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  • 1. Welcome and introductions

    The meeting commenced at 10:00am.

    The meeting chair, Michelle de Niese (Executive Director, Corporate Tax Association), opened the meeting and welcomed all members and participants to the last meeting of the group for this year. In light of the objectives of the LBSG, Michelle encouraged open and frank channels of communication and consultation.

    Michelle welcomed the following attendees to the meeting:

    • Maryanne Mrakovcic – Deputy Secretary, Revenue Group, The Treasury
    • Karen Payne – Chief Executive Officer, Board of Taxation
    • Kimberley Simpson – Group Tax Manager, Cochlear Limited
    • Abs Osseiran – Group Tax Director, Lion

    Michelle advised that the following members will be stepping down at the conclusion of this meeting and thanked them for the contribution to this forum:

    • Paul McCartin – Partner, PwC - Andrew Woollard of EY will represent the Big 4 next year.
    • Robert Zizic – Group Taxation Manager, IBM Australia & New Zealand - Robert sent an apology for this meeting
    • Paul Hooper – Group Head of Tax, Lend Lease
    • Dayani Perera – Group Finance & Tax Manager, Ramsay Health

    Action items from previous meeting

    There was one Action Item from the 15 August 2016 LBSG meeting. The Action Item and its status follow:

    Action item 1 – 01-150816

    LBSG Secretariat to circulate a short briefing note regarding the Justified Trust project with the minutes of this meeting.

    Status: Complete – The briefing note was circulated on 10 October 2016. 

    Briefing papers

    Tax Avoidance Taskforce

    Members discussed the Multinational Anti-Avoidance Law (MAAL) compliance strategy and the need for advisors to communicate to the global head of tax the options available to taxpayers in considering the application of the MAAL.

    Members also discussed the recently released OECD paper on Mutual Agreement Procedure (MAP) Peer Review Documents. Australia's MAP processes are currently contained in Taxation Ruling TR 2000/16 and the ATO is expected to release MAP guidance documents by the end of this year. Some members have observed an international increase in MAP disputes.

    Foreign Investment Review Board

    No discussion on this paper.

    2. Exchange of information

    Mark Konza led discussions on the development of protocols for exchange of information (EOI) requests:

    • The ATO is currently considering the extent to which a taxpayer could or should be advised of an EOI request being made against them, including the need to distinguish between incoming and outgoing EOI requests. Anthony Siouclis, Assistant Commissioner, Public Groups and International, has oversight of this project.
    • The ATO will consult on this issue as the project progresses.
    • Members observed that a taxpayer's lack of understanding with respect to the ATO's need for information pertaining to the global value chain can hamper settlement negotiations.

    Action item:

    161115.1

    Responsibility:

    Anthony Siouclis

    Anthony Siouclis to report on the progress of developing protocols for exchange of information requests at the appropriate time.

    3. Advance pricing arrangements (APA)

    Mark Konza led discussions on the APA program, including the ATO's 'triage' process:

    • APA statistics:
      • 41 APAs were completed in the 2016 financial year: 19 Unilateral; 22 Bilateral.
      • 131 active APAs currently in place: 76 Unilateral; 55 Bilateral.
      • 107 APAs are in progress: 36 requests in the early engagement stage and 71 formal APAs lodged.
      • 57 APA requests were received: 44 renewal requests and 13 new APA requests.
      • Average time to finalise an APA from formal lodgement was 9.76 months for unilateral APAs and 16.32 months for bilateral APAs.
       
    • Trends demonstrate an increase in APAs, particular bilateral APAs as unilateral APAs expose MAP risks.
    • The ATO's APA Management Unit has oversight of the APA program.
    • Following feedback that some taxpayers have difficulty distinguishing the APA process from an audit process, the ATO is developing a document summarising the difference. Members welcomed the development of this document.
    • The ATO's 'triage' process is a low cost mechanism to determine whether a taxpayer should proceed to lodge a more cost-consuming APA application. Members observed that taxpayers lacked sufficient understanding of the 'triage' process.

    Action item:

    161115.2

    Responsibility:

    Cameron Smith

    Cameron Smith to provide an outline of the APA 'triage' process at the next LBSG meeting, including expectations, lessons learned and sufficiency of Practice Statement PS LA 2015/4.

    4. Related party debt

    Maryanne Mrakovcic of Treasury discussed the Treasury's awareness of the OECD's thin capitalisation recommendations and the Treasury's continued monitoring of Australia's thin capitalisation rules.

    Mark Konza discussed the ATO's adoption of a cluster approach to thin capitalisation which focuses on taxpayers who may be using tax planning strategies to facilitate excessive debt deductions in Australia as a result of the thin capitalisation rules (Division 82) being circumvented or via legislative deficiencies being exploited.

