The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
Aug. 11 — The Australian tax authority alerted multinational companies of its intention to crack down on tax structures it claims are being used to sidestep the nation's recently passed anti-avoidance law.
Three Aug. 10 alerts concern using an offshore entity to report sales, attributing profit to a permanent establishment of an Australian entity, and companies which, the Australian Taxation Office claims, are reporting debt as equity—while still getting an interest deduction—in order to stay under the country's thin capitalization rules.
“While most large companies and multinationals do the right thing, some are sailing too close to the wind with these manufactured arrangements,” Deputy ATO Commissioner Mark Konza said in a release issued with the alerts. “Taxpayers need to ensure they meet the spirit and intent of the law and pay the right amount of tax on income they earn here.”
In one alert , the ATO said some companies have entered into arrangements in response to the Multinational Anti-Avoidance Law, passed in 2015, to report income from the sale of intangible products and services in a foreign jurisdiction (25 Transfer Pricing Report 399, 7/28/16).
The law takes aim at non-Australian firms which use an Australian entity to supply products to customers, but avoids designating it as a permanent establishment through a “scheme that has a principal purpose of obtaining an Australian tax benefit”—and if so, the commissioner can cancel the arrangement and issue penalties.
According to the ATO, some companies are attempting to avoid this law by designating the foreign entity itself as an agent of the Australian distributor, which is also purportedly the supplier.
“We have encountered arrangements which involve foreign and Australian entities swapping their roles via contracts. These contracts purport to make the Australian entity the distributor of the intangible products or services and the foreign entity an agent of the Australian entity, collecting the sales revenue from the customers on its behalf,” the ATO stated.
At the same time, the companies are claiming the income isn't subject to the country's goods and services tax, the ATO said.
The tax authority said it has already begun “engaging with taxpayers” who have constructed these arrangements, and will scrutinize such structures in the future—possibly, if disregarding them, imposing penalties of up to 75 percent of the taxes allegedly avoided.
The ATO also said it is looking into Australian companies which use a PE structure to, it claims, underreport income in Australia.
In particular, companies may be asserting that the Australian entity which engages in transactions with third-party customers has an off-shore PE—and then attributing all, rather than just some, of its income to that PE.
“It may involve a misunderstanding of what it means for income to be derived by a company in carrying on business at or through a PE,” the ATO stated in its alert.
“While identifying that a PE exists and undertakes certain activities on behalf” of an Australian subsidiary “is an essential the analysis, it does not, of itself, mean all of the income” derived from the Australian subsidiary should be attributed to that PE.
In addition, through this arrangement, the taxpayer claims there is “no substantive contribution from Australia to the business carried on, at or through” the off-shore PE, but then claiming a deduction in the foreign jurisdiction for goods and services provided by the Australian entities.
“We are concerned that, under these arrangements, the right amount of taxable income is not being returned by the consolidated group in Australia,” the ATO stated. “In particular, the amount of taxable income returned does not reflect the economic substance and significance of the operations carried on and between Australia and the offshore jurisdiction consistent with the arm's-length principle in our transfer pricing rules.”
Finally, the ATO said it is looking into arrangements in which companies allegedly skirt the country's thin capitalization rules by classifying debt as equity, yet still claiming a “debt deduction associated with the financial arrangement.”
The ATO said these taxpayers are “incorrectly calculating the value of their debt capital” by “excluding the component of a debt interest that is separately disclosed as an equity component in the statement of financial position for accounting purposes.”
The agency said it is looking into its powers to either disallow the deductions or to substitute an “appropriate value” for the debt capital.
An Ernst & Young LLP analysis of the alerts , as well as other recent steps by the ATO, noted that it was encouraged “by strong political and public focus on the adequacy of corporate tax revenues.”
Earlier in the week, Australia released a plan to address use of offshore marketing and other centralized business hubs it said companies often use to shift profits to other jurisdictions (25 Transfer Pricing Report 469, 8/11/16).
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For more information, the alerts can be read at https://www.ato.gov.au/Media-centre/Media-releases/ATO-issues-new-warnings-for-large-companies-and-multinationals/ .
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