Both politically and socially, the debate about tax transparency has resonated loudly in Australia. The Australian Government has actively endorsed the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) work. With the 2016 Federal Election results now largely known, it is worth taking a stocktake of the Australian Government’s approach to the key BEPS Action Items.
Australia will implement anti-hybrid rules that target arrangements that exploit differences in the tax treatment of instruments or entities to achieve double deductions, double non-taxation and/or long term deferral of taxation.
The rules will apply from the later of 1 January 2018 or 6 months after Royal Assent. Pre-existing arrangements will generally not be grandfathered.
Whilst the Australian Labor Party proposed changes to Australia’s already strict thin capitalisation rules, the Coalition Government did not. Following the 2016 Federal Election results it would seem that there will be no significant changes to the existing thin capitalisation rules in the short term at least.
This seeks to include provisions in double tax agreements (DTAs) that eliminate opportunities for reduced taxation through treaty shopping.
Australia is supportive of adopting this action, as seen in the new German Australian DTA which was signed in November 2015 (but is not yet in force).
This new DTA incorporates a comprehensive limitation of benefits article which includes a Principal Purpose Test to prevent abuse of the DTA. The Australian government has stated that future DTAs will include similar provisions to prevent treaty shopping abuse.
The OECD has recommended changes to the permanent establishment definition in the Model Tax Convention to deal with arrangements that are intended to prevent a permanent establishment (and thus a taxable presence) in a country.
The new German-Australian DTA incorporates these changes including an anti-fragmentation rule to prevent entities splitting contracts to avoid the presence of a permanent establishment.
In addition to the Multinational Anti-Avoidance Law introduced in 2016, a Diverted Profits Tax is to be introduced for income years commencing on or after 1 July 2017, which will impose a penalty tax rate of 40 percent on certain profits transferred to offshore related parties.