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  • MAAL client experience roadmap

    Client experience roadmap

    The Multinational Anti-Avoidance Law (MAAL) applies to certain schemes that obtain a tax benefit on or after 1 January 2016. We will work closely with taxpayers to provide greater certainty on whether MAAL applies, and (where applicable) work with those taxpayers to restructure their operations in Australia to comply with the new law.

    What is the purpose of this roadmap?

    This roadmap is designed to help taxpayers apply the new law and outlines the process for taxpayers looking to engage in an open and transparent manner with us about MAAL. This will increase the likelihood of reaching mutually agreeable positions and reduce the need to proceed with ordinary compliance activities.

    Differentiating your client experience

    Taxpayer situations will differ depending on their current situation and engagement with the ATO.

    We envisage that taxpayers who are in scope of MAAL (eg the taxpayer’s business structure has the requisite hallmarks of a scheme to which MAAL may apply) will fall into five categories.

    These are set out below. Each category will have a slightly different client experience and we have tailored the roadmap accordingly. The client experience may also depend on the particular facts and circumstances of each case.
       Flowchart of the client experience roadmap showing the taxpayer's and the ATO's role in the process.

    Terms / explanation

    • 'In scope of MAAL' means the taxpayer has a scheme that has the requisite hallmarks of a scheme to which MAAL may apply and 'MAAL applies' means the scheme meets all of the required elements of s.177DA.
    • The five categories outlined above are designed to assist the process by defining how the taxpayer enters the process.
      • They should not be interpreted as pre-determining what the outcome will be, and a taxpayer may leave the process at various exit points.
      • Also, if a taxpayer’s business evolves, or there is an increase in annual global income, at some future date (such that they subsequently fall in scope of MAAL), then we would encourage the taxpayer to engage with us at that point in time.
       

    What are our expectations and what can you expect from the ATO?

    We expect taxpayers and advisors to engage early to discuss how and if MAAL applies to a taxpayer’s existing structure.

    We expect taxpayers to review their structure beforehand and to provide accurate, relevant and complete information to ensure we have a meaningful discussion about MAAL’s application.

    In return, we will provide guidance about how the provisions apply and options to obtain certainty, including:

    • risk assessments
    • binding interpretative views
    • advance pricing arrangements.

    Early engagement and risk phase – 2-4 weeks (once R1/R2 received)

    Undertake risk assessment process – ATO to follow standard risk assessment process to formulate a risk hypothesis to determine whether MAAL is likely to apply to the existing structure.

    A risk assessment will entail a risk rating of high, medium or low, depending on the facts and circumstances. The documentation to be provided at steps R1, R2 and R3 (as well as some of the accompanying processes) are set out on the next page. A low risk assessment will mean an early exit from this process.

    It is noted that this phase may not apply in particular circumstances e.g. where the taxpayer considers the risk assessment to be high – as well as some category A taxpayers – proceed directly to step S1.

    R1 – documentation includes but is not limited to:

    R2 – Documentation includes but is not limited to:

    • contracts for related party transactions
    • breakdown of Australian sales
    • management accounts of the Australian and overseas entities
    • headcount and duties for staff undertaking functions connected with Australian sales.

    R3 – Risk assessment letter issued by the ATO (will outline engagement options). It is likely that the course of action will be:

    • low-risk MAAL applies – no further action required in relation to MAAL
    • medium-risk MAAL applies – review by the ATO(proceed to S1)
    • high-risk MAAL applies – review by the ATO (proceed to S1).

    Assessment phase – 4-8 months preferably once S1/S2/S3 received)

    MAAL liability – Taxpayer to prepare functional analysis and profit attribution calculations (including comparability analysis) as discussed over page at item S1.

    We review the taxpayer’s materials and form a view on the appropriate MAAL liability. Settlement discussions will follow to examine whether a negotiated position can be reached.

    Legacy issues – While facts and circumstances will differ, the ATO will work with taxpayers to reach a concluded view on the application of the existing law to legacy risks for periods prior to 1 January 2016.

