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  • ATO issues new warnings for large companies and multinationals

    The ATO has released a series of taxpayer alerts cautioning large companies and multinationals seeking to avoid their tax obligations through certain contrived arrangements.

    These arrangements relate to offshore permanent establishments, GST and the operation of the Multinational Anti-Avoidance Law (MAAL), and incorrectly calculating debt capital for thin capitalisation purposes.

    Deputy Commissioner Jeremy Hirschhorn said the first alert deals with arrangements where Australian consolidated groups use offshore permanent establishments that have entered into intra-group transactions.

    “Through these arrangements groups may be understating their true Australian income and claiming deductions incorrectly. The end result is double non-taxation, and in some cases, groups are even claiming further tax relief they’re not entitled to,” Mr Hirschhorn said.

    “Taxpayers need to ensure the taxable income returned properly reflects the economic substance and significance of operations carried on, consistent with the arm’s length principle.”

    The ATO is already investigating cases using these contrived arrangements, some of which may attract the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936), also known as the general anti-avoidance rule.

    The ATO is also reviewing structures developed by companies in response to the MAAL which are designed to reduce the amount of GST payable.

    “We’re concerned some of these structures have been set up to avoid GST, which is clearly inconsistent with the underlying policy intent of MAAL and the GST Act,” Deputy Commissioner Mark Konza said.

    “Companies found to have established these types of contrived arrangements will have to pay back liabilities and may face penalties of up to 75% of tax owed.

    “We’re also looking closely at intermediaries who encouraged these arrangements and may consider them promoters of tax exploitation schemes.”

    Mr Konza said the ATO is cautioning against the intentional miscalculation of debt capital for the purposes of thin capitalisation rules in a third taxpayer alert released today.

    “In some cases, taxpayers are failing to include the value of a debt interest that’s been treated as equity for accounting purposes in their debt capital. As a result, the taxpayer’s adjusted average debt is understated, allowing them to claim more debt deductions than they’re entitled to,” Mr Konza said.

    “Taxpayers need to consider the debt capital values used in thin capitalisation calculations carefully. If we think a taxpayer has undervalued debt capital then we will pursue compliance action. Taxpayers may be liable to penalties in addition to paying back any tax owed.

    “While most large companies and multinationals do the right thing, some are sailing too close to the wind with these manufactured arrangements. Taxpayers need to ensure they meet the spirit and intent of the law and pay the right amount of tax on income they earn here,” Mr Konza said.

    Any taxpayer who has, or is thinking of, entering into the above arrangements should seek independent advice, review their arrangement or discuss their situation with us by emailing PGIAdvice@ato.gov.au.

    For more information on these arrangements, refer to Taxpayer Alerts:

    TA 2016/07

    TA 2016/08

    TA 2016/09

    Taxpayer alerts are intended as an ‘early warning’ to taxpayers and their advisers of significant tax planning arrangements that the ATO has under risk assessment.

    Last modified: 10 Aug 2016QC 49837