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By Peter Hill
Australia’s chief for international tax has warned some multinational companies that they could face a tax bill in the future if they arrange their affairs to principally obtain a local or foreign tax benefit.
Several companies have already been warned of the possibility of the new diverted profits tax (DPT) being considered “in the future,” Mark Konza, the head of international tax at the Australian Tax Office said May 29 in a keynote address at a transfer pricing conference in Sydney. The companies may also be at risk of a tax if they aimed to get a tax advantage in connection with a scheme involving a foreign associate.
Konza said that as the DPT only came into effect on July 1, 2017, the ATO “will not be in a position to issue a DPT assessment” until “significant global entities” earning more than A$25 million ($19 million) revenue in Australia, file their 2017 tax returns. The tax office therefore wouldn’t be ready to issue any DPT assessments until at least the beginning of 2019, Konza said.
Despite the delay, Konza said the ATO is already looking “very closely” at some arrangements, which involve the transfer or effective transfer of valuable intangible assets offshore; the transfer or effective transfer and or centralization of functions and or risks offshore; a significant transfer of value relative to overall profitability; or the mischaracterization of payments (for example, service fees rather than royalties).“If we assess a taxpayer to be in breach of the DPT, we will apply a 40 percent tax on the DPT tax benefit which must be paid within 21 days,” Konza warned.
Konza also gave an update of Australia’s participation in the OECD’s pilot International Compliance Assurance Programme (ICAP), which was launched January 2018.
The ATO is one of eight tax administrations in the program, which Konza said “involves tax administrations undertaking cooperative multilateral risk assessments on MNE groups using their country-by-country reports and other relevant information.”
As part of the pilot program, the ATO is engaging “in real time” with participating MNEs “to reach an early decision about the level of transfer pricing and permanent establishment risk.” This has so far included the ATO commencing to review documentation for ICAP cases and attending risk assessment workshops where, according to Konza, “the MNE walked through their documentation in order to enhance tax administrations understanding of the MNE’s business, global value chain and related party transactions.”
Konza said the ATO was collating feedback “in terms of what is working well and what could be enhanced” for a meeting of the participating ICAP tax administrations in July.
Konza said that a focus in 2018 for Australia will be the Mutual Agreement Procedures since the country last year signed up to the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures, as part of the organization’s base erosion and profit-shifting project.
As of March 28, Australia had 47 MAP cases on hand. Based on current reservations of jurisdictions, Konza said, arbitration may be available for 15 of these cases by July, 1, 2019, “if not resolved by that date.”
He also said that Australia has selected final offer or “baseball” arbitration “as our preferred method for arbitration.” He said that only one treaty partner, Malta, “has opted for a different method.”
The MLI is expected to modify 31 of Australia’s 44 bilateral tax treaties, Konza said.
“These countries can choose to adopt mandatory binding arbitration under the MLI and Australia has chosen to do so for all of its Covered Tax Agreements,” he said. “Arbitration is currently available under Australia’s treaties with Germany, New Zealand and Switzerland.”
Noting the “seismic shifts” of the transfer pricing landscape, Konza added that “for those MNEs who may previously have sought to game the system, there is increasing pressure to get on board and use real substance and real commercial drivers in making their pricing decisions. It is up to those MNEs and their advisers to get with those who have been doing the right thing all along and to get real.”
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