Australia introduces multinational tax avoidance laws

Australia is taking a leading role in the growing push for global businesses to pay their fair share of tax.

The Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 (the Bill) has been released, revealing Australia’s plans to tackle corporate tax avoidance through the imposition of stringent reporting requirements for multinational companies, a multinational anti-avoidance law (MAL) and harsh penalties for entities found to be flouting the rules. The Bill is currently in draft form and at first reading stage. We will be following its progress through Parliament.

The Bill implements recommendations made at the 2014 G20 summit on the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting Action Plan through a host of amendments to both the Income Tax Assessment Act 1936 (1936 Act) and Income Tax Assessment Act 1997 (1997 Act) as well as the Taxation Administration Act 1953 (Administration Act).

The package of measures introduced in this draft of the Bill has been summarised below.

Introduction of ‘Significant Global Entity’

Schedule 1 of the Bill amends the 1997 Act by introducing the concept of a ‘significant global entity’, which is generally defined as a global parent entity with an annual global income of $1 billion or more, or any member of a global parent entity’s group.

If an entity fails to provide the Commissioner with the required global financial statements, the Commissioner can declare that an entity is a significant global entity for the purposes of the 1997 Act if he reasonably believes that, had the statements been prepared, the entity’s annual global income would have been $1 billion or more over the relevant period.

Multinational anti-avoidance law

Schedule 2 of the Bill amends the anti-avoidance provisions in Part IVA of the 1936 Act by introducing a MAL. The MAL will prohibit significant global entities from entering into complex, contrived and artificial schemes to avoid paying tax in Australia.

The MAL is expressed to target multinational companies that do significant work in Australia, but avoid paying tax by booking their revenue offshore. The MAL will impact multinationals which enter into schemes that have a principal purpose of avoiding tax in Australia, or reducing their foreign tax liability.

Broadly, the MAL will apply when the following occurs:

• a foreign entity derives income from making supplies to Australian customers;
• an entity in Australia supports the making of those supplies, and the Australian entity is an associate of or commercially dependent on the foreign entity; and
• the income derived from the supply to Australian customers is then sent elsewhere.

Much like the ‘dominant purpose’ test in Part IVA, for the MAL to apply, it must be concluded that the scheme was entered into or carried out for ‘one or more of the principal purposes’ which are listed in the legislation. Notably, the ‘principal purposes’ test is a lower threshold than the ‘dominant purpose’ test.

Schedule 3 of the Bill doubles the maximum administrative penalty that the Commissioner can hand down under the Administration Act.

If a significant global entity contravenes the MAL without a reasonably arguable position, the Commissioner can now impose a maximum penalty of up to 100% of the amount of tax avoided under the scheme. The penalty can be raised to 120% where aggravating factors apply.

New reporting obligations for Significant Global Entities

Significant global entities will be required to give the Commissioner three statements – a ‘Country by Country report’, a ‘master file’ and a ‘local file’. The content of the reports will assist the Commissioner in assessing transfer pricing risks and commencing audit enquiries where necessary. The reports will be filed in the country where the multinational entity has its global parent entity and will then be automatically exchanged with the tax authorities of the other countries in which the entity operates.

Conclusion

If the Bill is passed by Parliament in its current form, most of the new measures introduced will come into effect on 1 January 2016.

In their current form, the proposed laws will fortify the Commissioner’s transfer pricing, profit shifting and anti-avoidance toolkit, and will force multinationals that sell to Australian customers to re-assess their current practices, especially given the harsh penalties at stake.

We suggest you consult us as soon as possible to establish whether you could be considered a ‘significant global entity’ under the proposed laws and, if so, whether the tax structures and practices you currently have in place are compliant. For example, you may need to take action to ensure systems are in place to capture the new information required to be reported to the Commissioner.