    This will be the preferred course of action in most cases, unless there is a strategic reason to continue with the existing compliance activity. ATO risk assessment process for legacy issues, and taxpayer submission content discussed over page at item S2.

    Restructuring

    We will not provide advice on how the taxpayer should restructure, but we will require that the resultant structure, and the arm’s length profits returned to Australia thereunder, be appropriate for and commensurate with the functions performed, risks borne and assets owned or used.

    We would also expect the restructure to result in an allocation of functions performed, risks borne and assets owned or used by the Australian operations that is not artificial.

    S1 – Detailed submission including, but not limited to:

    • full functional analysis
    • comparability and benchmarking analysis
    • profit attribution calculations and justification
    • staff employment contracts
    • evidence in relation to contractual negotiation process with customers.

    We may ask for additional information to that listed above where necessary.

    S2 – Legacy compliance risks arising under existing law (e.g. permanent establishment, transfer pricing and Part IVA) for periods prior to 1 January 2016:

    • ATO risk assessment for legacy compliance risks prepared
    • taxpayer submission with full functional analysis, profit attribution calculations and benchmarking
    • refer to legacy issues which outlines our approach.

    S3 – Restructure proposal includes but is not limited to:

    • proposed Global and Australian business structure and value chain
    • restructure implementation plan, including proposed timeline
    • materials that demonstrate how contracts will be concluded with Australian customers going forward
    • proposed profit attribution calculations and related party pricing including supporting benchmarking.

    Settlement phase – 4 weeks

    Settlement – We will follow standard settlement processes.

    The terms and conditions will be set out in a MAAL settlement deed.

    We anticipate in most instances the Deed will cover:

    • legacy issues
    • MAAL – exposure
    • the agreed restructure proposal.

    Part of these discussions will involve reaching agreement on the attribution of profits to Australia under the new structure going forward (with an APA / BAPA to be finalised subsequently, refer T1).

    S4 – ATO will agree settlement terms to cover the issues progressed in parallel, including, legacy risks under existing law, MAAL liability and restructure (including agreed pricing / attribution methodologies.)

    The Australian entity, foreign entity, and any related parties affected and the ATO will negotiate the settlement terms on primary tax and penalties (for both MAAL and legacy risks)

    S5 – Penalty submission may have regard to:

    • reasonably arguable position as per MT 2008/2
    • voluntary disclosure as per MT 2012/3
    • remission of administrative penalties relating to schemes as per PSLA 2011/30.

    Note: if a settlement cannot be reached between the ATO and the group, we will take appropriate compliance action. This may include:

    • a review or audit
    • issuing default assessments
    • legal prosecution.

    Post settlement phase – by 31 December 2018

    Future certainty – a taxpayer may request a private ruling (PR) regarding the new structure for example to confirm that MAAL does not apply.

    This is not anticipated to be the case in every instance for example some taxpayers may prefer to seek a prospective Advance Pricing Arrangement (to cover the proposed structure on a prospective basis with critical assumptions to be tested and validated once the structure is in place and at regular intervals via a robust Annual Compliance Review).

    Legacy issues

    Category A – we may continue with its current risk review or audit activities, or alternatively, if agreed, seek to settle the legacy risks under existing law.

    Settlement is our preferred course of action, unless there is a strategic reason to continue with the existing compliance activity (eg contentious point of law which requires judicial clarification of the law).

    Category B and Category C – we will seek to settle legacy issues we have identified and assessed as either *high risk or where there is a material quantum of tax at risk.

    Whilst every case is different, we don't anticipate pursuing legacy issues for category B and C taxpayers for periods prior to 1 January 2016 where they are rated as *low risk.

    Category D – compliance review activities will be initiated by us to assess the risk profile and materiality of any legacy issues (if they arise).

    As this activity is initiated by us, the legacy issues will be assessed in existing compliance review products. It is anticipated that we will pursue all legacy risks unless the risk is *low risk and/or quantum is of low materiality.

    *Low risk / *high risk assessment: refer to the ‘high risk’ and ‘low risk’ example referenced in the Law Companion Guideline (LCG 2015/2).

