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On 27 March 2014, the Commissioner of Taxation announced an initiative (called 'Project DO IT') to allow taxpayers to voluntarily disclose unreported foreign income and assets.
The Project covers amounts not reported, or incorrectly reported, in tax returns, including:
All taxpayers are eligible to make a disclosure, unless specific exclusion conditions apply.
The exclusions are as follows:
In addition, taxpayers who have had their offshore tax-related issues finalised or who are in dispute about offshore tax-related issues generally cannot make a disclosure about those issues under this Project.
Taxpayers who do not qualify for the initiative may still make a voluntary disclosure under standard arrangements and may be able to negotiate a specific agreement with the ATO, depending on their circumstances.
Disclosure must be truthful and full and made in accordance with the disclosure statement form on the ATO website. Information that must be provided includes: details of all omitted foreign income, gains or over-claimed deductions, details of all relevant offshore structures, assets and entities and any information concerning advisers who assisted in setting up or maintaining such structures. The disclosure must be sufficient to enable the Commissioner to identify the tax shortfall amount for the relevant years.
The disclosure statement must be lodged by 19 December 2014.
The above benefits will not apply if:
Also, exemptions will notapply for reporting entities in relation to obligations under anti-money laundering legislation.
The ATO has various means of obtaining information about a taxpayer's offshore activities, income and assets, including:
In short, the ATO has many sources of information and can obtain such information much more quickly than in the past, often in 'real time'. In his recent speech (see below), the Commissioner called this the 'data revolution' and said that country by country reporting, the US Foreign Account Tax Compliance Act(FATCA), and the new G20-endorsed global standard for automatic information exchange means it is now 'harder to hide'. The chances of offshore assets and structures being detected by the ATO are considerably greater than they once were.
In a speech on 14 April 2014, the Tax Commissioner, Chris Jordan, said the early results from Project DO IT are 'promising', saying there have so far been 16 disclosures and 33 expressions of interest from others who intend to make a disclosure. The ATO, he said, is 'confident this program will bring many taxpayers back into the system with direct and future compliance dividends'.
Since 2011/12, businesses with international related party dealings above a specified threshold, that have interests in a foreign subsidiary, branch or trust or that are subject to the thin capitalisation rules have been required to lodge an International Dealings Schedule (IDS) (replacing the former Schedule 25A and Thin capitalisation schedule) with their tax returns. The disclosures required under the IDS are very detailed.
The IDS for the 2012/13 year had 44 questions about categories of transactions, financial dealings, business restructuring, thin capitalisation, foreign-sourced income, interests in foreign entities, transfer pricing methodologies used and documentation held (for each type of transaction), accompanied by 133 pages of instructions. It is understood that the ATO does not propose to make any significant changes to the IDS for the 2013/14 year, although it may seek to improve the instructions.
The ATO has also introduced a Reportable Tax Position (RTP) schedule to be lodged by certain taxpayers it regards as being of 'higher consequence' (i.e. higher risk - determined under the ATO's 'Large business risk differentiation framework'). At present, it is only required to be completed by taxpayers that are notified by the ATO that they must lodge the Schedule. For the 2011/12 year, the Schedule was trialled on a few very large companies in the 2011/12 year and, for the 2012/13 year, the ATO contacted a small number of large market business taxpayers to notify them they must lodge an RTP Schedule.
An RTP is a position taken by the taxpayer for the purposes of their tax return that comes within one of the following 3 categories:
New provisions were enacted on 29 June 2013, applicable from the 2013/14 year, requiring the Commissioner to publish certain tax information about large corporate taxpayers (i.e. that have 'total income' of A$100M or more for an income year as reported in their tax return) and entities that have an amount of MRRT or PRRT payable for a year (as reported in their MRRT or PRRT return).
The information to be published will include the entity's name and ABN and (in relation to income tax) its total income, taxable income or loss and tax payable for the income year, as reported in the entity's tax return.
This is stated to be a 'transparency' measure, to inform public debate, enable better public disclosure of tax revenue, improve information sharing among Government agencies and discourage large corporate taxpayers from engaging in aggressive tax avoidance.
On 16 April 2014, the ATO released a package consisting of a draft Taxation Ruling and two (2) draft Practice Statements, providing guidance on record keeping and documentation requirements for transfer pricing (TP) purposes (with comments due by 30 May 2014), as follows:
An Addendum to MT 2008/2 (administrative penalties for taking a position that is not reasonably arguable) was also issued.
