Companies Must Reveal Cross-Border Tax Mismatches: Australia

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By Peter Hill

The Australian Tax Office wants multinational companies to provide details in their 2018 tax filings of tax planning that exploits different tax rules between jurisdictions.

Known as a hybrid mismatch structure, companies can use the arrangements to claim a deduction in one jurisdiction without a corresponding increase in income in another—or, in some cases, when a company can claim a deduction on both ends of a transaction. Companies must include details of international dealings of more than A$2 million ($1.5 million) with related parties as part of the schedule of their international tax planning for the 2018 tax year, the ATO said in a June 12 release.

If a company answers admits to having any hybrid mismatch arrangements in place, it must then also specify the amount of affected income. The requirement comes in advance of passage of proposed hybrid mismatch laws by the end of August.

The tax authority has included several new questions in its International Dealings Schedule (IDS) to prompt disclosure of any hybrid mismatch arrangements or entities. These arrangements are targeted by proposed legislation contained in Treasury Laws Amendment (Tax Integrity and Other Measures No.2) Bill 2018, which was only introduced into parliament in May. If passed, the bill won’t take effect until 2019.

The ATO has also updated nine existing questions relating to controlled foreign companies (CFCs), attribution income of CFCs, foreign hubs, cross border hybrid entities and hybrid instruments, thin capitalization, valuation of intangibles, and financial service entities.

Pragmatism

For other new disclosures required of multinational companies for the 2018 tax year, the ATO has acknowledged that relevant companies may not yet have in place accounting systems which automatically collect and aggregate the required information for the new disclosures.

The 2017 IDS didn’t, for example, include a question (13f), which, according to the ATO, “aims to identify whether you have performed research and development (R&D) type activities for the benefit of a related party in another country where you have been remunerated for performing these activities at an amount based on the costs of these activities plus an agreed margin (cost plus basis).” The question is intended to cover all R&D expenses regardless of whether or not they qualify for the R&D incentive.

The ATO says that if companies are not able to easily identify exact figures for costs of such activities, they should make “a best effort to estimate” figures if they do not have records of the actual data, and to keep a record of that determination and what data they used to make it.

The same pragmatic approach is expected for another new query relating notional assessable income and notional allowable deductions of controlled foreign companies.

The ATO also “strongly recommends” that any business required to complete the IDS read its 140-page instructions when doing so.

To contact the reporter on this story: Peter Hill: in Sydney at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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