BEPS in Australia: Focus on financial services

Nick Houseman and Prashant Bohra, PwC Australia  

In these times of change, it is important for a multinational taxpayer to review its tax and transfer pricing arrangements with a view to address any risk areas and to be vigilant and continuously monitor the developments in this space.

The BEPS debate has been active in Australia over the last year. The former Government had openly commented on the need for stronger rules to combat profit shifting and had endorsed the need for global action. The current government has reiterated the need for Australia to be an active participant in the global debate through forums such as the Group of 20 (G20) and the OECD. A number of initiatives have been introduced domestically and the ATO is gearing its administration to address the challenges presented by BEPS.

Notwithstanding the current political climate, many of the themes arising from the BEPS debate have been on the agenda in Australia for a number of years. In fact, it could be argued that through recent reforms in transfer pricing and anti-avoidance legislation, Australia has already implemented many of the legislative tax tools equipped to deal with risks associated with profit shifting.

l. Transfer pricing reforms

The rewrite of Australia's transfer pricing rules was initiated in 2011 following the Commissioner's loss in two judicial decisions on the pre-existing transfer pricing regime.

Phase 1 of the reform involved introducing retrospective rules applying to dealings with related parties in tax treaty countries. These rules were enacted in September 2012 and have now been inserted into the Income Tax Assessment Act (ITAA) 1997 as Subdivision 815-A. Despite strong protests from business community and tax advisers, these rules apply retrospectively from July 1, 2004.

Phase 2 involved comprehensively rewriting the Australian transfer pricing rules. These rules have been enacted with effect from July 1, 2013 and will operate on a self-assessment basis with a seven year statute of limitations for adjustments. The new rules are broader in scope than the existing ones and require detailed consideration of arm's length conditions and also introduce reconstruction powers. There are special considerations for thin capitalisation and pricing related party debt. Documentation will be required to be prepared by the time of lodging tax returns to mitigate penalties.

The intention of the reform was to modernise Australia's transfer pricing rules and more closely align them to OECD's transfer pricing guidance. However, the modernisation is yet to extend to the rules for attribution of profit to PEs that are important to participants in the financial services industry who often operate through PE structures. It is unclear if, and when, Australia will adopt the authorised OECD approach for PE profit attribution. The Board of Taxation (BOT)1 provided its report on the review of PE attribution rules to the government in April 2013. It is expected, that in line with past practice, BOT's report will be available at the time the Government releases its response to the report. In the meantime, taxpayers (particularly in the financial services industry) have to address significant uncertainties in this area of law which is also receiving close attention from the ATO. As an example, the ATO have released a series of Interpretative Decisions2 regarding the allocation of funding and liquidity costs to a foreign bank's Australian PE. The Interpretative Decisions are not law but a summarised record of a Tax Office decision. The decisions reflect the ATO's view that interest expense to fund general reserve liquid assets and internal estimates of notional funding costs are not deductible under section 8-1 of ITAA 1997 or under the business profits article of a tax treaty. There is disagreement regarding this position, in particular many in industry believe that this decision is not the correct interpretation of the existing rules.

ll. Increased disclosure and transparency

A number of new disclosure and transparency measures relevant to an Australian taxpayer's transfer pricing arrangements have been introduced in recent times, with further measures also currently being proposed at the OECD level.

A. New transparency laws

New legislative measures intended to improve the transparency of Australia's corporate tax system have recently been enacted. Under the new law, the Commissioner of Taxation is required to publish certain tax information of large corporate taxpayers (on a named basis) including those that have 'total income’ equal to or exceeding AU$100 million for an income year, as reported in the entity's tax return. These measures apply broadly from the 2013-14 year and are stated to provide more information to inform public debate about tax policy, enable better public disclosure of aggregated tax revenue collected, and improve information sharing between government agencies. It also has the broader objective of discouraging large corporate entities from engaging in aggressive tax avoidance practices which is part of the government's broader BEPS agenda.

