INTERNATIONAL TAX REFORM

WHERE ARE WE, HOW DID WE GET HERE AND WHERE

ARE WE GOING? Mathew Chamberlain CTA, EY

Purpose and context

Set tone for the day – “it’s about the context” Recent history, i.e. since 2001 Current issues and developments Crystal ball gazing

Not designed to analyse issues Role of following presentations

Focus on developments for corporates Other fundamental changes for individuals, eg section

23AG, temporary residents etc

Purpose and context

Fundamental premise of international tax Outbound – profits/gains from conduct of active foreign

business with third parties not subject to Australian tax on: Derivation (CFC rules and section 23AH) Repatriation (section’s 23AJ and 23AH) Exit (AFBAP and section 23AH) Distribution to non-residents (CFI)

Inbound – ensure an “appropriate” Australian sourced profits/gains subject to Australian tax Transfer pricing Treaty model Capital gains on taxable Australian property

Where have we come from?

2001 – 2003 Review of International Taxation Arrangements (RITA)

Starting point for this analysis Debt/equity and thin capitalisation changes

Substance over form? Taxation of Financial Arrangements (TOFA) 1/2

Treatment of foreign exchange (FX) gains and losses Treaties – new model

Reduced rates of withholding taxes (WHT) US – 2001; Canada – 2002; UK – 2003

2003 budget International tax as centrepiece

Where have we come from?

2004 Outbound capital gains (CGT) exemption

? Based on “active foreign business asset percentage” Changes to non-portfolio dividend and foreign branch

profits exemptions? Section 23AJ and section 23AH? Extended/simplified exemptions

Introduction of foreign hybrid rules? Clarity around characterisation/treatment of certain hybrid

entities (eg US LLCs, LLPs, LPs etc) CFC – reduction in scope of tainted services income

? Australian recipients only

Where have we come from?

2005 - 2006 Conduit Foreign Income (CFI) rules

? Exemption from dividend WHT for foreign sourced profits distributed by way of unfranked dividends to non-residents No Australian tax if foreign shareholder had invested directly

Foreign Resident CGT reforms? Narrowed range of assets held by non-residents subject to

Australian CGT? “Taxable Australian Property” (TAP), includes:

Taxable Australian real property (TARP), including shares in “land rich” companies (Australian and foreign)

Assets used at any time in carrying on business in Australia through a permanent establishment

Where have we come from?

2007 Abolition of restrictive foreign loss quarantining and

foreign tax credit regimes Replaced with relaxed foreign loss and foreign income tax

offset (FITO) regimes? FITO - non-refundable tax offset for foreign tax paid on

assessable income? Swings and roundabouts (quarantining, carryforward)

TOFA 3/4? Interaction with exemption provisions

Where have we come from?

2008 – 2009 Division 6C reform - managed funds Managed Investment Trust – CGT changes Japan, South African and New Zealand Treaties Proposal to reform attribution rules

? Removal of FIF measures? Replaced by targeted Foreign Accumulation Fund rules? Simplification of CFC provisions

Recognition of primacy of transfer pricing (TP) rules Examples include introduction of grouping and removal of

base income (i.e. tainted sales and services) from rules

Where have we come from?

2010 - 2011 Private equity tax determinations re source, Treaties etc Repeal of FIF rules and deemed present entitlement rules Rewrite of transfer pricing rules

? November 2011 TP changes announced – move from focus on price to profit?

? New International Dealings Schedule (IDS) - FY12? Impact on representations made and Public Officer role

? Reportable Tax Positions (RTPs)? 2012 ATO pilot program

Where are we now?

2012 onwards OECD BEPS reports released TP changes – Tranche 1 (Subdivision 815-A)

? Reflect developments in OECD TP guidelines? Treaty jurisdictions only? Retrospective measures applying from 2004

TP Changes - Tranche 2 (Division 815)? Reconstruct or disregard related party arrangements? Arm’s length requirement

Noza Holdings – impact of section 25-90? Interaction of section 23AJ, section 25-90 and thin cap

provisions

Where are we now?

Re-engineering of Part IVA? Return focus to motive rather than existence of tax benefit? Removal of “do nothing” defence

Clearing Backlog ? Investment Manager Regime? Debt/equity integrity rules? Thin Capitalisation – repeal of section 25-90, Board of

Taxation Review etc BEPS – Australian response

? Treasury Paper – May? Action plan – July? Impact on ATO risk reviews, audits etc

Where are we now?

Tax reporting and transparency Thin Capitalisation reforms

? