Tax Avoidance and Profit Shifting: New Amendments

Monday 15 July 2013 @ 11.25 a.m. | Taxation

The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 No 101 was assented to on 29 June 2013 and brings into force important amendments with respect to anti-avoidance and transfer pricing. The amendments will apply to transactions that commenced to be carried out on or after the 16th November 2012.

The federal governments claims these amendments are based on its policy of "taking steps where necessary to ensure the integrity and sustainability of the tax system ... [which] ... Without these amendments, [would see] significant amounts of revenue that should be available for the benefit of all Australians ... at risk of not being collected".

Anti-avoidance Amendments

The first schedule of the amending Act amends the  Income Tax Assessment Act 1936, Part IVA the anti-avoidance rules to ensure that Part IVA "continues to counter schemes that comply with the technical requirements of the tax law but which, when viewed objectively, are conducted in a particular way mainly to avoid tax". Without this, there would be significant scope for taxpayers to plan their way around the law's intended operation and undermine the revenue base.

Generally Part IVA applies when three elements exist:

  • There is a scheme;

  • A tax benefit is obtained in connection with the scheme; and,

  • It is reasonable to conclude that someone entered into the scheme for the sole or dominant purpose of obtaining a tax benefit in connection with the scheme.

As the minister pointed out in his second reading speech recent cases have focused on the "tax benefit" element of the operation Part IVA, a tax benefit being found to exist if a scheme produces a tax advantage, being an advantage that would not have been obtained, or might reasonably be expected not to have been obtained, if the scheme had not been entered into.

The concept of "tax benefit" has two limbs as they are called:

First limb: tax advantages that "would" not have been obtained without the scheme, deals with cases where simply removing the scheme reveals a coherent taxable situation consistent with the substance of what happened.

Second limb: tax advantages that "might reasonably be expected" not to have been obtained without the scheme. It deals with "cases where what is left after simply removing the scheme would not make sense or would be inconsistent with the taxpayer's actual commercial objectives and instead requires a prediction about alternative ways that the substance of what happened might reasonably have been achieved".

The amendments made by Act 2013 No 101 are intended to reinforce the view that the two limbs of the tax benefit element of the Part IVA are alternative tests: "there is not just one test that merely spans a spectrum of likelihood". The amendments made by Act 2013 No 101 are also intended to ensure that, "in deciding whether an alternative to the scheme is reasonable, that regard is had both to the substance of the scheme and to the non-tax results or consequences for the taxpayer that the scheme achieved. In making that decision, the tax consequences of the alternative are ignored".

Transfer Pricing Rules Amendments

The second schedule according to the federal government seeks to modernise Australia's transfer pricing rules in accordance with the Government's announcement of November 2011 by providing a "new, comprehensive and robust transfer pricing regime that is aligned with internationally accepted principles".

The government's new rules operate on a self-assessment basis and are designed to bringing the transfer pricing rules into line with the overall design of the Australian tax system. This is said to be in contrast to the old rules, which relied upon the Commissioner making a determination. Under the new rules taxpayers will be able to self-assess their Australian tax position in accordance with the "arm's length principle".

The new rules also include specific rules linking voluntary documentation with a reduction in administrative penalties. As well the new rules introduce a time limit in which the Commissioner may amend a taxpayer's assessment to give effect to a transfer pricing adjustment. Under the previous rules, the Commissioner had an unlimited period in which to amend an assessment. Finally the  new rules maintain the existing interaction between the transfer pricing and thin capitalisation rules developed by amendments made to the transfer pricing rules in 2012.

Conclusion

The government has stated that "the measures ... are vital for maintaining the integrity of the Australian income tax system". However, already various sources have criticised the changes saying they are confusing and that their real effectiveness or otherwise will takes some time to assess.

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