Show download pdf controls
  • Australian Financial Markets Association Liaison Group key messages 29 October 2019

    Disclaimer

    ATO/Australian Financial Markets Association (AFMA) Liaison Group agendas, minutes and related papers are not binding on the ATO or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change. It is strongly recommended that where a formal ATO view does not exist for an issue contained in these messages that, for the abundance of clarity and certainty, Private Rulings be sought.

    Welcome and opening remarks

    James Campbell opened the meeting and welcomed attendees.

    He sent apologies from Sandra Farhat who is currently acting as Deputy Commissioner International, and Chris Ferguson, who is currently acting in Sandra’s position but was unable to attend.

    James Campbell noted the recent restructure to the Compliance Engagement Group (CEG) to integrate the Indirect Tax business line into the respective business lines meant that Goods and Services Tax (GST) financial supply issues would be managed by the Public Groups & International (PG&I) business line.

    There are still changes occurring within PG&I to teams and reporting structures.

    At the next AFMA/ATO meeting, the ATO will have staff responsible for GST financial supply issues in attendance to update the industry. There is considerable work happening on public guidance for the industry with the Australian Business Association (ABA) taking the lead given the recent Practical Compliance Guideline 2019/D7 Schedule 1 is focused on credit card businesses.

    AFMA noted it is looking at how the PCG could lead to further public guidance and how that might apply to wholesale banking businesses.

    Multilateral Instrument (MLI) and Mutual Agreement Procedure (MAP) overview

    Tax Base Management – International is the new name for the long standing area that covers Diverted Profits Tax (DPT), the Advance Pricing Arrangement (APA) and MAP Program Management Unit, Base Erosion and Profit Shifting (BEPS) implementation and the Treaties Consultation Unit. Simon Hellmers has taken over as Assistant Commissioner of this area.

    The MLI is an Organisation for Economic Co-operation and Development (OECD) initiative coming out of the BEPS action items. It modifies the operation of existing treaties to address BEPS measures and improves the resolution of cross border disputes. Some articles in the MLI are mandatory, while some are optional.

    When countries sign up to the MLI, they indicate the articles where they have reservations.

    For the MLI to apply to a bilateral treaty, both countries need to nominate the treaty as a ‘covered tax agreement’.

    Australia is currently a signatory to 45 bilateral tax treatiesExternal Link. It is expected that 32 of Australia’s 45 treaties will eventually be modified by the MLI. The ATO commented that the USA was a significant treaty partner that had not signed the MLI. The German treaty was negotiated with the BEPS action items taken into account and thus does not require MLI modification to give effect to them.

    Australia signed up to the MLI on 7 June 2017, ratified in August 2018, and lodged its instrument of ratification with the OECD in September 2018. Australia nominated 42 countries as covered tax agreements, and expressed its reservations.

    The MLI came into force for Australia’s treaties on 1 January 2019. However, this is subject to treaty partners signing up to the MLI and lodging their notification with the OECD.

    Substantive issues relevant to AFMA members include:

    • Implementation of a principal purposes test – the ATO intends to draft guidance in a Practice Statement setting out relevant factors to be considered and the administrative process to be followed by ATO staff when they are considering applying a purposes test included in any of Australia’s tax treaties.
    • Developing processes for mandatory binding arbitration – this article was optional, but Australia adopted it and it is expected to eventually operate in respect of 16 of our covered tax agreements. We are working with other jurisdictions to agree on arrangements for arbitration, with a view to publishing guidance in due course.

    Australia has published synthesised texts for nine covered tax agreements. These synthesised texts show the text of the treaty and how the MLI impacts particular articles. These texts are discussed with our treaty partners and should be consistent between partners, although there are some treaty partners that are not publishing synthesised texts e.g. Singapore.

    The ATO has an MLI webpage that shows the status of implementation by Australia’s treaty partners.

    The OECD website has a MLI Matching DatabaseExternal Link, which sets out all countries’ reservations.

    ATO provided an overview of the following MLI articles:

    • Article 8 – Dividend Transfer Transactions
      • Imposes a 365 day holding period to get lower rates of withholding tax.
      • The holding period can straddle the dividend payment date, so higher rates of withholding tax could apply when a dividend is paid, however a taxpayer can then apply for a refund after meeting the 365 day holding period.
      • ATO is working on a form for the refund of this withholding tax which will be available on the ato.gov.au.
      • It is expected that nine of Australia’s treaties will be impacted by this MLI article, while two existing treaties already contain this rule.
       