    Jeremy Hirschhorn discussed recent taxpayer alerts on thin capitalisation and the ATO's current focus on:

    • Inappropriate asset valuations and revaluations;
    • Inappropriate asset recognition of self-generated intangible assets;
    • Failure to correctly impair asset values;
    • Excessive allocation of value to Australia as a result of business restructures (both external acquisitions and merger and internal acquisitions - e.g. 'top-hatting');
    • Debt/equity tax planning and interactions with accounting standards when financial instruments are treated as equity for accounting purposes (i.e. Taxpayer Alert TA 2016/9).

    Jeremy urged the group as stewards of the tax system to robustly address direct challenges to policy. The ATO will continue to work with tax professionals and other Government departments to address this issue while the 'Chevron' decision is being appealed.

    Shaz Panhwar advised members that the ATO is developing guidance on the transfer pricing of debt. This guidance, following extensive consultation, will be available in the New Year and will deal with both inbound as well as outbound markets. The ATO's position is that underlying conditions, in addition to credit rating and price, are also important factors to be taken into consideration.

    5. Recent developments in large business tax policy

    Maryanne Mrakovcic updated members on the status of the following policy matters of interest to large business:

    • Company tax cuts legislation has been introduced in Parliament and discussed at the Senate Estimates Committee.
      • Cuts for large corporates are still a topic of conversation.
      • Members observed that there does not appear to be any interaction between the personal and corporate tax rate.
       
    • Legislation on the Diverted Profits Tax is currently being drafted for further consultation
      • 20 submissions were received from the initial round of consultation
       
    • 100-fold penalties for non-lodgement
      • The measure is intended to address wilful and repeated failures to lodge.
      • Maryanne undertook to follow up on the progress of this announcement.
       

    6. Board of Taxation

    Karen Payne from the Board of Taxation led discussions on the voluntary tax transparency code (the Code):

    • The Board provided an update on participation in the Code and noted the different response and take-up between large Australian-based groups and foreign multinationals and private companies.
    • The Board acknowledged that most members represented at the LBSG had adopted the Code and that the Board was grateful for the support of the CTA, Business Council of Australia and G100 in supporting the Code.
    • There are currently 52 organisations registered to the Code. These 52 organisations together comprise 64% of total taxable income and 62% of total tax payable in Australia.
    • Notwithstanding the large take-up by large domestic corporates, there is a risk that without more take-up, some sectors of the community may continue to call for a mandatory code of transparency. This appears largely directed at mandatory public disclosure of country-by-country reporting.
    • The Board noted that AASB Guidance material is still to be released and that this will provide additional material to be considered as part of the financial reporting process.
    • Members suggested campaigning to companies to support the Code.
      • The Business Council of Australia has been actively encouraging its members to register for the Code.
      • Consider also targeting the Institute of Company Directors, chairs of risk audit management committees and tax advisors.
       
    • Members observed that if the purpose of the Code is to encourage cultural change at the board/director level, making the Code mandatory will defeat that purpose.

    7. Compliance risks and emerging issues

    Bruce Collins led discussions on the following matters of interest in the context of income tax:

    • Corporate Tax Transparency:
      • The ATO will publish the 2014–15 corporate tax transparency report in early December – this year it will be one list of all entities over the relevant thresholds (over $100 million for public and foreign owned, over $200 million for privately owned) but the format will be similar to the 2013–14 report. 2014 late lodgements will also be published.
      • Revised contextual guidance material was published on ato.gov.au in mid-October and we will provide further guidance in the form of analysis of the data at the same time as the 2014-15 report. Trends appear to be similar to the 2013–14 year.
       
    • General Purpose Financial Statements (GPFS):
      • The ATO published a discussion paper on 15 August 2016 regarding the administrative arrangements for the provision of general purpose financial statements by Significant Global Entities (SGE). Submissions closed on 30 September.
      • 12 submissions were received, which included views that:
        • SGEs with overseas parent companies who are consolidated for accounting purposes ought to be able to provide the GPFS of their parent prepared in accordance with the accounting standards of their parent’s place of residence (eg IFRS or US GAAP);
        • the expression ‘financial year most closely corresponding with income year’ should be sufficiently flexible to accommodate SGEs with substituted accounting periods notwithstanding the definition of financial year in the income tax law; and
        • guidance is required for specific scenarios (including for MEC groups and non-residents with Australian branch operations).
         
      • We plan to re-engage with stakeholders who made submissions later this month, with a view to receiving their further input by the end of the year so that we can provide practical compliance guidance to affected stakeholders by early next year.
       
    • Reportable Tax Position Schedule (RTP).
      • The ATO has received useful input through consultation on the revised RTP schedule.
      • Higher consequence taxpayers will be subject to the RTP Category C changes from the 2017 income tax year.
      • The RTP obligation will be expanded to the top 1,000 taxpayers from the 2018 income tax year and the ATO is looking at how best to communicate with this population about this change.
      • There was disagreement amongst members as to whether taxpayer alerts were becoming more interpretational.
       
