Tax Auditors Uncover Multinational Tax Avoidance
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 focuses 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 will 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 differently, 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 applying section 815-130.
Notably, 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 incredibly diligent in analysing and complying with the new transfer pricing rules.
New thin cap rules
The Australian Parliament passed new thin capitalisation legislation in September 2014. The thin cap rules affect the tax deductibility of interest internationally.
The thin cap is not new in Australia. Under the old rules, finance costs were only fully deductible in general terms, 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. 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 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 “arm’s length” amount under the circumstances (i.e. 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?
If you have any questions in relation to the above, do not hesitate to reach out and contact us.
*Correct as of December 2014
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.