    • Article 3 – Transparent Entities
      • Prevents treaty benefits from being available if a taxpayer has transparent entities where it’s inappropriate to do so.
       
    • Permanent Establishment (PE) definitional changes
      • Article 10 (anti abuse rules in third jurisdictions) and Article 12 (definition change to ‘habitually concludes contracts’) were not adopted by Australia.
      • Article 13 was adopted, which clarifies the scope of the preparatory and auxiliary provision, and also includes an anti-fragmentation rule.
      • There is an anti-fragmentation example in the OECD BEPS Action 7 Final Report that considers the rule in the context of banking operations, where an office in one country collects information from the PEs in that same country, to return to the head office in another country. The office would have previously been able to rely on the exceptions and not be considered a PE. However, Article 13 of the MLI would now treat the activities of that branch as connected to the activities of the other PEs.
      • Article 14 was also adopted, in relation to contract splitting, though this will be more relevant to the construction industry.
       
    • Mandatory Binding Arbitration
      • Australia has elected to use the default choice of ‘final offer’ arbitration, where the arbitration panel has to choose from the offers submitted by each jurisdiction.
      • Arbitration will not apply to matters involving Part IVA of the ITAA 1936 and section 67 of FBTAA
      • Arbitration will be confidential, with taxpayers and tax advisers required to sign confidentiality agreements.
       

    Anti-hybrid rules guidance

    ATO provided an update on the following guidance products:

    • The structured arrangement guidance in Law Companion Ruling 2019/3 and Practical Compliance Guideline 2019/6 has been finalised. Not much was changed from the draft to finalised form.
    • Law Companion Ruling 2019/D1 is intended to be finalised by the end of the year. Guidance is now expected to be published in early 2020.
      • This provides the view of some interpretative aspects of Subdivision 832-J of the ITAA 1997, is a targeted rule to prevent taxpayers from using inbound funding that is routed through low/no tax jurisdictions
       
    • A new draft Taxation Determination is expected to be published, relating to the new US Global Intangible Low-Taxed Income (GILTI) regime
      • To apply the anti-hybrid rules, you need to determine whether income on the other side of a transaction has been included. Inclusion can be in a number of forms including, what is akin to attribution via controlled foreign company (CFC) provisions. A comparison needs to be made of the foreign tax regime and how it corresponds to sections 456 and 457 of ITAA 1936.
      • The GILTI regime sets up an alternate minimum tax, targeting US based multinationals, allowing them to attribute back profits referrable to low taxed intangibles across the world.
      • It applies a 10.5% tax rate after calculating deemed deductions and also deems an ordinary return.
      • The query is whether GILTI amounts to the inclusion of income.
      • The draft should be out by the end of November 2019 and remain open for consultation to January 2020.
       
    • The ATO has come to a preliminary view on whether US equivalent hybrid mismatch rules are comparable to Australia’s rules or if they have a substantially similar effect. This could impact how the rules do or don’t work in an Australian context.
      • The ATO is querying whether there is a need to provide guidance on this.
       

    The ATO provided additional updates in relation to the anti-hybrid rules:

    • The International Dealings Schedule (IDS) now has questions focused on the hybrid mismatch rules.
      • Question 45 asks whether the hybrid mismatch rules affect the taxpayer. To clarify, this means whether the rules were operative for the period of the form. If yes, there will be additional questions to answer.
      • However, if the rules have affected a taxpayer because it led to restructuring prior to the rules becoming operative, the answer to question 45 would be no. Question 49 asks whether a taxpayer was required to restructure and requests a description of how this was carried out. The intent behind this question is for the ATO to get insight in to which hybrid rules were thought to be applicable and the actions taxpayers make to mitigate their risk.
      • The IDS instructions have been revised for 2019 IDS to clarify this point
       
    • Anti-hybrid rules are starting to come up in the Justified Trust reviews, so taxpayers may see questions being put to them in relation to the application of the rules.

    AFMA asked whether the ATO was seeing any structures relevant to the Banking & Finance industry.

    ATO is currently looking at whether there is a potential for double deductions, given the way that banks attribute branch profits.

