Australia: Responding to the new multinational tax anti-avoidance law

Last Updated: 27 September 2015
Article by Niv Tadmore and Piotr Klank

Most Read Contributor in Australia, August 2016

Key Points:

Taxpayers subject to the new multinational anti-avoidance law should determine whether they restructure or stay firm.

On 16 September 2015, the Government introduced legislation into Parliament to implement the new multinational anti-avoidance law (MAAL). This was announced as part of the 2015-16 Federal Budget and is targeted at multinationals which are considered to be avoiding the attribution and taxation of business profits in Australia. As follows we provide an overview of the MAAL, implications for taxpayers and some observations on how taxpayers may respond.

When will the MAAL apply?

The MAAL applies to "significant global entities" (member of a group with global annual revenue of $1bn or more). The Government has indicated that the MAAL is targeted at 30 large multinationals, although up to 100 companies may need to review their arrangements to make sure they comply with the law.

The MAAL is an extension of the current general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (Cth). In broad terms, it will apply where:

  • a foreign entity derives income from making "supplies" to Australian customers (eg. goods and services, including digital supplies);
  • there is an entity in Australia (associated or commercially dependent) which supports the making of those supplies (eg. assisting with advertising, marketing and client relationship);
  • the foreign entity avoids the income derived from the supply being attributable to a permanent establishment of that entity in Australia (effectively an avoidance of a taxable presence in Australia); and
  • it would be concluded that the above structure was established for the principal purpose or for more than one principal purpose of enabling the foreign entity to obtain a tax benefit (effectively a reduction in their Australian tax liability).

If the MAAL applies, the foreign entity will be taxed as if the income had not been avoided. That is, the foreign entity will be taxed based on a fiction ? a reasonable alternative postulate which comprises a reasonable alternative to the existing structure. For example, it may be considered that a reasonable alternative would involve an Australian entity making the supplies directly to the Australian customers and therefore the sales revenue would be booked in Australia rather than overseas.

Implications for taxpayers

A key practical issue is identifying the reasonable alternative postulate ?what would a reasonable alternative Australian taxable presence look like and how much income would be attributed to this? This is particularly important as it will form the basis for any tax adjustment (ie. increase in Australian tax liability) and also may give rise to a risk of double taxation where the tax authority in the other jurisdiction does not agree.

Having regard to Australian case law on Part IVA the answer often requires a rather involved "what if" analysis. As Part IVA is an integrity regime it is based on a comparison of what would have happened – a counterfactual. In many cases there will not be a clear cut answer, with a fairly broad and deep spectrum of possibilities and scope for disagreement between taxpayers and the Commissioner of Taxation. Some of the questions that may be relevant to think about in examining the new provisions are:

  • if most (all?) companies in the same industry structure their dealings with Australian customers in the same way ? does this reflect the "industry standard"?
  • how do you re-define the industry standard and what should be occurring?
  • how do you take into account the group's circumstances? Do you assume a structure similar to structures in other countries?
  • how do you best determine how much income should be attributed to the Australian presence?
  • how do you determine the margin or profit that is attributable to the Australian presence? In high turnover businesses, even a difference in margin of 1% can be significant ($ millions). Also, how do you determine a formula that is flexible enough to deal with future developments in the business (eg. digital disruption)?

A further issue is the lower "tax motive" threshold. The existing provisions in Part IVA target arrangements which are "predominantly" tax driven. In contrast, the MAAL is intentionally broader in scope and may apply where avoiding Australian tax is only "one of the purposes" behind a structure (and also applies where one of the principle purposes is avoiding foreign taxes). For example, the MAAL may cancel out a reduced Australian tax liability that is essentially a "collateral" benefit of a structure that has been adopted by a multinational for foreign tax reasons. In addition, the Government has doubled the penalties which may apply to structures caught by the MAAL. Taxpayers may now potentially face penalties of 100% of the tax shortfall, as well as interest.

The UK has introduced similar legislation, in the form of the Diverted Profits Tax (colloquially referred to as the "Google tax"). The aim of the UK tax was to encourage taxpayers to restructure their arrangements so that the tax did not (potentially) apply to them. With respect to the MAAL, given the uncertainty around when and how the tax may apply, some taxpayers may choose to do the same. Others may choose to stay firm and deal with any questions from the Commissioner as and when they arise.

Observations for those who stay firm

It goes without saying that those taxpayers who are confident that their arrangements are consistent with the MAAL should have robust supporting documentation to substantiate their position. However, importantly, they will need to ensure that what actually happens is consistent with that documentation. In our experience, the Commissioner will test the facts and assumptions in supporting documentation and representations by taxpayers. He may interview people and request information which relates to the domestic and global operations. Slide decks and walk-throughs may not be enough to address the Commissioner's information requests, and there is a real risk of a more detailed review being conducted.

Example 3.9 in the Explanatory Memorandum to the new legislation foreshadows that the Commissioner may challenge arrangements where what actually happens is not permitted under internal agreements. In practice, arm's-length parties sometimes depart from the terms of a written contract where this is convenient and/or considered commercially favourable or necessary. Departure from internal agreements, processes and controls likewise may occur within a wholly owned group for a number of reasons. The extent to which this has occurred and how it impacts on the tax position should be tested.

A key challenge for taxpayers who stay firm will be how they communicate to the Commissioner that there is no reasonable alternative postulate under which their taxable presence in Australia would be greater (and/or that under the alternative the same tax liability would arise). This may not be easy and reliance on global policies, foreign tax implications and commercial drivers alone will not be sufficient. Taxpayers should be ready to explain and support the commercial rationale for the adopted structure, be able to demonstrate that the form and substance of the arrangements are consistent and be in a position to explain why an alternative arrangement would not be "reasonable" in the circumstances.

Observations for those who choose to restructure

Those taxpayers who choose to restructure may benefit from frank and open dialogue with the Commissioner on the proposed restructure so that it addresses and pre-empts any concerns which may arise in the future. These discussions should also take into account the potential tax consequences of the restructure, such as the transfer of functions, assets and risks to or between Australian entities. These discussions may be in a form and context which does not prejudice the parties' rights in relation to other issues.

Based on our experience, we expect that disagreements are likely to arise at the practical level noted above ? as to what the new structure should look like and, in particular, what profits should be "attributed/allocated" to the Australian taxable presence. Taxpayers will need to be able to clearly articulate the commercial drivers behind their proposed structure. In this regard, input from internal stakeholders (business/operations) should be considered essential. Likewise, input may be sought from overseas tax authorities, to address any risk of potential double taxation.

Next steps

If passed by Parliament as expected, the MAAL will apply from 1 January 2016. It will apply to all arrangements (ie. not just those entered into after this date) and could apply to arrangements which have been in place for 5, 10 or even 20 years.

Taxpayers subject to the MAAL should determine whether they restructure or stay firm. Those who stay firm should test and support their tax position. In either case, taxpayers may benefit from early, frank and open dialogue with the Commissioner, which may be assisted by an engagement framework.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.