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  • A strong domestic tax regime

    Australia has a strong domestic tax regime applying to large corporate groups, underpinned by a robust general anti-avoidance rule (known as the GAAR or Part IVA) and transfer pricing rules.

    Australia’s tax regime has been significantly bolstered over the past few years across a range of areas. This includes through:

    • enhancements to the GAAR by introduction of the multinational anti-avoidance law (MAAL), the diverted profits tax and other amendments
    • enhancements to the transfer pricing provisions to align them to OECD best practice
    • adoption of a range of transparency measures, including Country-by-Country (CbC) reporting.

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    General anti-avoidance rule

    Australia is fortunate to be among the few countries to have the benefit of general anti-avoidance measures. In addition to the many specific rules addressing tax avoidance, we have a robust income tax general anti-avoidance rule (GAAR).

    The GAAR is a last resort measure used to protect the integrity of our tax system. It ensures blatant, artificial or contrived arrangements to obtain tax benefits will fail. It is assessed on the objective facts and circumstances of each case. It applies where a taxpayer enters into a scheme for the sole or dominant purpose of obtaining a tax benefit.

    In determining the tax benefit, we look at the taxpayer’s tax position under the scheme. We compare this to the tax position that would arise, or may reasonably be expected to, if they had not entered into the scheme.

    In past years, some Full Federal Court of Australia cases revealed a weakness in the capacity of the GAAR to determine a tax advantage gained from an arrangement. In a series of cases, the courts found a taxpayer would have abandoned its commercial project altogether if it could not avoid the tax on it – so there was no tax benefit. These cases showed a gap in the capacity of the GAAR to address arrangements that, objectively viewed, had been carried out with a relevant tax avoidance purpose. To strengthen the law, the government amended the GAAR in 2013.

    We can now determine the tax benefit in one of two ways: the annihilation or reconstruction approach. The annihilation approach simply ignores the steps that comprise the scheme. The reconstruction approach provides the ability to reconstruct a transaction rather than erase it. It compares the tax consequences of the scheme with those of an alternative reasonably capable of achieving the same tax results and consequences as those achieved by the scheme.

    We have an advisory body, the GAAR Panel, comprising senior ATO officers and external members. This panel advises us on the application of the GAAR to particular arrangements. It brings consistency and independence to the consideration of the GAAR.

    Multinational anti-avoidance law

    The multinational anti-avoidance law (MAAL) is an extension of Australia's general anti-avoidance rules. This law ensures multinational enterprises pay their fair share of tax on the profits earned in Australia. The MAAL counters the erosion of the Australian tax base by multinationals using artificial and contrived arrangements to avoid the attribution of profits to a permanent establishment in Australia.

    The law applies to certain benefits derived on or after 1 January 2016. It broadly applies to significant global entities. A significant global entity is a standalone or accounting consolidated parent entity with annual global income of A$1 billion or more.

    In administering the MAAL, we developed tools to help clients self-assess their risk. We are using analytics to target significant global entity. We have internal assurance processes in place where our risk assessment indicates a taxpayer’s structure falls within the scope of the MAAL provisions. This will ensure a rigorous and consistent application of the law.

    We are engaging with each identified taxpayer within the scope of the MAAL to provide assurance and/or assess their risks. As appropriate, we will help them transition into certain and compliant arrangements.

    As at the end of October 2018, 44 multinational entities have brought, or are in the process of bringing, their Australian sourced sales back onshore in compliance with the MAAL. As a result we anticipate around $7 billion in sales will be returned to Australia, sales revenue that was previously booked offshore.

    We issued guidance and are conducting tailored reviews with large multinationals. By doing this, we are encouraging voluntary compliance and self-correction. We are also responding very strongly to any contrived arrangements attempting to avoid the application of the MAAL.

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    Diverted profits tax

    The diverted profits tax ensures the tax paid by multinational enterprises properly reflects the economic substance of their activities in Australia. It aims to prevent the diversion of profits offshore through contrived arrangements.

    The diverted profits tax applies to income tax years starting on or after 1 July 2017. It will impose a 40% penalty rate of tax to be paid upfront. As with MAAL, this applies to significant global entity.

    The diverted profits tax will apply where one of the principal purposes of the scheme is to obtain an Australian tax benefit or both an Australian and foreign tax benefit. It complements the application of the existing anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936.

    By applying a penalty rate of tax, the diverted profits tax will encourage large multinational enterprises to:

    • increase compliance with their Australian tax obligations
    • be more open with us about their tax affairs, including applying for advance pricing arrangements on their related party transactions.

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    Base erosion and profit shifting action plan

    Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in global tax rules.

