Australia's new multinational anti-avoidance law
Donald Drysdale discusses new measures in Australia to curb tax avoidance by multinational companies and the lessons for the UK's tax regime.
There has been steady progress in the OECD's base erosion and profit shifting (BEPS) project, which seeks to address perceived flaws in international tax rules and thus discourage base erosion and profit shifting by multinational enterprises.
Earlier this year the UK was criticised in some quarters when the then Coalition Government jumped the gun on BEPS by introducing the new Diverted Profits Tax (DPT) from 1 April 2015, before concerted action on such measures could be taken worldwide.
DPT was implemented to deter and counteract the diversion of profits from the UK by large groups, typically multinational enterprises, which use contrived arrangements to circumvent rules on permanent establishments and transfer pricing.
But the UK isn't alone in jumping the gun. Australia has now made a pre-emptive strike by amending its general anti-avoidance rule (or GAAR) to target multinational companies which take artificial steps to avoid having a taxable presence there.
Australia's general anti-avoidance rule
Australia has a lengthy history of general anti-avoidance measures. Its GAAR known as 'Section 260' was enacted as long ago as 1936, but it was interpreted unexpectedly narrowly by the courts and was superseded in 1981 by the current GAAR known as 'Part IVA'. This GAAR has been further developed and expanded since 1981, as the legislature has sought to plug gaps arising from the judiciary's unduly narrow interpretation of its provisions.
The latest proposed change, the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, was introduced into the Australian Parliament in Canberra on 16 September 2015.
Effectively an extension of the existing GAAR, it is being dubbed the 'MAAL' (multinational anti-avoidance law). In the spirit of BEPS, it seeks to counter the erosion of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid the attribution of business profits to a taxable presence in Australia.
Although this Australian measure is not a separate diverted profits tax along the lines of the UK's DPT, the proposal reflects some of the thinking behind the first limb of the UK legislation, namely, the avoidance of a permanent establishment in the country. The MAAL will apply on or after 1 January 2016, whether or not the scheme in question was entered into or commenced before that day.
Following earlier consultations, changes have been made to the proposals and the law will now cover all multinationals operating in Australia with global revenues above $1 billion, i.e. around 1,000 enterprises.
There is now no requirement for the foreign entity making the supplies to Australian customers to be connected with a low or nil tax jurisdiction to be potentially caught.
Furthermore, the operation of the MAAL is not excluded where the profits (which would otherwise have been in Australia) are located in a country where there is substantial economic activity.
The result is that the MAAL, which will generally apply from 1 January 2016, is much broader than expected and there are less legislative 'escape routes'. A greater number of offshore companies with economic activity in Australia (but no permanent establishment there) will need to consider whether they should now engage with the Australian Taxation Office to obtain certainty about their current structures, or examine whether some restructuring is necessary.
This is due in particular to the risk of unanticipated exposure to Australian tax if the Commissioner of Taxation determines that the amended GAAR applies, and because the Bill also proposes harsh penalties. The penalties can arise for years beginning on or after 1 July 2015, regardless of whether the arrangements were entered into before, during or after the year in question.
Under the MAAL, when companies are caught cheating, they will have to pay double what they owe, plus interest. Australia's Federal Treasurer has made it clear that integrity must be a key component of any tax system, and that his country has no tolerance for tax avoiders.
These are familiar themes here in the UK, where the new Government is consulting on measures to strengthen its GAAR further, while also considering the detail of introducing a GAAR penalty.
Article supplied by Taxing Words Ltd.