Taxpayer Alert

TA 2008/18

Arrangements to shift foreign business losses into Australian branches or resident entities

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

FOI status: may be released

This Taxpayer Alert describes arrangements within multi-national companies operating through branches, or operating through transactions with foreign associates, which seek to shift deductions for losses from foreign operations into their Australian businesses. Such arrangements are intended to result in the Australian resident entity or branch reporting a lower taxable income than would have been the case without the arrangement.

DESCRIPTION

The alert applies to arrangements having some or all of the following features.

Arrangement 1

1. A foreign resident entity has a branch in Australia which has assessable income for the relevant income year.

2. The foreign resident entity has:

a.

accumulated losses,

b.

assets with embedded, but not yet realised, losses ("loss assets", for example, a book of [bad] debts), or

c.

a liability to pay a third party (the "third party liability").

3. The foreign resident entity arranges to inappropriately attribute to the Australian branch:

a.

some or all of the losses from foreign operations,

b.

loss assets at an inflated price (i.e. by not properly accounting for the decrease in value arising from the embedded losses when it is attributed to the Australian branch), or

c.

the third party liability without attributing to the branch adequate compensation for the value of the liability assumed by the branch.

4. As a result of the arrangements, greater deductions for losses are sought in Australia by the Australian branch or subsidiary.

5. Similar tax outcomes may be sought by an Australian resident entity with a foreign branch failing to properly attribute to that branch relevant losses, loss assets or third party liabilities.

Arrangement 2

6. A foreign resident entity has an Australian resident associate (including a subsidiary member of a multiple entry consolidated group) with assessable income for the relevant income year.

7. The foreign resident entity has:

a.

assets with embedded, but not yet realised, losses ("loss assets", for example, a book of [bad] debts), or

b.

a liability to pay a third party (the "third party liability").

8. The foreign resident entity and the Australian resident associate arrange to inappropriately transfer:

a.

loss assets to the Australian resident entity at an inflated price (i.e. by not properly accounting for the decrease in value arising from the embedded losses), or

b.

the third party liability to the Australian resident entity without receiving proper compensation for the value of the liability assumed.

9. As a result of the arrangements, greater deductions for losses are sought in Australia by the Australian resident entity.

Features which concern us

The Tax Office considers that arrangements of this type give rise to the following taxation issues, including whether:

1.

any amount expended by the Australian resident entity would be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), including the extent to which such an amount was incurred in the gaining or producing of non-assessable non-exempt income

2.

any amounts would be reduced by the commercial debt forgiveness provisions in Division 245 of the ITAA 1936

3.

any amounts of bad debts would be deductible under section 25-35 of the ITAA 1997

4.

any losses would be affected by the participation exemption provisions in Division 768-G of the ITAA 1997

5.

any company's tax losses or deductions may be affected by the provisions in Division 175 of the ITAA 1997

6.

any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936)

7.

any articles in applicable tax treaties between Australian and a relevant country may apply, especially:

a.

the associated enterprises article (where applicable), or

b.

the business profits article (where applicable)

8.

the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and

9.

any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

The Tax Office is currently reviewing these arrangements.

Amendment history

Date of Issue: 13 November 2008

Date of Effect: 13 November 2008

Related Practice Statements:
PS LA 2005/13 - Taxpayer Alerts
PS LA 2007/24 - Making default assessments: section 167 of the Income Tax Assessment Act 1936 and other similar provisions

Subject References:
Transfer pricing
Double tax agreements
International tax
Losses
Consolidation
Bad debts
Debt forgiveness
Participation exemption
General anti-avoidance rule
Promoter penalties

Legislative References:
Income Tax Assessment Act 1997
Section 8-1
Section 25-35
Division 175
Subdivision 768-G
Income Tax Assessment Act 1936
Division 13
Part IVA
Division 245
Taxation Administration Act 1953
Division 290

Authorised by:
Stephanie Martin