Some international tax developments

Articles Written by Jane Trethewey

ATO amnesty for offshore income

ATO amnesty for offshore income

What is it?

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:

  • Foreign income or a transaction with an offshore structure;
  • Incorrectly claimed deductions relating to foreign income;
  • Capital gains in respect of foreign assets or Australian assets transferred offshore;
  • Income from an offshore entity.

Who is eligible?

All taxpayers are eligible to make a disclosure, unless specific exclusion conditions apply.

The exclusions are as follows:

  • If the taxpayer is already being audited by the ATO (including a covert investigation or audit) in relation to the omitted offshore income or gains or the over-claimed deductions;
  • If the taxpayer has received a compulsory information-gathering notice from the ATO, requiring them to produce information or attend and give evidence in relation to the relevant matters;
  • If the taxpayer has been involved in promoting or marketing tax evasion schemes (subject to some exceptions);
  • Of the taxpayer is already under criminal investigation concerning tax-related criminal offences or has previously been convicted;
  • If the foreign assets or income were derived from serious criminal offences unrelated to tax; or
  • If the taxpayer has not complied with specific obligations from a previous offshore voluntary disclosure initiative in which they were involved.

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.

What does a taxpayer need to do and when?

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.

What are the benefits?

  • Assessments will only be raised for years where the time limit for amendment has not yet expired (generally 4 years);
  • The tax shortfall penalty will be reduced to 10% (rather than up to 90% under the penalty provisions) and no penalty will apply if the additional income is $20,000 or less for an income year - however, normal interest charges will apply;
  • The ATO will not investigate the disclosure for the purposes of prosecuting the taxpayer for a criminal offence and will not refer the taxpayer for criminal investigation by another agency - however, the ATO cannot give any assurances or grant amnesty from investigation by any other law enforcement agency or prosecution by the DPP;
  • Assurances and certainty can be provided concerning the tax effects of winding-up any offshore structures or repatriation of offshore assets;
  • Only certain financial information is required to be provided.

What are the limitations?

The above benefits will not apply if:

  • The taxpayer does not ensure the offshore structure is brought within the Australian taxation system;
  • The taxpayer gives false or misleading information; or
  • The taxpayer seeks to dispute the tax, penalties or interest imposed.

Also, exemptions will notapply for reporting entities in relation to obligations under anti-money laundering legislation.

How does the ATO detect offshore income and assets?

The ATO has various means of obtaining information about a taxpayer's offshore activities, income and assets, including:

  • Under information exchange provisions in tax treaties (including information exchange agreements with a number of 'tax haven' or 'secrecy' jurisdictions), many of which provide for automatic exchange of information;
  • Data from Austrac about cross-border fund movements;
  • Information from other Australian and foreign government agencies;
  • Information from domestic and foreign banks about offshore accounts and transactions.

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.

What are the results so far?

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'.

Tax disclosure and transparency

Tax disclosure and transparency

International Dealings Schedule (IDS)

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.

Reportable Tax Position (RTP) Schedule

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:

  1. A position that is about as likely to be correct as incorrect, or less likely to be correct than incorrect;
  2. A position in respect of which uncertainty about taxes payable or recoverable is recognised and/or disclosed (for the first time in or after the 2011/12 year) in the financial statements of the taxpayer or a related party of the taxpayer (in accordance with accounting principles), subject to a materiality requirement;
  3. A reportable transaction or event, i.e. certain CGT events where the capital proceeds exceed A$200M and there is a relevant difference between accounting income and the tax outcome above a materiality amount.

Publication of taxpayer information

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.

Transfer pricing documentation - ATO guidance

Transfer pricing documentation - ATO guidance

Release of draft guidance by ATO

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:

  • Draft Taxation Ruling TR 2014/D4 (TP documentation requirements);
  • Draft Practice Statement PS LA 3672 (administration of TP penalties);
  • Draft Practice Statement PS LA 3673 (guidance for TP documentation).

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.

TP rules and documentation requirements

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 and Draft PS LA 3673

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):

  • It may reduce the risk of a TP audit;
  • It is likely to streamline risk assessment, audit activity and assist in minimising additional compliance costs; and
  • It could assist the entity if the amounts are disputed.

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.

OECD discussion draft on preventing treaty abuse (BEPS Action 6)

OECD discussion draft on preventing treaty abuse (BEPS Action 6)

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:

  1. Developing model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.
  2. Clarify that tax treaties are not intended to generate double non-taxation.
  3. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a treaty with another country.
  4. In relation to A:
  5. The Draft distinguishes between 2 types of cases:
  6. Circumventing limitations provided by the treaty itself (i.e. 'treaty shopping', typically involving residents of 3rd States seeking to access indirectly the benefits of a treaty between 2 Contracting States); and
  7. Circumventing the provisions of domestic tax law using treaty benefits, such as: thin capitalisation and other financing structures using tax deductions to reduce borrowing costs, dual residence strategies, transfer 'mispricing', arbitrage transactions to take advantage of mismatches in domestic law of one State or between the domestic laws of 2 States and transactions that abuse relief of double taxation mechanisms to avoid tax completely).
  8. The Draft recommends a 3-pronged approach to addressing treaty shopping, namely including:
  9. a clear statement in the title and preamble of treaties that the Contracting States wish to prevent tax avoidance and, in particular, intend to avoid creating opportunities for treaty shopping;
  10. a specific anti-abuse rule based on the limitation of benefits provisions included in treaties concluded by the US and some other countries, and other targeted specific anti-abuse rules (e.g. dealing with contract-splitting to avoid 12-month rules for permanent establishments, transactions to avoid dividend characterisation, dividend transfer transactions to obtain a lower or nil treaty tax rate, transactions to avoid Article 13(4) in relation to shares of land-rich companies and dual residence tie-breaker rules3); and
  11. a general anti-abuse rule, incorporating principles already reflected in the OECD Commentary on Article 1 to the effect that the benefits of a treaty should not be available where one of the main purposes of arrangements or transactions is to secure a benefit under a tax treaty that would be contrary to the object and purpose of the relevant provisions of the treaty.
  12. In relation to the issue of circumventing domestic provisions, the Draft says the main objective is to ensure that treaties do not prevent the application of specific domestic law anti-avoidance provisions (such as a GAAR, thin capitalisation, CFC and dividend-stripping rules), as well as to have a general anti-abuse rule in the treaty.

In relation to B:

  • The Draft notes that tax treaties were originally developed with the prime objective of preventing double taxation, although paragraph 7 of the OECD Commentary has for some time made it clear that it is also a purpose of tax conventions to prevent tax avoidance and evasion.
  • The Draft recommends that the title of the OECD Model state clearly that this is a purpose of the treaties and that the Model include a preamble that expressly states that States enter into a tax treaty to eliminate double taxation without creating opportunities for tax evasion and avoidance, including by way of treaty shopping.

In relation to C:

  • The Draft states it was agreed that a clearer articulation of policy considerations that countries should consider before deciding to enter into a tax treaty could make it easier for countries to justify their decisions not to enter into tax treaties with certain low or no-tax jurisdictions, whilst also recognising that there are many non-tax factors for concluding a tax treaty and the sovereign right of states to enter into tax treaties with any jurisdictions with which they decide to do so.
  • The Draft notes that the results of this work are also relevant to the question of whether to modify or terminate a treaty if a change of circumstances (such as changes to the domestic law of a treaty partner) raises BEPS concerns.
  • Changes to the Introduction of the OECD Model to this end have been proposed, under the heading 'Tax policy considerations that are relevant to the decision of whether to enter into a tax treaty or amend an existing treaty'.

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.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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