As we highlighted in the December edition of the Large Business Bulletin, we are continuing our focus on the wide range of issues detailed in the Compliance program 2010-11.
The following are just some of the risks relevant to large businesses.
Profit shifting, international and cross-border transactions
This is the use of arrangements between Australia and offshore affiliates to shift or shelter profits.
We are maintaining our focus on these transactions through arrangements we have in place with our offshore affiliates. We have also updated our risk profiling and assessment activities so that they are better aligned to our Risk Differentiation Framework.
Specifically, we continue to focus on transfer pricing and related international risks associated with:
- business restructures
- guarantee fees and intra group loans
- global profit/loss allocation
- supply/acquisition of property for non-arm's length consideration.
We have recently issued two new taxation rulings that set out our views on the way the transfer pricing provisions in Division 13 apply in Australia's tax treaties. These rulings are:
- TR2011/1 in relation to business restructures
- TR2010/7, which explains our views on how the thin capitalisation provisions in Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) interact with the transfer pricing provisions.
Corporate restructures, mergers and acquisitions
These are arrangements where taxation and economic outcomes are not aligned and are unnecessarily complex.
Private equity
We issued tax determinations, TD 2010/20 and TD 2010/21. These relate to treaty-shopping arrangements designed to avoid Australian tax on the disposal of investments acquired in a leveraged buy-out by private equity.
Two further draft determinations, TD 2010/D7 and 2010/D8, were released on 1 December 2010. These relate to determining an Australian source when private equity funds sign a leveraged buy‑out contract and the application of treaty benefits through fiscally transparent limited liability partnerships.
We have written to private equity firms to inform them of these determinations and encourage them to engage with us to so we can provide greater certainty in terms of their tax positions. We are also conducting a number of risk reviews.
Demergers
An area of concern is the recent trend in demergers being undertaken in conjunction with a contemplated, pre-determined sale of either the demerged entity or the head entity of the demerger group. The question as to whether such schemes are genuine demergers needs to be considered. In such cases taxpayers might need to consider whether section 45B or Part IVA could apply to these arrangements.
Consolidation
Consolidation risks include unintended or inappropriate income tax outcomes where there are complex interactions between the consolidation provisions, other parts of the tax law and external regulatory frameworks.
We are currently profiling cases that include the following:
- exits and re-entries to the same economic group where the economic ownership has not changed
- arrangements that allow the tax-free disposal of underlying assets (Division 855/ Multiple Entry Consolidated groups involved).
Our main concerns with these cases are:
- the refreshing of asset values on re-entering
- the avoidance of capital gains tax on exits.
Some of these cases have now progressed to the risk review stage.
Research and development claims
We are focussing on research and development (R&D) claims that incorrectly classify normal business activities as R&D and wrongly allocating related expenditure to R&D activities.
The areas we are paying particular attention to include:
- non-compliance with 'own behalf' rules
- failure to correctly apply feedstock rules
- misclassification of operating expenditure as relating to R&D
- wrong classification of expenditure as between R&D categories.
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Last Modified: Monday, 23 May 2011