- Multinational anti-avoidance legislation
The Tax Law Amendment (Combating Multinational Tax Avoidance) Bill 2015 (“MAAL”) casts the spotlight onto corporate activity that encourages the reduction of tax liabilities in Australia.
It is designed to counter the erosion of the Australian tax base by multinational entities using artificial and contrived arrangements to avoid the attribution of profits to a permanent establishment (PE) in Australia.
The MAAL applies to income years commencing on or after 1 January 2016 and will not be applied retrospectively.
Who is affected by MAAL?
The MAAL only applies to “Significant Global Entities” which can be defined as:
- A global parent company whose annual global income is A$1 billion or more; or
- An entity which is a member of a consolidated group for accounting purposes with annual global income of A$1 billion or more.
The 2017-18 Federal Budget extended the scope of the MAAL so that it applies to:
- corporate structures that involve the interposition of partnerships that have any foreign resident partners
- trusts that have any foreign resident trustees, and
- foreign trusts that temporarily have their central management and control in Australia.
The primary condition for the MAAL to apply is that it is reasonable to conclude that there was a ‘Principal Purpose’ of obtaining either an Australian or foreign tax benefit. This Principle Purpose test is the same as the Diverted Profits Tax and lowers the evidentiary hurdle of ‘sole and dominant purpose’ contained in Part IVA, the general anti-avoidance rules for income tax.
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. This is a lower hurdle for the ATO to demonstrate that the sole and dominant purpose be contained in Australian anti-avoidance legislation
The requirements for MAAL to apply?
The MAAL applies in the following circumstances:
- 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, and
- 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 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 would 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% 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.
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?
The ATO has provided a “roadmap” for 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, in some cases significantly.
When MAAL was introduced in 2016, the ATO moved quickly to enforce the rules. The ATO notified 175 at-risk companies that MAAL potentially applied. Of these companies, 70 of which were ruled out, with 24 companies restructure their operations. The outcomes of the remaining companies have not been finalised by the ATO.
The MAAL process can be quite extensive and time-consuming. We recommend a thorough assessment of your position in light of ATO’s MAAL roadmap.
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 to determine your best course of action.