can be set up so it has one resident corporate partner that has a minority interest in the partnership, thus making partnership an ‘Australian entity’ so the MAAL does not apply, even though most profits are allocated offshore for tax purposes, the ATO said.

These arrangements may not be effective to avoid the MAAL and may trigger other Australian antiavoidance rules, the ATO warned.

“We will initiate compliance activity, if necessary, to address such arrangements and this may result in substantial penalties of up to 120% of the tax avoided being imposed,” the notice warns.

Further, the notice warns that those promoting such arrangements may be considered a promoter of a tax exploitation scheme.

“We continue to take a dim view of any arrangements that are designed to sidestep the MAAL and will act firmly as soon as we become of aware of them,” ATO Deputy Commissioner Mark Konza said.

Round-robin financing

A second taxpayer alert, TP 2016/10, warns multinational groups about cross-border round-robin financing arrangements, where an Australian entity funds an overseas related entity, but subsequently receives the funds back.

The transactions are structured in various ways, but all purport to generate Australian tax deductions for interest payments without corresponding income inclusions.

Examples are provided in the notice of transactions involving loans to related companies located in low tax jurisdictions, loans to related hybrid entities, and loans between members of separate Australian consolidated groups.

“Taxpayers should be very cautious about schemes which create interest deductions out of thin air, simply by shuffling funds around a group, or through simply making some book entries,” Hirschhorn said.

He said that companies that have already entered into transactions covered by the notices should consider approaching the ATO to discuss how to resolve their tax position rather than wait for ATO compliance activities.

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