Peter Madden and Sarah Blakelock remind taxpayers who may be affected by the Tech Mahindra decision to engage with the ATO early.
For those taxpayers identified by the Australian Taxation Office (ATO) as being impacted by the Full Federal Court’s decision in Tech Mahindra Limited v Commissioner of Taxation  FCAFC 130; the time is closing in for engagement with the ATO and benefiting from the considerable concessions on offer.
The ATO letters offer those taxpayers who come forward on or before 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). It is clear that the ATO is taking meaningful steps to ensure such payments are correctly brought to tax in Australia. This is a unique opportunity for such taxpayers to engage with the ATO so as to avoid any formal audit activity and reduce penalty and interest.
In summary, the taxpayers identified as recipients of the ATO letters are those considered to potentially be in comparable circumstances as Tech Mahindra, namely Indian-based companies supplying Australian customers with ‘technical services’ which constitute a royalty, most often through a permanent establishment in Australia where those services are supplied under a contract for service with Australian customers and some of the services are provided by the Indian company in performance of the contract.
As you may recall, in that case the Federal Court found that under article 12 of the Indian Agreement Double Tax 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:
Where such services are provided to Australian customers, the payments for the ‘technical services’ (meaning engineering, architectural, computer software development and IT services) come within the definition of royalties in Article 12(3)(g) of the India/Australia Double Tax Agreement (DTA). Accordingly, Australia has a right to tax these payments up to a maximum of 15 percent of the gross payment under Article 12. Further, by the finding that these are royalties, Article 23(1) of the DTA deemed these payments, for Australian domestic tax purposes, to have an Australian source resulting in the income being included in the Australian assessable income of the Indian company pursuant to section 6-5(3) of the Income Tax Assessment Act 1997.
Any analysis of whether the Tech Mahindra decision applies to a taxpayer should begin with a consideration of the contracting environment with Australian customers followed by a consideration of the services provided in India and in Australia to fulfil that contract. This is not always an easy task as it requires analysis not only of the services agreement with Australian customers but also the accounting for those services both in Australia and in India. If you believe that your circumstances may fall within the above scenario, whether or not in receipt of the ATO letter, we can assist you not only to engage with the ATO but also to characterise and quantify any exposure.
The ATO’s concessional offer encourages early engagement and should be taken advantage of if possible or at least considered as part of an overall strategy to manage risk. If you are currently in audit or objection with the ATO on issues arising from the Tech Mahindra decision, there may be the opportunity to negotiate with the ATO to fall within the ATO’s offer.
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.