INTERNATIONAL TAX ISSUES AND REFORMS

– WHERE ARE WE?Mathew Chamberlain

EY

Agenda1. What have we been, where are we at and where are we

going?2. Current issues3. Update on BEPS4. Current ATO activity5. Tax changes in other jurisdictions – potential impact on

Australia6. Foreign companies operating in Australia – “traps for

young players”

Where have we been?2001 – 2009, including: Review of International Taxation Arrangements

Debt/equity and thin capitalisation changes Taxation of Financial Arrangements Treaties – new model Outbound CGT exemption Simplification of foreign branch profits and dividend

exemptions Conduit foreign income Changes to CGT for non-residents Introduction of foreign Income Tax Offset regime

Where have we been (cont)?2010 onwards, including: Repeal of FIF rules and deemed present entitlement rules Rewrite of transfer pricing rules – tranches 1 and 2

implemented OECD BEPS reports released Noza Holdings – impact of section 25-90 Re-engineering of Part IVA

Return focus to motive rather than existence of tax benefit Removal of “do nothing” defence

Tightening of thin cap rules

Where are we now? BEPS – Australian response

Treasury Paper – May 2015 Action plan – July 2015 Impact on ATO risk reviews, audits etc (see below)

Tax reporting and transparency Clarification of operation of TARP rules Treaty negotiation program – Netherlands, Singapore etc G20 and Australian chair Project Do IT ATO transfer pricing rulings, PSLAs and APA guidelines

Where are we going? Concept of “fair” amount of tax being paid by

multinationals Tax as a reputational risk issue for multinationals

Do you want to be on page 1 of the Fin? BEPS - will it eventuate in a meaningful global way?

Europe/developing world versus the US Responses to action items

CFC reforms – now if, not just when? Advanced Pricing Arrangements Future treaties – what is the model?

Current issues – thin capRestricts deductibility where debt levels exceed a maximum allowable debt levelMethods for calculating maximum allowable debt Safe Harbour Debt Test – Maximum debt limited to 60% of

total average value of assets Worldwide Gearing Debt Test – Maximum debt based on

worldwide gearing ratio applied to total assets of entity Arm’s Length Debt Test – Maximum debt that would be

lent in respect of Australian operationsThe thin capitalisation rules do not apply to: Entities whose debt deductions) do not exceed A$2m Outbound groups with less than 10% of their operations

offshore

Recent amendments

Old law New lawThe de minimis threshold is debt deductions of A$2m or less

The de minimis threshold is debt deductions of A$250,000 or less

Safe harbour debt ration for general taxpayers is 75%

Safe harbour debt ration for general taxpayers is 60%

Wordwide gearing test currently 100%

Wordwide gearing test currently 120%

Worldwide gearing test extended to inbound groups

Affected groups

Foreign Multinational

AusHold Co

Finance Company

NFSAAusSub

AusSub

InternalDebt

Bank(Third Party)

50%

AusAssociate

Inbound Groups

AusLimited

NFSAAusSub

AusSub

ForeignHoldco

50%

AusAssociate

Outbound Groups

ExternalDebt

On-lentDebt

Foreign Subs

Implications of breachInterest deduction denials are permanent Higher effective tax rate and cash tax cost Interest withholding tax still appliesOptions available to manage thin capitalisation Reduce debt levels Enhance the safe harbour Arm’s length debt test Worldwide gearing test

Reducing debt levels Opportunities include:

Refinancing Capitalising intra group debt Issuing additional equity Turning off interest expense

Challenges/considerations include: Locked in debt arrangements, break fees Transfer pricing implications Foreign exchange implications Debt forgiveness Limited recourse debt Capital injection considerations (COT, available fraction)

Arms length debt testAllows groups to have gearing levels that exceed safe harbour limit having regard to: Debt levels the entity might reasonably be expected to

have; and Debt levels that commercial lending institutions might

reasonably be expected to have advanced to the entity on an arm’s length basis

Level of debt established by arm’s length arrangements, taking into account industry practice and specific assumptions required in the tax legislation.Evaluated from perspective of “independent lender” and “independent borrower”The arm’s length debt test is currently under review by Australia’s Board of Taxation.

Current issues – dividends New Subdivision 768-A

Replaces section 23AJ and applies to distributions made after 16 October 2014

Aligns dividend exemption to debt/equity character (not legal form dividends)

Extends the exemption to interposed partnerships and trusts Changes to CFC rules to prevent “pooling” of portfolio

dividends Voting rights requirement replaced with 10% or more

participation interest, being the higher of voting interests, dividend entitlement, capital entitlement (excluding rights on winding up)

Participation interest need not attach to the instrument on which the “distribution” is paid

ATO developing guidelines on application of rules

Current issues – CGT Broad CGT exemption for non-residents except in respect

of the disposal of investments in Australian real property assets

Extends to investments in companies whose asset value is principally attributable to such assets

Legislative amendments ensure that newly created assets arising from intra-group transactions are ignored for purpose of principal asset test in Division 855

