Australia signs MLI to prevent tax avoidance

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Australia has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”). The Minister for Trade, Tourism and Investment, Mr. Steven Ciobo MP, signed the Convention for Australia at a ceremony hosted by the Organisation for Economic Cooperation and Development (OECD) in Paris on 7 June 2017.  67 other jurisdictions also signed the Convention, including 35 of Australia’s bilateral tax treaty partners.

The Convention is a key outcome of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, which aims to ensure that multinationals pay tax in the jurisdiction where economic value is created or added.

Once in force, the Convention will modify most of Australia’s bilateral tax treaties to implement new integrity rules that will help prevent exploitation for tax avoidance purposes and improve tax treaty-based dispute resolution mechanisms.

The Convention will enter into force after signatories have completed their domestic requirements and deposited their instruments of ratification with the OECD. Legislation will be introduced into the Australian Parliament as soon as practicable to give the Convention the force of law in Australia.

Australia: FTA negotiation with Peru

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On 24 May, Australia and Peru launched negotiations for a free trade agreement (FTA). A fellow signatory to the Trans-Pacific Partnership (TPP) Agreement, Peru has been one of the fastest growing economies in Latin America. A Peru-Australia FTA would enable Australian businesses to access the opportunities presented by that growing market.

Furthermore, Peru is a growing market for Australian goods and services exporters. In 2015-16, total two-way trade in goods and services with Peru was worth $504 million, up 19.4% from the previous year. An FTA with Peru would provide Australian businesses with an opportunity to expand engagement with this emerging market.

Australia: New rate for franking credits

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The company tax rate for small business has been reduced to 27.5% for 2016-17 and the maximum franking credit of small business has decreased to 27.5% (previously 30%). This reduced rate applies to companies with an aggregated turnover of less than $10 million.

If a corporate tax entity fully franked a distribution during its 2016-17 income year before the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (the amending Act) became law on 19 May 2017, the amount of the franking credit on the distribution statement provided to members may be incorrect. This is because the franked distribution would likely be based on the 30% corporate tax rate, when the entity’s tax rate for that income year may in fact be 27.5% because of the law change.

Australia: GST registration system for non-resident businesses

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Non-resident businesses supplying services and digital products to Australian consumers and who meet the turnover threshold of A$75,000 will need to register for Australian GST by 1 July 2017.

There are two ways non-resident businesses can register for GST:

  • Using the simplified online GST registration system from 26 June 2017;
  • Using the standard system. An Australian business number (ABN) is required and it can take up to 28 days to process the GST registration.

Australia: Practical Compliance Guideline – cross-border related party financing arrangements and related transactions

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On 16 May 2017, the Australian Tax Office (ATO) released a draft Practical Compliance Guideline that sets out the compliance approach for cross-border related party financing arrangements as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into with a cross-border related party.

The ATO uses the framework in this draft Guideline and the accompanying schedules to differentiate risk and tailor their engagement with taxpayers according to the features of related party financing arrangement, the profile of the parties to the related party financing arrangement and the choices and behaviors of the group. The tax risk associated with related party financing arrangement is assessed having regard to a combination of quantitative and qualitative indicators.

If any related party financing arrangement is rated as being low risk under this framework then taxpayers can expect the Commissioner will generally not apply compliance resources to review the taxation outcomes, in the relevant schedule, of any related party financing arrangement, other than to fact-check the appropriate risk rating. If any related party financing arrangement falls outside the low risk category, taxpayers can expect the Commissioner will monitor, test and/or verify the taxation outcomes of taxpayer’s related party financing arrangement.

This draft Guideline will have effect from 1 July 2017 and will apply to existing and newly created financing arrangements/ structures/ functions.

Australia: Draft Taxation Ruling TR 2017/D2 – Central Management and Control test of residency

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The Australian Tax Office has now released a new draft ruling TR 2017/D2 and has withdrawn its preceding ruling TR 2004/15 on the tax residence of foreign incorporated companies.

Following the decision in Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 the Commissioner has formed the view that the position expressed in former TR 2004/15 on when a company carries on business in Australia can no longer be sustained. At [57] the majority of the High Court rejected the contention that to be a resident of Australia, a company must have its central management and control in Australia and in addition it must also carry on its business operations in Australia.

Therefore, if a company carries on business and has its central management and control in Australia, it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and its trading operations are conducted outside Australia.

The draft ruling incorporates a number of changes from the standard ATO rulings template with the intent of providing more practical and streamlined advice. The ruling sets out the Commissioner’s view as to the principles relevant to applying the central management and control test of residency.

Australia: Implementation of the OECD hybrid mismatch rules

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The Government of Australia has committed to the implementation of Action Item 2 of the G20/OECD BEPS Action Plan, which recommends neutralizing the effects of hybrid mismatch arrangements that occur due to the different treatment of an entity or instrument, under the laws of two or more tax jurisdictions.

The rules will apply to related parties, members of a control group and structured arrangements that involve cross-border hybrid financial instruments and/or hybrid entity structures.

The OECD anti-hybrid rules operate to deny deductions for the payer (or alternatively include taxable income in the hands of the payee) where an entity is able to claim a tax deduction in one jurisdiction but not include an income amount in the other tax jurisdiction; and deny duplicate deductions where an entity is able to claim a tax deduction in both tax jurisdictions for a single payment.

The rules will apply to payments made on or after the later of 1 January 2018 or six months following the date of Royal Assent for the legislation.

On 9 May 2017, the Government announced specific rules to eliminate hybrid mismatches that occur in relation to regulatory capital known as Additional Tier 1 (AT1), issued by regulated entities such as banks and insurers, by preventing returns on AT1 capital from carrying franking credits where such returns are tax deductible in a foreign jurisdiction and where the AT1 capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were to be franked.

Subject to transitional arrangements, these rules will apply to returns on AT1 instruments paid from the later of 1 January 2018 or six months after Royal Assent.