Current as of December 2014
Avoidance of Australian tax by multinationals is featuring prominently in newspapers in Australia, with stories of a global tax hunt with tax auditors camped out in the Australian corporate offices of some of the world’s biggest companies.
- ATO’s global tax hunt: Multinationals under scrutiny for minimisation schemes
- Joe Hockey eyes Britain’s ‘Google tax’ to boost tax take
- Joe Hockey confirms Tax Office crackdown on multinational tax ‘robbers’
The articles are possibly largely politically driven, and a couple focus on a so-called ‘Google tax’ that we don’t currently have, they demonstrate a climate where the profit shifting provisions that are currently in place are likely to be closely scrutinised. These are the Transfer Pricing and Thin Capitalisation rules, which are briefly addressed below.
Australia’s current transfer pricing regime is relatively new, having applied since 1 July 2013. The new laws apply the internationally accepted arm’s length principle which is to be determined consistently with the relevant OECD Guidance material.
The new provisions require taxpayers to self-assess whether their international related party transactions differ from arm’s length conditions. Where they differ and a tax advantage is derived, the arm’s length conditions are taken to operate.
Section 815-130 of the Income Tax Assessment Act 1997 (“ITAA97”) gives power to the Commissioner to disregard the actual transactions and replace them with arm’s length conditions where the actual transactions are inconsistent with their substance, where independent parties would have transacted in a different way, or they would not have entered the transactions at all.
The Commissioner has released taxation ruling TR 2014/6 to provide the Australian Taxation Office views about the application of section 815-130.
Importantly, the new transfer pricing rules are part of Australia’s self-assessment regime, so the onus is on the taxpayer to ensure compliance. It is essential that all related party international dealings be closely reviewed, and that formal documentation is prepared.
It’s worth noting that additional disclosures are required on income tax returns for companies where international related party dealings exceed $2m. Taxpayers in those circumstances should be especially diligent in analysing and complying with the new transfer pricing rules.
New thin cap rules
New thin capitalisation legislation was passed by the Australian Parliament in September 2014. The thin cap rules affect tax deductibility of interest in an international context.
Thin cap is not new in Australia. Under the old rules, in general terms finance costs were only fully deductible where the total relevant debt was less than three times equity. Interest on the excess debt was not tax deductible. The rules only applied, however, where total debt deductions exceeded $250,000.
The new rules, which apply from 1 July 2014, change the debt-to-equity ratio to 1.5 : 1. That is, where debt is more than 1.5 times equity, interest on the excess is not tax deductible. The good news is that the thin cap rules now only apply where total debt deductions exceed $2m.
Where debt deductions exceed $2m and the debt to equity ratio exceeds 1.5 : 1, interest may still be tax deductible if:
- The debt can be shown to be an “arms length” amount under the circumstances (ie is it a commercially valid arrangement), or
- Is the Australian company’s debt-to-equity ratio no higher than the group’s worldwide debt-to-equity ratio?
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