    ATO Identity (ID) Security Strategy

    The ATO ID Security Strategy was developed in response after identifying the occurrence of a large amount of ID security and crime.

    Mark Robinson is leading a central coordination team.

    The main aim of the strategy is to prevent and respond to security threats, not just to revenue, but within the financial ecosystem.

    By understanding, detecting and discovering ID security risks and threats as early as possible, the ATO can consider what mitigations to put in place.

    The ATO ID Security Strategy has nine key priorities:

    1. Building effective relationships:
      • Met with the superannuation industry and the Fintel Alliance. Other stakeholders include the Interbank Fraud Forum, Department of Human Services (DHS) and Department of Home Affairs.
       
    2. Build community resilience:
      • Currently working with Australian Competition and Consumer Commission Scamwatch.
       
    3. Prove and maintain identity:
      • Working with DHS and the Digital Transformation Agency in to the possibility of having a single digital identity for individuals to interact across the public service.
       
    4. Disrupt criminal syndicates:
      • Working with the banking industry to disrupt onshore and offshore syndicates that are disrupting the tax and financial systems.
       
    5. Robust security controls:
      • Building ID crime models and using operational analytics, and devising ways to be able to retrieve funds after a fraud is perpetrated.
       
    6. Robust intelligence:
      • Intelligence and information sharing across industries and government agencies.
       
    7. Respond to identity security breaches:
      • Bringing in partners to stop funds that are subject to fraud.
       
    8. Legislative and policy review:
      • Advocating for changes to legislation and policy to benefit ID security and financial crime. For example, as part of the Tax Practitioners Board review by Treasury, proposed to include requirements for tax agents to strengthen their cybersecurity as part of the registration process, as well as requiring tax agents to report breaches to the ATO.
       
    9. Placing ID security at the centre of tax and super design:
      • Making sure that ID security is being designed in to the system.
       

    The ATO ID Security Strategy team is keen to share information and intelligence and is also open to receiving intelligence from the industry.

    AFMA noted that a good forum might be a quarterly meeting of the ABA, Australian Transaction Reports and Analysis Centre, AFMA and DHA, which is attended by the Money Laundering Reporting Officers of the members.

    AFMA also noted the anti-money laundering bill that had been introduced into the House of Representatives that proposes reforms to sharing of information.

    AFMA members queried whether there was a repository of cases or new types of transactions that were being identified which could be used to train front line staff.

    The ATO responded that there was no such repository of case studies, but would be interested in taking the discussion offline.

    Withholding Tax Refund process

    The ATO’s current process to refund withholding tax amounts involves a paper form that is to be mailed or faxed to the ATO, as per website guidance.

    In order to reduce the ATO’s internal manual processing of these forms, the ATO is looking to improve the system and migrate to a more digital approach by utilising the existing online portals. A new portal message will be created for this purpose.

    This will allow the attachment of documents and the ability to submit online, and the request will be routed to the correct area within the ATO.

    The ATO has developed an Excel spreadsheet for these refund requests. The preference is for each submission to be limited to a single client, although multiple periods would be possible.

    The ATO noted that that a contact number should be supplied to enable more effective communication in case there is a need for further information.

    The ATO would like to standardise the table, but is seeking feedback from the industry to see whether the table can be created as proposed, or what alternatives can be created.

    Keeping the request as close to the pro forma as possible will help to streamline the ATO’s process.

    AFMA noted that this work should also be presented to the Australian Custodial Services Association.

    The ATO website will be updated in due course to give more guidance on the process.

    Tax Assurance Program (Top 100 & 1000)

    The ATO presented the Banking & Finance Strategy for 2019–20. The document covers demographics of the industry and key numbers. It also outlines the key focus risks and issues for the domestic and foreign banks, which have been fairly consistent year to year throughout the years of the taskforce.

    Top 100 – includes five Australian banks and two foreign banks.

    • Casework is focused on producing the Tax Assurance Report (TAR).
    • All major banks should have received at least one version of a TAR. This is intended to be an ongoing document, with a detailed analysis on the fundamental tax issues.
    • The ATO is aiming to get all banks in the Top 100 to high assurance in this financial year, and then moving to a lighter touch approach to maintain knowledge of the business and focus on changes and major transactions.
    • International topic areas for example branch attribution, transfer pricing, CFCs, are challenging to review. However, a taxpayer can still obtain overall high assurance with a medium assurance with no red flags for branch attribution and transfer pricing issues, and 90% of economic activity is covered.
    • Governance is another issue that has been difficult to assure. While banks have sophisticated governance processes across the group, these may not necessarily be in line with the ATO governance framework. The ATO noted that obtaining Stage 3 on governance is actually quite a high level that is considered challenging to achieve in other industries. The fact that banks have rated higher on governance relative to other industries is reflective of the level of regulation in the banking & finance industry.

