The Australian Taxation office (ATO) is currently reviewing arrangements implemented by taxpayers with effect from 1 January 2016, when the new MAAL legislation was entered into effect.
The MAAL applies to multinational entities:
- Which enter into or carry out schemes designed to avoid or reduce the attribution of income to a permanent establishment (PE) in Australia.
- Where one of the principal purposes of the scheme is to obtain an Australian tax benefit and/or a reduction in a foreign tax liability.
(The MAAL empowers the Commissioner of Taxation to cancel any tax benefits that the foreign entity and/or its related parties derived from the scheme on or after 1 January 2016 and impose penalties of up to 120%.)
The ATO has recently expressed concerns that although international arrangements may be legally effective in achieving their commercial outcomes, they may themselves be deemed as schemes to which the MAAL anti-avoidance rules apply.
One example noted within the Taxpayer Alert TA 2016/2 is a scenario where Foreign and Australian entities swap roles via contracts. Prior to the restructure, the multinational's structure fulfilled the MAAL criteria set out in subsection 177DA(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936), but under the revised contractual arrangements:
Australian customers continues to enter into contracts with the foreign entity
the foreign entity grants the right to distribute and/or supply products or services to an associate entity in Australia
the Australian entity enters into an undisclosed agency agreement with the foreign entity to supply these products on behalf of the Australian entity, with the aim of swapping the entities' roles despite no changes being made to the underlying functions performed by the entities
the foreign entity does not recognise a PE in Australia.
Under these new arrangement, the ATO believes the foreign entity is continuing to supply the products or services to Australian customers but purports to avoid the application of the MAAL by arguing that:
- the supply function is undertaken wholly as agent on behalf of an Australian entity and thus no supply is made by a foreign entity (see subsection 177DA(1)(a)(i) of the ITAA 1936); and
- no income is derived by the foreign entity from the supply (see subsection 177DA(1)(a)(iv) of the ITAA 1936).
One question not adequately addressed by the example within the Alert is whether or not ownership and functional independence of the Foreign and Australian entities would have produced a different conclusion. This may be the case where former management or staff enter into a management buyout and an agency agreement with the foreign entity.
The ATO has told companies affected by MAAL to take care that re-configured structures or arrangements used in response to the MAAL do not themselves constitute a scheme to avoid tax. The ATO has further stated that new arrangements must reflect the substance of their activities in Australia, including appropriately reflecting the functions performed, assets used and risk assumed in Australia. In this regard the ATO is seeking dialogue with foreign entities that restructure their Australian operations.
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