At the political and social levels, the debate about tax transparency and ensuring global companies pay their fair share has resonated more in Australia than in most other Asia Pacific countries. Since the 2008 financial crisis, the Australian government has struggled with a string of budgetary deficits and a shrinking tax base, causing questions over the lack of Australian tax paid by some large foreign-controlled companies.
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 managementand 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 addresshybrid 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 thehigh 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 paymentand filing obligations.
Nevertheless, the Australian government has already announced or enacted laws to target the following items of the OECD BEPS Action Plan:
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 bereduced 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’slength 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 ontax transparency and the use of OECD standards in Australian tax law (Actions 8–10). In addition, the Australian government has recently enacted laws implementing country-by-country reporting into Australia’s domestic income tax law for income years starting on or after 1 January 2016 (Action 13).
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 taxpayable for large corporate entities (those with annual revenue of greater than 100 million Australian dollars — AUD) (Action 11).
Multinational anti-avoidance law (MAAL): The Australian government has enacted the MAAL, which is intended to counter the erosion of Australia’s tax base by multinationalenterprises 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 theirAustralian tax liabilities by avoiding a taxable presence in Australia.
As part of the Australian government’s greater scrutiny of international corporate structures, the Australian Taxation Office (ATO) established a project titled International Structuring and Profit Shifting (ISAPS). Under this project, the ATO will send questionnaires to certain Australian companies with overseas related-party transactions requiring data at a level similar to the country-by-country data requested under the OECD BEPS Action Plan. The ATO will use this information to assign risk ratings to taxpayers and also determine whether to proceed to audit.
Given the ATO’s underlying interest in the details of where volume arises in international supply chains, global groups with Australian subsidiaries should monitor what information these subsidiaries are disclosing under the new IASPS requirements. Even small Australian subsidiaries may have tomake these broad disclosures, and the ATO is known to be proactive in sharing relevant tax information with other jurisdictions. Even groups with a minor business presence in Australia could find themselves subject to increased audit and enforcement activity in other countries as a result of the ATO’s IASPS project.
As noted in the introduction, Australia’s zeal in getting ahead of the game in adopting BEPS proposals could work against the goals of the OECD BEPS project. Until an integrated set of new tax principles is finalized for all 15 BEPS Actions, countries that adopt early versions of this work in progress could complicate the global tax situation and hamper the implementation of commonly agreed and fully developed tax principles.