Below is a brief summary of the TP rules and documentation requirements and of draft TR 2014/D4 and PS LA 3673.
New TP rules (under Subdivisions 815-B, 815-C and 815-D of the Income Tax Assessment Act 1997 (Cth), dealing with cross-border conditions between entities, permanent establishments and partnerships & trusts, respectively), as well as new TP documentation requirements (in Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA)), apply for income years ending on or after 29 June 2013.
The new TP rules are intended to ensure that the amounts brought to tax in Australia in relation to cross-border arrangements and dealings are based on the 'arm's length' principle and that the rules are applied consistently with the OECD Guidance material.1 Unlike the former TP rules, the new rules are 'self-executing' and do not require a determination to be made by the Commissioner.
Section 262A of the Income Tax Assessment Act 1936(Cth) contains the general record-keeping obligation, requiring all taxpayers that carry on business to keep records that explain all of their transactions and other acts that are relevant for tax purposes. New section 284-255 of Schedule 1 to the TAA sets out specific documentation and record-keeping requirements for the purpose of the TP rules, requiring records to be kept that allow various matters to be readily ascertained (such as relevant arm's length conditions and particulars of methods used to identify them) and explain the particular way in which Division 815 has been applied and how it best achieves consistency with the OECD Guidance material.
The records must be prepared before the time the entity lodges its income tax return for the relevant income year - any records prepared afterthat time will be disregarded. If records are notprepared in accordance with the relevant requirements (including if they are not prepared by the required time), the taxpayer will be deemed not to have a 'reasonably arguable position' (RAP) for the purpose of the penalty provisions in Division 284, thus increasing their exposure to a penalty under that Division.2
TR 2014/D4 sets out the Commissioner's views on the TP documentation that an entity should prepare and keep as required by s 284-255 in order to be able to have a 'reasonably arguable position' and states that satisfaction of s 284-255 will also satisfy the obligations under s 262A. The Ruling is to be read in conjunction with both PS LA 3672 and 3673, which provide practical guidance in respect of the administration of TP penalties and documentation, respectively.
The draft Ruling discusses the TP documentation requirements in some detail and says that keeping records in accordance with these requirements could have the following benefits for taxpayers (in addition to enabling them to have an RAP and reduce penalties accordingly):
Draft PS LA 3673outlines a 'practical process' for TP documentation to be followed by ATO officers when undertaking a TP review and sets out5 steps that they need to evidence:
Step 1: Identify the actual conditions in connection with the commercial or financial relations.
Step 2: Select the most appropriate and reliable method to be used to identify the arm's length conditions.
Step 3: Identify the comparable circumstances relevant to identifying the arm's length conditions.
Step 4: Application of the transfer pricing rules so as best to achieve consistency with the relevant guidance material.
Step 5: Monitor, review and update transfer prices, as necessary.
On 14 March 2014, the OECD released for public consultation its discussion draft on Action 6 of the BEPS Action Plan, dealing with preventing treaty abuse (Draft). The BEPS Action Plan identified treaty abuse, and in particular treaty shopping, as one of the most important sources of concerns in relation to base erosion and profit shifting (BEPS).
The Draft contains some preliminary conclusions in relation to the 3 areas identified in Action 6, namely:
In relation to B:
In relation to C:
Public consultation on the Draft was due to occur by 15 April 2014.
The question is how successful any such changes are likely to be in combatting the BEPS issues that are currently concerning the OECD and the G20.
1 Currently, the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, OECD, 22 July 2010, and the OECD Model Treaty and Commentary, last amended on 22 July 2010.
2 A matter is 'reasonably arguable' (under s 284-15) if it would be concluded in the circumstances, having regard to relevant authorities, that the matter argued for is about as likely as not, or more likely than not, to be correct as incorrect. If the tax shortfall from the TP adjustment exceeds the relevant threshold, the minimum base penalty in the absence of an RAP is 50%but, if the taxpayer has an RAP, the base penalty is reduced to either 25%or 10%, depending on whether the taxpayer entered into the scheme with the sole or dominant purpose of getting a 'transfer pricing benefit'.
3 In particular, a proposal to introduce an alternative tie-breaker rule to Article 4(3), by providing for the competent authorities of the Contracting States to determine by mutual agreement the State of which a dual resident non-individual should be resident for the purposes of the treaty and, failing that, the person is not entitled to any relief from tax under the treaty except as may be agreed upon by the competent authorities. A provision along these lines is in Article 4(3) of the most recent Australia/NZ DTA, which came into force in 2010.
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