The introduction of Tax Law Amendment (Combating Multinational Tax Avoidance) Bill 2015 (MAAL) casts the spotlight onto corporate activity that encourages the reduction of tax in Australia through the manipulation of profits, devising of profit shifting schemes and tax manipulation regimes.

Following several months of discussions and public consultation, the MAAL received Royal Assent on 11 December 2015. Importantly, the threshold for breaching these new rules will be based on the principal purpose test for schemes entered into on or after 1 January 2016. MAAL is expected to target taxpayers who have set up structures for the principal purpose of tax avoidance and tax reduction, foreign companies operating in Australia without establishing a permanent entity (PE), undocumented transfer pricing transactions, and any other suspicious activity aimed at reducing tax liabilities.

Which taxpayers does the MAAL affect?

MAAL will apply to any significant global entity which can be either of the following:

  • a global parent company whose annual global income is AUD $1 billion or more
  • an entity which is a member of a consolidated group for accounting purposes with annual global income of AUD $1 billion or more

These new rules will apply to income years commencing on or after 1 January 2016 and will not be retrospective. Affected entities will need to report the economic activities they are engaged in on a global scale including the various arrangements that they are entered into.  

 When does the MAAL apply?

The new MAAL will apply if the following requirements are satisfied:

  • a foreign entity derives income from the making of supplies to an Australian customer
  • activities are undertaken in Australia, directly in connection with the supply by an Australian entity (or an Australian PE of an entity) that is an associate of, or is commercially dependent on, the foreign entity
  • some or all of the income derived by the foreign entity is not attributable to an Australian PE of the foreign entity
  • there is a principal purpose of obtaining an Australian tax benefit (encompassing income taxes as well as withholding taxes) or a reduction (including a deferral) in tax liabilities arising under foreign law

How does the MAAL apply?

If the above requirements are met, there may be additional tax payable on transactions deemed subject to Australian tax and/or withholding tax where sales are made through an Australian PE. Furthermore, the Australian Tax Office (ATO) has highlighted that unprecedented penalties will be applicable should the taxpayer engage in tax avoidance schemes.

Non-compliance with MAAL will be treated harshly and could result in substantial penalties up to an additional 120 per cent of the tax avoided under the scheme entered into by the relevant entities. For companies with exposure to MAAL, the impact of the added tax burden and steep penalties in light of breaches of this Act could have a significant impact.

However, financial penalties for breach of MAAL can be reduced substantially by having a Reasonably Arguable Position (RAP) paper. For example, should the ATO find that an affected taxpayer has breached MAAL, any penalty can be reduced to 30 per cent if the taxpayer has a RAP. It is important that steps are taken to consider the impact of MAAL on any taxpayers and arrangements that may be subject to these rules.

ATO guidance

The ATO has recently provided a roadmap for the coordination of MAAL which provides guidance for taxpayers on the initial implementation of this legislation. It lists five categories of taxpayer classification ranging from “taxpayers under review” to “out of scope taxpayers”. Depending on which category the taxpayer falls under, the process and timeline of review, assessment and settlement will vary. This can be quite an extensive process so we recommend a thorough assessment of your position in light of this roadmap. A copy of this roadmap can be requested directly from the ATO via their website.

What you should do?

Activities that fall within the scope of this legislation will need to be closely monitored to ensure that appropriate documentation is prepared. This will help mitigate the risks of breaching MAAL requirements and to reduce any applicable penalties. We recommend that you seek appropriate advice and consider the below questions to assist determining your next course of action.

Are you prepared?

 To protect your business against non-compliance, it is important to take necessary action early.

  • Do you meet the size threshold to fall within the scope of this legislation?
  • Have you reviewed the MAAL requirements and answered ‘yes’ to any of them?
  • Has there been appropriate documentation and advice provided with respect to your tax arrangements after taking into account these new rules?
  • Are there enough mitigating factors to limit the extent that you are exposed to potential penalties and back taxes?

For more information please contact your usual Grant Thornton advisor, or:

Jason Casas

Austalia & Asia Pacific Leader - Transer Pricing Services
+61 3 8663 6433

Vince Tropiano

Partner - Tax
T +61 2 9286 5491

Daniel Kave

Partner - Tax
T +61 3 8663 6314

Lorena Sosa

Associate Director - Transfer Pricing Services
T +61 2 8297 2548