    Top 1000 – taxpayers with more than $250 million in turnover, includes 72 economic groups from the industry and is heavily dominated by foreign owned banks.

    • ATO has started or completed two thirds of all the banking & finance cases.
    • A few larger cases are scheduled to be completed in this final year.
    • As noted in the last meeting, there are no major systemic tax risks within the population.
    • Very few cases are receiving low assurance. Some cases are getting to high assurance, but this will be more difficult for groups with more complex structures and business models.
    • Next action work is being planned based on priorities. Some cases may move ahead now with next actions, which may include anything from a follow up letter to audit/review activity. This population is not seeing the need for audits yet, so will likely be a follow up letter, or specific issue review.
    • In relation to transfer pricing and branch attribution, the ATO has had difficulties with evidence, documentation and confirming whether the functional analysis, benchmarking and price testing is satisfactory. To get to high assurance, taxpayers need to be putting more work into their documentation, in particular ensuring it is tailored to the Australian operations and functional profile.
    • AFMA members have had feedback that they may need more notice to provide information requested by the ATO during the reviews.
    • ATO noted the Economist Practice is now attached from the start of a review together with two people from Banking & Finance Strategy.
    • Banking & Finance Strategy presented at the Strategic Management Committee (SMC) on the foreign bank strategy. The SMC was satisfied with the progress report and no changes were recommended, other than to extend the life cycle of some of the more complex cases.
    • With the extended budget for the Taskforce, the ATO anticipates a more targeted review of the Top 1000 population.
    • ATO has published a Top 1000 report online with general messaging, updates and highlights. A status update was posted three months ago, with key findings at a program level. It does not include a breakdown at the market segment level, but reports on an aggregate level, including overall assurance ratings and issues in the population.

    AFMA raised the need for the ATO to consider public messaging and whether there would be industry-specific disclosures. AFMA also queried whether there would be an expectation that ATO determined tax assurance report ratings would (and indeed could) be disclosed by entities signed up to the Voluntary Tax Transparency Code. AFMA raised these in the context of its members handling public perception around the Justified Trust program.

    In relation to transparency, AFMA members were reminded to review their disclosures and identify any issues before the release of the Corporate Tax Transparency report which is expected in early to mid–December.

    Action item

    1

    Responsibility

    AFMA

    Action item details

    AFMA to provide any feedback on the ATO’s Banking & Finance Strategy document.

    Offshore Banking Units (OBU) update

    The OECD’s Forum on Harmful Tax Practices (FHTP) raised concerns about Australia’s OBU regime. The key areas of concern are its low tax rate and ring-fencing features. Australia has been tasked with removing these ‘harmful’ features.

    Treasury has been working to modify the regime and last met with the FHTP in July 2019, where feedback was provided by the FHTP to Treasury on its suggested amendments.

    ATO was expecting an announcement from the Treasurer; however the FHTP’s deadline has been extended from December 2019 until the next FHTP meeting in April 2020, which effectively gives Treasury more time to consider its response. The ultimate outcome of this issue remains dependent on both Treasury and the FHTP.

    AFMA noted that there may still be OBU applications and queried what the approach was to process these registration requests.

    ATO will be transparent with these taxpayers regarding the FHTP review and query whether they still want to proceed with an application. If so, the ATO will continue to process their application and in the absence of any Treasury announcement, the ATO can provide a Treasury contact for follow-up queries.

    Negative interest rates

    AFMA has had queries from its members regarding the treatment of payments resulting from negative interest rates. It is an issue that is being grappled with at both an operational and transactional level.

    For example, where a local branch deposits excess funds with its head office overnight, they may need to pay an amount as negative interest.

    However, these amounts paid are not compensation for the use of funds, so it is difficult to consider these payments to be interest. If they are not interest, then there should be no withholding tax liability or requirement that withholding tax be paid before it is deductible. As it is not interest, there would also be no requirement for disclosure on the Reportable Tax Positions Schedule.