    • Research & Development (R&D).
      • A package of taxpayer alerts relating to the R&D tax incentive is currently being prepared for release in late 2016 early 2017 addressing governance practices where taxpayers are failing to distinguish between business-as-usual activities and eligible R&D activities;  
      • The package also targets several industries with widespread risk of ineligible activities including software claims in the banking and financial sectors;
      • In conjunction with the alerts, AusIndustry is about to release new guidance materials for a range of high risk activity issues, and a new public findings product that will be used to give claimants and advisors decisions to follow on eligibility of R&D activities.
       

    Deborah Jenkins led discussions on the following matters of interest in the context of indirect tax:

    • The government announced that from 1 July 2017, non-resident suppliers selling goods to consumers based in Australia who meet the registration turnover threshold of A$75,000 will need to register for the Australian GST and report and pay GST to the ATO. Draft LawExternal Link was released by Treasury on 4 November 2016 for comment and proposes a vendor registration model.
    • The ATO is continuing to examine how the GST 'connected with Australia' (the Indirect Tax Zone) rules apply to 'e-commerce' providers who utilise server networks in Australia to make services available in Australia. The interaction with changes to commercial operating structures for MAAL is also being considered.
    • Testing continues on the practical application of private rulings issued to banks about the GST treatment of costs related to credit cards; with a pilot of 4 financial institutions.
    • The ATO is receiving increasing numbers of private ruling requests involving the potential application of GST-free provisions as a result of the 'Travelex' decision for financial supply providers.
    • The potential misapplication of reduced credit acquisitions resulting in the over-claiming of input tax credits is emerging as a risk, which the ATO is monitoring.
    • Practical application of the “four year rule” and the recent change to self-assessment for GST, including the cessation of 'stop the clock' letters, is currently a focus, particularly as we transition to the new regime. The ATO is currently receiving a large number of requests for amendments and potential objection claims.
    • The ATO released a number of fuel tax credit guidance documents in September. Our focus is on ensuring fuel tax credits are appropriately claimed. We are keen to understand the basis for any new claims, and that they are consistent with our view of the law. These included:
      • fuel tax determination 2016/1 (FTD 2016/1) referring to the FTC rate being reduced by the road user charge for fuel used in a heavy vehicle for idling on a public road or powering the air conditioning unit of the vehicle’s main cabin when travelling on a public road;
      • the explanation of ‘public road’ was clarified in fuel tax ruling FTR 2008/1;
      • Practical compliance guideline PCG 2016/11 replaces PSLA 2013/4 (GA) and is a guide to methods that claimants can use to apportion fuel used in heavy vehicles to power auxiliary equipment.
       
    • The ATO will be releasing on 18 November 2016 a Practical Compliance Guideline on GST and countertrade transactions (PCG 2016/16).

    8. Offshore hubs

    Rebecca Saint led discussions on the Offshore Hubs consultation paper:

    • Following the release of the draft Practical Compliance Guideline (PCG) on Offshore Hubs, the ATO received a number of written submissions, met with key stakeholders and provided a copy of the draft PCG to tax authorities in Singapore, UK and Canada.
    • Singapore did not provide specific comments on the draft PCG. However, they did advise that they understood the guide to be a risk assessment tool.
    • As a result of the submissions received, the ATO has made some changes to the draft PCG, including;
      • Clarification that the PCG is a compliance risk guide and not a technical guide
      • Clarification of circumstances when taxpayers won’t need to self-assess, which has resulted in the creation of a new 'white zone'
      • Removal of the behavioural indicators
      • Removal of the limitations to access the APA program for taxpayers outside of the 'green zone'
      • Refinement of the definition of offshore marketing hubs
      • Allowing taxpayers that don’t meet the risk benchmark to move to the green zone if profit of the hub is fully attributed
       
    • The ATO is aiming to publish the final PCG before Christmas. It is anticipated that a copy of the final PCG together with a compendium of comments will be provided to stakeholders that provided written submissions before the PCG is published.
    • The ATO is not aware of any other jurisdictions that have taken the same approach.
    • Members observed that the first case on offshore hubs is currently being heard in Canada.

    9. Industry perspective

    Premila Roe discussed trends and issues in the Energy & Resources Industry:

    • The 2016 financial year was a challenging year for the Energy & Resources industry due to the decrease in commodity prices. The current year has been more promising with increases in the prices of most commodities and oil.
    • The reduction in commodity prices in 2016 resulted in several mining companies recognising impairments. These impairments may have an impact on their calculations for the safe harbour for thin capitalisation.
      • Members discussed the 3 thin capitalisation tests and the importance for clear guidance on topical issues such as revaluations.
       
    • There was discussion on India and China and their consideration of BEPS - particularly whether an amount of corporate tax should be borne where the customer is based.
    • The industry continues to work towards ensuring that the industry tax contribution is well understood by the public.

    10. Other business

    Other matters

    There were no other matters raised for discussion.

    Next LBSG meeting  

    The dates for the 2017 LBSG meetings will be scheduled shortly. The LBSG secretariat will send members calendar invitations to these meetings.

    The meeting concluded at 2.45pm.

      Last modified: 28 Feb 2017QC 51393