B. International dealings schedule

The ATO has introduced enhanced reporting requirements of taxpayers cross border related party transactions. The new International Dealings Schedule (IDS) has replaced the old Schedule 25A and represents a significant increase in disclosure requirements, particularly for financial services industry where transaction volumes tend to be significantly higher though not necessarily reflective of correspondingly higher risk. The ATO will use the new schedule as a risk assessment tool to screen for risks and identify areas of concern which the ATO perceives as high risk.

C. Reportable tax positions schedule

The ATO has introduced a reportable tax position (RTP) schedule, which requires certain key taxpayers (based on ATO criteria) to disclose information about reportable tax positions (i.e. uncertain or contestable positions) in an attachment to their annual income tax return.

It is understood that the ATO intends to use the information gathered in the RTP Schedules in its assessment of the tax risk of each taxpayer, which will be considered when selecting cases for reviews or audits. Financial services companies and banks, in particular, tend to generally fall in the category of a 'key taxpayer’ given their size and hence some taxpayers in the industry may be impacted by these disclosure requirements.

lll. BEPS specific initiatives
A. Treasury paper

At the time of the OECD's release of its BEPS Action Plan, the Australian government released a paper titled “Risks to the Sustainability of Australia's Corporate Tax Base - Scoping Paper”. This paper looks at the broader issues surrounding multinational profit shifting and was developed in consultation with experts from the community sector, academics, business and the tax profession on the taskforce.

The Scoping Paper sets out the Treasury's assessment of the risks facing Australia's corporate tax system as a result of BEPS and makes recommendations on actions Australia should take to address these risks. The recommendations contained in the Scoping Paper are aligned to the OECD's BEPS Action Plan.

B. Budget announcements

As part of the last budget, the former Government announced certain corporate tax changes that interplay with the transfer pricing rules.

These included reduction of the 'safe harbour’ debt limit under the thin capitalisation rules to address profit shifting through the artificial loading of debt in Australia. The new Government has now confirmed that it intends to proceed with the proposed reductions of the safe harbour.

The BOT has also been asked to undertake a post-implementation review of debt and equity rules including whether there can be improved arrangements within the Australian tax system to address any inconsistencies between Australia's and other jurisdictions' debt and equity rules that could give rise to arbitrage opportunities. The Board has been asked to report to the Government by March 2015.

However, a couple of other measures to address perceived integrity issues, such as the removal of a tax deduction for interest expenses incurred in deriving certain exempt foreign income and changes to the offshore banking units (OBU) tax regime are proposed to be curtailed by the new Government and replaced by some targeted anti-avoidance provisions.

C. ATO compliance programme

The ATO's 2013-14 Compliance Programme has a strong focus on BEPS. Profit shifting has been identified as a significant tax compliance risk for large businesses (turnover of more than AU$250 million) and medium businesses (turnover greater than AU$2 million, but less than AU$250 million).

The ATO has set up a new compliance project team 'International Structuring and Profit Shifting’ (ISAPS) to review profit shifting risks as part of specific funding provided to the ATO in the last budget. It is understood that the team will consist of 30 officers experienced in international tax and will act as an “advisory” team to field auditors. Further, it is understood that a significant number of corporate taxpayers have been identified for a risk questionnaire.

lV. Conclusion

Australia will chair the G20 summit in 2014, at which BEPS will be a key agenda for discussion. The recent initiatives of the government reflect Australia's commitment to lead the charge on BEPS. At the ground level, BEPS is influencing the manner in which the ATO is re-organising itself and engaging with taxpayers in risk reviews and audits.

In these times of change, it is important for a multinational taxpayer to review its tax and transfer pricing arrangements with a view to address any risk areas and to be vigilant and continuously monitor the developments in this space.

The authors may be contacted at:

BEPS will be discussed at the Global Transfer Pricing Conference in Paris March 31-April 1. For more information, click here.


1 BOT is a non-statutory advisory body charged with contributing a business and broader community perspective to improving the design of taxation laws and their operation.

2 ATO ID2012/90/91/92