    AFMA is raising the issue now as it is seeking consistency across the industry.

    ATO noted that while it had received some questions on the issue of negative interest rates, this has yet to occur in Australia and the issue has not been fully explored.

    ATO’s initial thought is that paying money to someone to hold money is more akin to an account keeping fee. The normal analysis for a loss/outgoing would then apply and it would also raise questions about the application of taxation of financial arrangements (TOFA) rules and branch attribution.

    The withholding tax treatment however has not been substantially considered by the ATO at this point.

    Negative interest rates create a number of operational issues for AFMA members and represents a real cost of doing business.

    ATO noted that it may need to look at the issue more broadly, and consider for example reporting obligations and how it should be reported on the IDS and in Country-by-Country (CbC) reports.

    Action item

    2

    Responsibility

    ATO

    Action item details

    ATO to consider how negative interest rates should be reported on the IDS and in CbC reports.

    Debt issuances subject to non-viability/bail-in conditions

    There was a meeting six weeks ago regarding this issue and AFMA has since supplied further information to the ATO with assistance from King & Wood Mallesons.

    AFMA has a preference for the ATO to publish a statement online that no compliance action will be taken.

    ATO noted that it may have some further queries on the information supplied but it now has a better understanding of the issue and how broadly it applies to instruments issued by the foreign bank industry. ATO is consulting internally and developing a submission to Treasury recommending it consult further with AFMA on the issue.

    ATO does have an internal legal view, but this would provide an unsatisfactory outcome, especially considering the domestic banking industry in Australia has access to the Regulations for statutory relief.

    AFMA reiterated that it would like some kind of compliance relief on the issue.

    Londing Inter-Bank Offered Rate (LIBOR) Transformation

    There is a significant amount of paper that is issued out of Australia referenced to LIBOR with contracts extending past 2021 when LIBOR will be discontinued.

    Other jurisdictions are beginning to consider the tax and accounting consequences that may arise from replacing LIBOR with another reference rate.

    Proposed regulations introduced in the US provide the amendment of a contract to replace LIBOR should not give rise to a gain or loss for taxation purposes.

    AFMA is of the view that the TOFA rules will apply such that the replacement of LIBOR should not trigger any assessable or deductible balancing adjustments under TOFA.

    AFMA also noted contracts that referenced Bank Bill Swap rates (BBSW) will likely be sustained but some may have contracts repapered to include a fall back reference rate should BBSW cease.

    ATO has started to consider potential tax consequences and will discuss with Treasury the need for public guidance.

    Close

    The ATO noted that this was the last meeting of the year.

    Attendees

    Attendee's details listed below.

    Organisation

    Attendees

    ATO

    Nick Maley (Chair), Public Groups and International

    ATO

    Alan Coorey, Public Groups and International

    ATO

    Heath Elridge, Client Account Services

    ATO

    James Blindell, Integrated Compliance

    ATO

    James Campbell, Public Groups and International

    ATO

    Jaspaul Mann, Small Business

    ATO

    Lindy Tan (Secretariat), Public Groups and International

    ATO

    Marcus Ryan, Tax Counsel Network

    ATO

    Mark Robinson, Commonwealth Business Registry Service

    ATO

    Melissa Ogier, Policy, Analysis & Legislation

    ATO

    Phil Daniel, Public Groups and International

    ATO

    Reuben Pace, Public Groups and International

    ATO

    Sarah Hong, Public Groups and International

    ATO

    Simon Hellmers, Public Groups and International

    ATO

    Wendy Scruth, Client Account Services

    AFMA

    Rob Colquhoun

    Goldman Sachs

    Anne Tat

    Goldman Sachs

    Chi Lee

    HSBC

    Jeffrey Tan

    HSBC

    Stuary Prior

    JP Morgan

    Alice Lam

    Macquarie

    Kane Nicholson

    Optiver

    Lise Rawlings

    Rabobank

    Tony Lo Russo

    Societe Generale

    Anley Viengkhou

    Apologies

    Attendee's apologies listed below.

    Organisation

    Attendees

    ATO

    Chris Ferguson, Public Groups and International

    ATO

    Sandra Farhat (Chair), Public Groups and International

    Deutsch

    Ross Baker

    JP Morgan

    Brendan Donnelly

      Last modified: 11 May 2020QC 62560