First big BEPS tax crackdown

First big BEPS tax crackdown

On 16 September 2015, we saw a revised version of the new multinational anti-avoidance law (MAAL) provisions first announced in the 2015 Budget.

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Tax Insight

The MAAL is the first tranche of a number of expected Base Erosion Profit-Shifting (BEPS) related measures designed to address the perceived or actual avoidance of Australian tax by foreign multinationals.

Instead of holding off until the release of the Organisation for Economic Co-operation and Development (OECD) and G20 deliverables in early October 2015, the Government felt it needed to act quickly on what it perceived as the most blatant tax avoidance arrangements.

The MAAL provisions are designed to ensure Australian tax is not avoided by large foreign multinational enterprises (MNE) providing goods or services directly to Australian customers where an associated entity in Australia contributes to the generation of that income. The measures were originally designed to focus on only 30 MNEs however the proposed measures will potentially apply to many more than 30 MNEs.

The revised measures widen the net considerably as carve outs contained in the previous version have been removed. Previously the MAAL provisions would not have applied if:

  • the scheme was not designed to avoid tax
  • there was no connection with a low tax jurisdiction
  • there was substantial economic activities in the entity deriving the income.

The operation of the proposed provisions now focus on whether there is a principal purpose of avoiding tax.

Many businesses, especially those in the digital economy, have business models which fall within the ambit of the proposed provisions and they will now have to establish that their business model was not established with a principal purpose of avoiding tax.

“A principal purpose” test is a new concept in Australian tax law and will cause uncertainty until we get some definitive judicial guidance as to how it should be interpreted. In the meantime, reliance will have to be had from examples in the accompanying Explanatory Memorandum to the MAAL legislation and guidance from the Australian Taxation Office.

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