Les Nielson
The Budget includes several tax integrity measures one of
which is to implement two more components of the Organisation for Economic Co-operation
and Development’s (OECD) Base Erosion and Profit Shifting Project (BEPS)[1].
These are:
- eliminating hybrid mismatch arrangements and
- updating transfer pricing rules. [2]
What problems are being addressed?
A hybrid mismatch
occurs where a company’s financial instrument is treated as, say, debt, in one
tax jurisdiction and as, say, equity, in another tax jurisdiction. The outcome
can be double non-taxation of the cash flows associated with this instrument.
These arrangements are wide spread and have resulted in ‘substantial erosion’
of countries’ tax bases.[3]
Transfer pricing occurs where a company in a low or no tax country
(the source country) charges an artificially high price for goods or services
sold to an affiliate in a higher tax country (the destination country). The
price to the affiliate in the destination country is an operating cost which
reduces its profit and tax payable in the high tax destination country. The
price to the company in the source country is recorded as revenue so that most of
the profit is effectively transferred to that country where little or no tax is
payable. Overall, tax is either minimised or eliminated altogether.
Transfer pricing can also
work in reverse, where a source country company charges an affiliate an artificially
low price for a commodity (say, iron ore) that the affiliate then sells for a
much higher price in a low or non-tax jurisdiction. Such sales are suspected of
occurring through Singapore-based commodity trading facilities by affiliates of
major Australian resource companies.[4]
How are they being addressed?
The OECD has published
substantial guidance on measures to address these issues, which Australia has
undertaken to implement.[5] The Australian Board of
Taxation has already reported to the Government on implementing the OECD’s
recommendations on the hybrid mismatch rules.[6] This Budget initiative
undertakes to implement that report as well as take action on the transfer
pricing issue.
Revenue effects
Measures to deal with hybrid mismatch arrangements will
apply no earlier than1 January 2018 and changes to the transfer pricing rules
from 1 July 2016[7]. The Government has not
provided estimates of the revenue effects for either measure for the forward
estimates.[8]
Background
Australia has been a strong supporter of the OECD’s BEPS
project.[9] This project is the most substantial
renovation of the international tax standards in almost a century.[10]
Its main output is fifteen ‘Actions’ or policy recommendations that countries
can implement in order to tackle multinational tax avoidance.[11]
The view of the OECD is that it is preferable that these Actions be implemented
in a coordinated fashion.[12] To date Australia has
taken the following BEPS-consistent actions in relation to:
- stronger transfer pricing legislation [13]
- multinational anti-avoidance laws to ensure multinationals that
make sales in Australia do not avoid tax by booking revenue offshore [14]
- implementation of OECD recommendations on country-by-country
reporting, tax treaty abuse, harmful tax practices and exchange of rulings [15]
- exchange of information with other countries on activities of
multinational corporations [16]
- new tax requirements on foreign investment applications to ensure
multinational companies investing in Australia pay tax here on what they earn here [17]
and
- introduction of legislation to remove the competitive tax
advantage for overseas companies by applying the GST to digital product and
other services sold overseas. [18]
What is the rest of the world
doing?
As mentioned, it is desirable that the BEPS package is
implemented in a coordinated way. To this end, the OECD has established a
co-ordination mechanism for participating countries to do just that. There are
far more countries participating in the BEPS process than there are members of
the OECD.[19]
In addition, BEPS-consistent actions have already been
undertaken by a number of countries. For example:
- a large number of countries (including Australia) have entered
into agreements for the automatic exchange of tax information, particularly
information on multinational corporations [20]
- the UK government is legislating the BEPS hybrid mismatch rules,
in particular, and is undertaking work on legislating other BEPS Actions and [21]
- Japan has introduced legislation to:
- impose
a consumption tax for the provision of cross-border digital services (Action 1:
Address tax challengers of digital society)
- eliminate
dividend exclusion for hybrid arrangements (Action 2: Neutralise the effects of
hybrid mismatch arrangements) and
- introduce
an exit tax for individuals (Action 6: Prevent treaty abuse).[22]
[4].
Senate Economics References Committee, Corporate
tax avoidance: Part I: You cannot tax what you cannot see, The Senate,
Canberra, August 2015, pp. 25–27. For example, BHP operates such a hub in
Singapore and its associated profits are not taxed in that jurisdiction. BHP has
paid additional Australian tax in respect of these operations under the
Controlled Foreign Company Rules, but it has publicly acknowledged that it has a
number of outstanding disputes with the Australian Tax Office over the
operation of its Singapore marketing hub (p. 26).
[7] Australian
Government, op. cit. p. 34-35.
[9].
S Morrison (Treasurer), Tougher
measures to tackle tax evasion pass Parliament, media release, 29
February 2016; J Hockey (Treasurer), Global
leaders tackle profit shifting and tax evasion, media release, 20
September 2014; D Bradbury (Assistant Treasurer), Address
at the launch of the Tax and Transfer Policy Institute, Canberra: Supporting
better tax policy for a stronger, smarter and fairer society, media
release, 27 June 2013.
[10].
OECD, Neutralising the effects of hybrid mismatch arrangements,
op. cit.
[17].
S Morrison, Tougher measures to tackle tax evasion pass
Parliament op. cit.
All online articles accessed May 2016.
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