    BEPS schemes are associated with inflating expenses (tax deductions claimed) in higher tax jurisdictions, and artificially shifting profits to low or no tax jurisdictions. BEPS schemes can result in relatively low or zero tax rates for some large corporate groups. Australia supported the OECD BEPS program during our presidency of the G20 in 2014.

    The OECD BEPS Action Plan was delivered on 5 October 2015. The plan contains 15 action items and sets out a clear framework for dealing with BEPS issues. The plan supports all jurisdictions in getting the right amount of tax and will develop a stronger international tax system.

    The integrity of Australia’s tax system will increasingly rely on the implementation and enforcement of BEPS recommendations and actions. It is no longer feasible to deal with these issues in isolation. We are playing a key role in developing bilateral and multilateral cooperation among global tax administrations.

    Australia has already adopted a number of the recommendations from the action plan. We are working closely with Treasury and are quite advanced in implementing some of these reforms. These include better transparency from the Country-by-Country (CbC) reporting and exchange of rulings initiatives.

    Together we continue to work with other jurisdictions in implementing other recommendations through our treaty framework. All of these will assist in mitigating the challenges in applying the treaty framework.

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    Country-by-Country reporting

    Country-by-Country (CbC) reporting requires multinational enterprises to provide a CbC report, setting out their key financials jurisdiction by jurisdiction. It outlines their international related-party revenues, profits and taxes paid. Australia will exchange and receive these CbC reports with relevant participating countries. The first exchanges occurred before 30 June 2018, with Australia exchanging with 50 jurisdictions.

    To further enhance our risk assessment processes, CbC reporting also requires the Australian members of these large multinational enterprises to lodge a master file and local file. The master file discloses information about their global value chain. The local file provides detailed information about their international related-party transactions.

    The information collected under the CbC reporting regime will help us to form a global picture of how multinationals operate. It will assist us to carry out transfer pricing risk assessments. This will provide the community confidence in the tax compliance of large multinational enterprises, and help us to target our investigations to the highest risk cases.

    Businesses that qualify as significant global entities under the law will be subject to CbC reporting. These are generally entities with annual global income of $1 billion or more. Over 3,800 taxpayers have lodged around:

    • 3,500 local files
    • 2,500 master files
    • 250 CbC reports.

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    Exchange of rulings

    In October 2015, the OECD released the final report on Action Item 5 to counter jurisdictions engaging in harmful tax practices. It introduced improved transparency through the spontaneous exchange of rulings between participating countries.

    Rulings covering certain topics are subject to exchange when they apply to a specific taxpayer, who is entitled to rely on it. This includes:

    • private binding rulings
    • advance pricing arrangements
    • settlement deeds (for future years)
    • rulings on international arrangements.

    Exchange commenced on 1 April 2016 for future rulings and 31 December 2016 for past rulings. Rulings exchanged provide vital intelligence in understanding the global operations of multinationals.

    Legislative changes to update transfer pricing guidelines

    Australia’s transfer pricing legislation was amended on 4 April 2017 to refer to the OECD’s updated transfer pricing guidance. The updated guidance, effective from 1 July 2016, includes recent changes resulting from the OECD BEPS Action Plan recommendations to better align taxation with value creation.

    The new guidance clarifies that the substance not the contractual form is most important. This will make it harder for multinationals to separate the country where the economic activity occurs from the country where they pay tax on the profits generated by that activity.

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    Multilateral instrument

    The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument) is a treaty allowing jurisdictions to address multinational tax avoidance by quickly modifying their bilateral tax treaties. Australia signed the Multilateral Instrument on 7 June 2017 – when it comes into effect depends on both domestic and treaty party ratification.

    The Multilateral Instrument will be used to implement a number of OECD BEPS Action Plan recommendations, including:

    • denying treaty benefits under Australian double tax agreements where one of the principal purposes of entering the arrangement is to obtain those treaty benefits
    • preventing the artificial avoidance of permanent establishment status
    • improving the effectiveness of dispute resolution mechanisms with mandatory binding arbitration adopted through the Multilateral Instrument.

    Hybrid mismatch rules

    Hybrid mismatch rules were enacted into Australian law in August 2018. The rules prevent multinational companies avoiding income tax or obtaining double tax benefits through arrangements that exploit differences in the tax treatment of an entity or instrument in the laws of two or more tax jurisdictions.

    The hybrid mismatch rules will apply to certain payments and income years commencing on or after 1 January 2019.

    The rules will apply to payments between related parties, members of a controlled group, or parties under a structured arrangement. We have developed guidance to assist any taxpayers who want to eliminate hybrid outcomes and avoid the application of the new rules.

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    Last modified: 13 Dec 2018QC 53276