Prevents double counting of assets Purpose/motive irrelevant Applies to CGT events after 14 May 2013 (7:30 pm) for

tax consolidated groups and from 13 May 2014 (7:30 pm) for non-consolidated groups

Example

ForeignParent

AussieHoldco

15%

AussieSub

Australian Land

$100Loan

$100 Asset

Aussie Sub holds land worth $100 and has an equivalent loan from Aussie Holdco

Aussie sub therefore has only nominal value

Aussie Holdco assets comprise a $100 receivable from Aussie Sub and equity of nominal value

Absent the law change Aussie Holdco may not be a TARP asset

Non-final 10% Withholding Tax Announced in 2013 Federal Budget Proposal to introduce 10% non-final WHT on the disposal,

by foreign residents, of certain ‘taxable Australian property’: Applies to transactions other than residential property under

$2.5 million Obligation imposed on the payer (purchaser) where payee

(vendor) is a foreign resident and the transaction involves taxable Australian property

Proposed commencement date of 1 July 2016 Non resident required to file income tax return Consultation paper issued 31 October 2014 Submissions due 28 November 2014

Current issues - DTA updateStatus of recent treaty negotiations

Re-negotiated and in force

To be re-negotiated

USA – 1 July 2003 NetherlandsUK – 1 July 2004 Republic of KoreaNorway – 1 January 2008 ItalyJapan – 1 January 2009 United StatesFrance – 1 January 2010 United KingdomSwitzerland – 1 January 2015 SingaporeIndia (protocol) April 2013 China?

Update on BEPSBackground OECD BEPS Action Plan addresses concern about

multinationals (MNCs) reducing tax liabilities by moving income to no or low tax countries: Driven by MNC tax issues in global headlines Ambitious BEPS agenda based on real political imperative G20 endorsed Action Plan committed to individual country

action (some countries already taking unilateral action) – coordinating changes and timing difficult across countries

Major non-OECD countries (including China, India and developing countries) actively participating in BEPS project

Tax authorities moving fast to upscale activities Treaty changes likely to take longer – 2016 at earliest?

Action Plan – scheduled dates

Tax challenges of digital economy – September 2014

Hybrid mismatch arrangements – September 2014

Controlled foreign corporation (CFC) rules – September 2015

Deductibility of interest and other financial payments – September/ December 2015

Harmful tax practices – September 2014/ September 2015/December 2015

Treaty abuse – September 2014

Artificial avoidance of permanent establishment status – September 2015

Transfer pricing for intangibles – September 2014/September 2015

Transfer pricing for risks and capital – September 2015

Transfer pricing for other high-risktransactions – September 2015

Development of data on BEPS and actions addressing it – September 2015

Disclosure of aggressive tax planning arrangements – September 2015

Transfer pricing documentation – September 2014

Effectiveness of treaty dispute resolution mechanisms – September 2015

Development of a multilateral instrument for amending bilateral tax treaties – September 2014/December 2015

2015 Budget announcementsAction AnnouncementAction 1 Extending GST to digital products and other services imported to apply

from 1 July 2017Action 2 Anti-hybrid rules – BOT to consult on OECD draft rules Action 4 Thin capitalisation – no immediate further action proposed after 2014

tightening of rulesAction 5 Harmful Tax Practices and Exchange of Rulings – ATO commenced

exchange of information on secret tax deals provided to MNEs by other countries that may contribute to tax avoidance in Australia

Action 6 Treaty abuse rules – Australia to incorporate OECD’s recommendations into treaty practice

Action 7 Multinational anti-avoidance law (extended Part IVA) – to apply from 1 January 2016 where there is avoidance of PE in Australia and principal purpose of tax benefit

Actions 8-10 ‘Inflated transfer pricing’ – ATO audits underway; further consultation with UK to consider rules

Action 13 Updated TP documentation (incl CbCR) to be implemented from 1 January 2016

Development of Public Tax Transparency Code on disclosure of tax information by large corporates

BEPS and ATO activity Senate hearings on “corporate tax avoidance”

Focus on IT, pharmaceuticals and sales and marketing hubs

ATO submissions – thin cap, new dividend exemption, exchange of information, application of Part IVA

ATO also recalled to give evidence and provided methodologies for “effective tax borne”

Working Group with UK on Diverted Profits Tax regime Lease in, lease out working group

Focus on asset leasing in oil and gas industry Hardening of attitude towards APA and transfer pricing

profit allocations Allocation of risk and profit to Australian principal

Tax changes in other jurisdictions UK Diverted Profits Tax French anti-hybrid rules Targeted Australian multinational anti-avoidance laws

(DPT light?)

Foreign companies in Australia Fundamental premise of international tax for inbounds:

Ensure an “appropriate” Australian sourced profits/gains subject to Australian tax Transfer pricing Treaty model Capital gains on taxable Australian property WHTs on Australian sourced payments

Foreign companies in Australia Issues

Taxable presence in Australia – subsidiary vs branch? Acquisition structuring Funding Charges in Australia, eg interest, royalties, management

fees etc Repatriation of cash and earnings Exit strategies

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© Mathew Chamberlain 2015

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.