Multi-nationals have been under increased scrutiny by legislators and the public alike. And headline news stories, such as the one in January that revealed tech giant Apple paid taxes of just $85 million in Australia last year on sales of $7.9 billion have kept the issue top of mind.
To step up its efforts in this area, Australia’s Federal Government has introduced new legislation, and the Commissioner of Taxation, Chris Jordan has vowed that the Australian Tax Office (ATO) will take a tougher stance on multinationals operating within Australia.
If you are an Australian or foreign multinational with global income of A$1billon or more, it’s important that you’re aware of the following new tax rules and how they will affect your tax situation.
- The Multinational Anti-Avoidance Law which is effective from 1 January 2016.
- The introduction of transfer pricing “Country-by-Country” reporting applying to years commencing on or after 1 January 2016.
- Rules requiring general purpose financial statements to be prepared and lodged for years beginning on or after 1 July 2016.
The Multinational Anti-Avoidance Law (“MAAL”)
What you need to know
The MAAL has been introduced to further strengthen existing anti-avoidance rules.
The MAAL is aimed at multinationals that conduct business on what is commonly known as an “operate here and bill overseas business model.” That is to say that they derive revenue from Australian customers, yet the income is treated as income of the overseas entity and is not taxable income in Australia.
The MAAL can apply if:
- a foreign entity makes a supply to an Australian customer; and
- activities are undertaken in Australia directly in connection with the supply; and
- some or all of those activities are undertaken by an Australian entity (which include a subsidiary and a permanent establishment); and
- the foreign entity derives income from the supply; and
- some or all of that income is not attributable to an Australian permanent establishment of the foreign entity; and
- the foreign entity is a member of multinational corporate group with “annual global income” of A$1b or more per year.
Should the conditions above be met, the MAAL will apply and the ATO will review the underlying reasons for the entity operating in this manner. In doing so they will pose the following question; is the ‘principal purpose’ to obtain a tax benefit in Australia or another jurisdiction?
If yes, the foreign entity could be subject to tax in Australia on profits that have been allocated to an entity outside Australia. There could also be a withholding tax exposure. Moreover, significant penalties apply – generally at a rate of 100%.
The following example has been adapted from the ATO’s explanatory memorandum
US Co, sells enterprise software to Australian business customers. An Australian subsidiary of US Co employs staff that provide significant levels of support to Australian customers. Australian customers who buy the product almost exclusively deal with the Australian employees.
The sales contracts, which are essentially negotiated by the Australian subsidiary with the Australian customer, are legally binding on UC Co and the revenue is recorded in its accounts. The MAAL could apply to tax the US Co on the revenue from the Australian customers.
If you fall within the scope of these laws, immediate actions need to be taken.
The first step is to consider if there was a “principal purpose” of obtaining a tax benefit in Australia or another jurisdiction. The “principal purpose” is determined objectively, after considering the relevant matters listed in the legislation. Subjective motives are not relevant.
There may be a number of principal purposes for entering into a scheme. If just one of these principal purposes is to obtain a tax benefit, then the “principal purpose” test may still be satisfied.
The principal purpose test needs to be documented. Some of the matters that need to be considered are:
- What were the principal purposes of the scheme having regard to the objective matters in the tax law?
- What contribution is being made by the Australian entity to the total supply chain?
- What is the nature of activities undertaken in Australia?
- Are Australian staff responsible for negotiations with the Australian customers?
- Do the Australian functions involve bearing risk, carrying out functions or owning any assets for which an appropriate profit allocation is not being made to Australia?
The ATO is undertaking a compliance program to identify affected taxpayers and you could receive a notification in this regard. Taxpayers that take a proactive approach by contacting the ATO before 31 March 2016 could benefit from a significant reduction in the potential penalties.
If you believe the MAAL could apply to your entity it is important to seek professional advice as early as possible.
Country-by-Country Reporting Regime
What you need to know
In an effort to increase the transparency of multinationals operating in Australia, a County by Country (“CbC”) reporting regime has been introduced. The regime will apply to income years starting on or after 1 January 2016.
If you a part of multinational group with global turnover of more than $1 billion, you will be required to prepare CbC reports.
CbC reporting will require the following documents to be lodged with the ATO:
- A CbC report showing the global activities of the multinational company including the location of its income and taxes paid.
- A transfer pricing master file containing an overview of the multinational company’s global business, its organisational structure and its transfer pricing policies.
- A local transfer pricing file that provides detailed information about the local taxpayer’s inter-company transactions.
If CbC reporting applies, immediate actions need to be taken, including:
- A review of current transfer pricing documentation (both Australian and overseas)
- An assessment of any global transfer pricing reports that are relied on, to determine if Australian operations are adequately covered.
- A consideration of the scope of any additional work required to comply with CbC reporting and commencement of the work.
- The Identification and mitigation of any risks that may arise from the lodgment of CbC reporting pack.
- Consideration as to whether voluntary disclosures need be made in advance of lodging the CbC reporting pack.
General Purpose Financial Statements
What you need to know
For further transparency, multinational entities which are part of group with turnover of more than $1billion will need to give the Commissioner of Taxation a general purpose financial statement if they do not lodge one with the Australian Securities and Investments Commission (ASIC).
This applies for years beginning on or after 1 July 2016. The financial statement must be given to the Commissioner of Taxation by the time the entity is required to lodge its income tax return.
If you are impacted by the above rules and don’t already prepare and lodge a general purpose financial statement, you should start putting systems in place to meet this requirement and engage with auditors.