For many years, Australia has also been at the forefront of the global trend toward a risk-based approach to tax audits based on the strength of a company’s tax governance, risk management and controls. As a result, Australian companies tend to have greater board-level engagement in tax matters and have become relatively conservative in their approach to tax planning.
Despite Australia’s commitment to driving the OECD BEPS Action Plan forward, aspects of the plan could be detrimental to Australian businesses. For example, proposals that address hybrid mismatches could dramatically increase the cost of capital for Australian subsidiaries with foreign parents, especially in light of Australia’s tight thin capitalization rules. Further, given the high level of Australian business activity in China, for example, a move toward attributing profits based on an expanded definition of permanent establishment could cause more onerous tax payment and filing obligations.
Nevertheless, the Australian government has already announced or enacted laws to target the following items of the OECD BEPS Action Plan:
- Digital economy: The law imposing GST on imported digital products and services by non-residents to Australian customers has been enacted. It applies to taxable supplies attributed to tax periods starting on or after 1 July 2017 (Action 1).
- Thin capitalization: The Australian government has announced that for income years beginning on or after 1 July 2014, the thin capitalization safe harbor gearing limits will be reduced from a 75 percent gearing ratio to a 60 percent gearing ratio (Action 4).
- Transfer pricing: Australia recently changed its transfer pricing rules to move away from an arm’s length price model to a whole economic analysis model (embracing an arm’s length profit allocation), consistent with OECD standards. While this change preceded the release of the OECD BEPS Action Plan, it is consistent with the Australian government’s increased focus on tax transparency and the use of OECD standards in Australian tax law (Actions 8–10). In addition, the Australian government has enacted laws implementing CbyC reporting into Australia’s domestic income tax law for income years starting on or after 1 January 2016 (Action 13), requiring companies to outline their international related-party revenues, profits and taxes paid. Australia will exchange and receive these CbyC reports with participating countries. The first exchanges are expected to occur by 30 June 2018. To further enhance risk assessment processes, CbyC reporting also requires the Australian members of these large international companies to lodge a master file and local file. The master file discloses information about their global value chain. The local file provides detailed information about their international related-party transactions. Australia’s transfer pricing legislation was amended on 4 April 2017 to refer to the OECD’s updated transfer pricing guidance. The updated guidance, effective from 1 July 2016, includes recent changes resulting from the OECD BEPS Action Plan recommendations to better align taxation with value creation. The new guidance clarifies that substance rather than contractual form is important. This will make it harder for multinationals to separate the country where the economic activity occurs from the country where they pay tax on the profits generated by that activity.
- Documentation and transparency: The former Australian government introduced rules that would require the Commissioner of Taxation to publish details of accounting profit, taxable income and tax payable for large corporate entities (those with annual revenue of greater than 100 million Australian dollars (AUD)). The Australian Taxation Office (ATO) is now undertaking a process to exchange rulings, which commenced on 1 April 2016 for future rulings and 31 December 2016 for past rulings. Rulings exchanged provide intelligence that is vital to understanding the global operations of multinationals. The new process improves transparency through the spontaneous exchange of rulings between participating countries. Rulings covering certain topics are subject to exchange when they apply to a specific taxpayer, who is entitled to rely on it. These rulings include:
- private binding rulings
- Advance Pricing Arrangements (APA)
- settlement deeds (for future years)
- rulings on international arrangements.
- Disclosure of aggressive tax planning: The Australian government is consulting on mandatory disclosure rules for taxpayers and tax advisers of aggressive tax arrangements (Action 12).In addition, the BEPS project realized a major milestone this year with the signing of the Multilateral Instrument. Australia, along with 66 other countries, signed the MLI, which intends to provide a simplified way to implement the BEPS program that does not involve laborious negotiation of each treaty (Action 15). Australia has concluded bilateral treaties with BEPS-related clauses for countries that fall outside the MLI, for example, the new tax treaty between Australia and Germany that entered into force late last year. Australia has unilaterally enacted a multinational anti-avoidance law and a diverted profits tax. Other measures have involved a voluntary tax transparency code, new requirements to lodge general purpose financial reports and a significant increase in penalties for large companies.
- Multinational anti-avoidance law (MAAL): The MAAL extends Australia’s general anti-avoidance rules and is intended to counter the erosion of Australia’s tax base by multinational enterprises with AUD1 billion or more of global annual income. In essence, the MAAL is a diverted profits tax aimed at preventing foreign entities from reducing their Australian tax liabilities by avoiding the attribution of profits to a permanent establishment in Australia. The law applies to certain benefits derived on or after 1 January 2016. The ATO reports as of June 2017, some of the largest e-commerce companies have changed their business models as a result of the MAAL. This has led to approximately AUD6.5 billion in sales being booked in Australia that were previously booked offshore.
- Diverted profits tax (DPT): The DPT in Australia, also applying to multinationals with AUD1 billion or more global annual income, ensures the tax paid by multinationals properly reflects the economic substance of their activities in Australia. The DPT aims to prevent the diversion of profits offshore through contrived arrangements. Applying to income years starting on or after 1 July 2017, the DPT will impose a 40 percent penalty rate of tax to be paid upfront. The DPT applies where one of the principal purposes of the scheme is to obtain an Australian tax benefit or both an Australian and foreign tax benefit. It complements Australia’s general anti-avoidance rules.
- General-purpose financial statements: For each income year starting on or after 1 July 2016, multinational enterprises with AUD1 billion or more of global annual income with an Australian presence must provide a general-purpose financial statement to the Commissioner of Taxation, unless it has already been provided to Australia Securities and Investment Commission. The requirement aims to enhance the transparency of the multinational’s Australian tax affairs.
- Increased penalties for large companies: Administrative penalties for statements and for failures to lodge on time increased as of 1 July 2017 for multinational enterprises with AUD1 billion or more of global annual income. This means multinationals could incur fines of up to AUD525,000 for late lodgment of tax returns.