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A pragmatic approach? ATO conducting reviews following Tech Mahindra case

ATO conducting reviews following Tech Mahindra case

Jai Patel and Peter Madden discuss the ATO's approach to review taxpayers in light of the Federal Court's decision in Tech Mahindra.

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Lotus Temple in New Delhi

The Australian Taxation Office (ATO) has begun targeting taxpayers who may be impacted by the Full Federal Court’s decision in Tech Mahindra Limited v Commissioner of Taxation [2017] FCAFC 130. Those in the line of the ATO’s sights have received a letter foreshadowing audit or review activity of past returns to identify if technical services supplied by those taxpayers fall within the scope of ‘royalties’, as it did in Tech Mahindra, under Article 12(3)(g) of the Indian Double Tax Agreement.

The recipients of the ATO letters are those who have been identified as being in comparable circumstances as Tech Mahindra, namely Indian based companies supplying Australian customers with ‘technical services’. As you may recall, in that case the Federal Court found that under article 12 of the Indian Agreement where an item of income constitutes a ‘royalty’ as defined in Article 12(3), both the country of residence and the state of source where the royalties arise have the right to tax those royalties (whether or not attributable to a permanent establishment in that State).

Here, the ATO views that technical services includes the supply of:

  • engineering services (including the subcategories of bioengineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical and industrial engineering) 
  • architectural services
  • computer software development, modification and other IT services.

In addition to notifying targets of audit and review, the ATO letters request detailed information about the particular business activities and structure as well as supplies made in Australia to ‘assess the impact that Article 12’ may have on previously lodged returns and to help provide some certainty for future years. Importantly, the ATO has encouraged taxpayers to make voluntary disclosures and emphasises the significant penalty and interest reductions for those coming forward early. In particular, the pragmatic approach the ATO is taking is offering those who come forward prior to the 9 March 2018 a potential 20 percent reduction to tax payable, base rate Shortfall Interest Charges and zero percent administrative penalties if an agreement is reached to amend previously lodged returns (to the extent the review period has not elapsed).

Proactively engaging with the ATO on this matter and making voluntary disclosure will also help taxpayers to achieve certainty with respect to future years. In such circumstances, it is our experience that the ATO will work collaboratively with taxpayers to achieve the best possible outcome.

Ultimately, taxpayers should seek independent and tailored advice specific to their own circumstances in relation to this matter, including whether it is in their best interests to take up the current ATO offer (as set out in the ATO's letter) as each taxpayer’s circumstances may differ. If you are currently in audit or review in respect of these matters, it is our view that there may be the opportunity to negotiate with the ATO to fall within the ATO’s offer.

KPMG is well placed to assist taxpayers not only with responding to the letter by 9 March 2018 (so as to avoid any formal review/audit) but also with quantifying the potential tax exposure in respect of past years and developing a strategy for making voluntary disclosure and engaging with the ATO for the best possible outcome in the circumstances going forward.

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