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New schemes associated with multinational profit shifting have caught the ATO’s attention, and taxpayers tempted to “push the boundaries” have been put on notice.
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ATO issues alerts on profit shifting
15 September 2016
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The ATO has released two new taxpayer alerts today, warning against international profit shifting by multinational companies.
Taxpayer Alert 2016/11 concerns a new scheme that attempts to bypass the Multinational Anti-Avoidance Law (MAAL). The MAAL applies to multinational groups that avoid a taxable presence in Australia by operating in Australia but booking their profits offshore.
Under the scheme, an Australian partnership is interposed between the foreign company and the Australian customer, the ATO said.
It is being asserted that because the partnership is technically an “Australian entity” for tax purposes (even though its profits are predominantly allocated to offshore entities for tax purposes), the MAAL does not apply, the ATO said.
Importantly, the creation of the partnership is the only change; all other commercial interactions between the multinational and its Australian customers remain unchanged.
Deputy commissioner Mark Konza said the ATO is concerned the interposed partnership is contrived to prevent the operation of the MAAL through a purported technical loophole, rather than by restructuring to acknowledge an Australian taxable presence.
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“While the majority of large corporates pay the right amount of tax in Australia and are transparent in their dealings with us, we are concerned that this particular scheme is another creative attempt to undermine the policy intent of the MAAL,” Mr Konza said.
“Our intelligence is that we have identified this particular scheme early, before it has had a chance to spread from a handful of companies that have implemented the structure.”
A second taxpayer alert, TA 2016/10, cautions multinational companies who engage in cross-border round-robin financing arrangements.
The ATO is concerned with arrangements where an Australian entity funds an overseas related entity, but subsequently receives the funds back in a manner that purportedly generates Australian tax deductions without corresponding Australian assessable income.
While the exact mechanism varies, typically an Australian company claims interest deductions on a loan from an overseas related party, which is funded by the Australian company ‘investing’ in the overseas related party. The end result is that deductions are claimed but income arising from this round-robin investment is subject to little or no tax.
Deputy commissioner Jeremy Hirschhorn said the alert serves as an early warning to taxpayers and their advisers about these round-robin financing arrangements or ‘loan back schemes’.
“Taxpayers should be very cautious about schemes which create interest deductions out of thin air, simply by shuffling funds around a group, or through simply making some book entries,” Mr Hirschhorn said.
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