Which currency is that?

Which currency is that?

Julian Humphrey examines the ATO's thinking on related party foreign currency denominated borrowings and cross currency swaps.

Partner, Corporate Tax

KPMG Australia


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Array of Chinese 1 yuan notes, and American 100 dollar notes

The Australian Taxation Office (ATO) is continuing its focus on the currency in which taxpayers undertake transactions. Most recently Taxpayer Alert 2016/3 considered related party foreign currency denominated borrowings together with associated related party cross currency swaps. 

With swap payments not being in the nature of interest, such borrowings in low interest rate currencies can result in a (significant) portion of the return to the non-resident related party not being subject to withholding tax. Similarly, the swap payments are not debt deductions and escape disallowance under the thin capitalisation rules (should they be relevant). 

Division 815 has given the ATO additional tools in these scenarios. Previously, the arrangement above would have to be attacked using the general anti-avoidance rules. Consideration would need to be given to the alternative postulate and the facts and circumstances existing at the time. But the analysis and approach in this Taxpayer Alert isn’t limited to the scenario where both the borrowing and the cross currency swap are international related party dealings. 

Consider a taxpayer whose non-resident parent has surplus funds in a particular currency and makes those funds available to its Australian subsidiary. The Australian subsidiary swaps the foreign currency with an unrelated Australian bank to use in its local operations. It is unlikely that Part IVA could be successfully applied to this scenario on the basis of withholding tax avoidance (or even the operation of the thin capitalisation rules) provided that the non-resident parent did in fact have surplus funds in the low interest rate currency.

Division 815 will, however, enable a very different approach to be taken. The arm’s length condition requirements enable the ATO to ignore the fact that the non-resident parent has surplus funds in a particular currency and instead allows it to simply ask the question “If the taxpayer was borrowing from an unrelated entity, what currency would it have borrowed in?” Typically for an Australian taxpayer with a business that effectively has income and expenses denominated in Australian dollars (AUD) the answer to that question will be AUD.The arm’s length condition requirements in the transfer pricing rules add a complex dimension to international related party dealings.

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