    Although this guidance is in relation to MAAL, the examples may be relevant risk benchmarks for legacy issues where the taxpayer has the same structure in place both pre and post 1 January 2016.

    In some instances, these examples may not be relevant – and in these cases the ATO will rely on our usual risk assessment processes and tailor these to best fit the specific circumstances.

    Penalties on legacy issues

    Any liabilities for penalties arising under Division 284 of the Tax Administration Act 1953 for legacy risks will be determined on a case-by-case basis (most likely via settlement discussions). As the legacy risks relate to pre-existing law, every case will be slightly different, but general guidance is provided in table 2 below.

    MAAL penalties

    Schedule 3 of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 doubles the penalties for SGEs for a ‘scheme shortfall amount‘ where the taxpayer does not have a reasonably arguable position (RAP).

    MAAL penalty provisions apply to scheme benefits arising from 1 January 2016, and a ‘scheme shortfall amount’ will arise after an assessment is made for the relevant income year.

    Taking an early engagement approach, a settlement (or similar arrangement) will be agreed with us before the relevant return being lodged (such that MAAL penalties should not arise). In the event this is not possible, due to extraneous factors, then the proposed approach for imposing MAAL penalties is outlined below:

    Category A – under current review

    See Table 1 to determine which penalty % is likely to apply. For example, where a taxpayer has a RAP for a scheme to which MAAL applies, then penalties are likely to be:

    • 25% (assuming there are no aggravating factors)
    • this may reduce to 20% if a voluntary disclosure is made during the examination.

    Category B – Responsive taxpayer

    See Table 1 to determine which penalty % is likely to apply. For example, where a taxpayer has a RAP for a scheme to which MAAL applies, then penalties are likely to be 5% (if there has been voluntary disclosure before an examination – assuming no aggravating factors).

    Category C – Voluntary disclosure taxpayer

    See Table 1 to determine which penalty % is likely to apply. For example, where a taxpayer has a RAP for a scheme to which MAAL applies, then penalties are likely to be 5% (if there has been voluntary disclosure before an examination – assuming no aggravating factors).

    Category D – Subsequently identified taxpayer

    See Table 1 to determine which penalty % is likely to apply. For example, where a taxpayer has a RAP for a scheme to which MAAL applies, then penalties are likely to be:

    • 25% (assuming there are no aggravating factors)
    • this may reduce to 20% if a voluntary disclosure is made during the examination.
    Table 1 – MAAL penalties

    Culpable behaviour

    Base Penalty Amount

    Aggravating factors

    Disclosure during examination

    Disclosure before examination

    Tax avoidance schemes (principal purpose test met)

    100%

    [if RAP, reduces to 25%]

    120%

     

    [if RAP, reduces to 30%]

    80%

     

    [if RAP, reduces to 20%]

    20%

     

    [if RAP, reduces to 5%]

    Table 2 – Legacy penalties

    Type of scheme

    Base Penalty Amount

    Disclosure during examination

    Disclosure before examination

    Scheme where sole or dominant purpose test met

    100% (1 July 2015 to 31 December 2015); otherwise 50%

    [if RAP, reduces to 25%]

    80% (1 July 2015 to 31 December 2015); otherwise 40%

    [if RAP, reduces to 20%]

    20% (1 July 2015 to 31 December 2015); otherwise 10%

    [if RAP, reduces to 5%]

    Scheme where sole or dominant purpose test not met

    50% (1 July 2015 to 31 December 2015); otherwise 25%

    [if RAP, reduces to 10%]

    40% (1 July 2015 to 31 December 2015); otherwise 20%

    [if RAP, reduces to 8%]

    10% (1 July 2015 to 31 December 2015); otherwise 50%

    [if RAP, reduces to 2%]

    More information

    For more information, contact us:

    • MAAL@ato.gov.au
    • Elizabeth Hardcastle, Assistant Commissioner (07) 3907 2474
    • Jennifer Kong, Director (02) 9374 8971
    • Fabian Fedele, Director (03) 8632 4889
      Last modified: 18 May 2017QC 52099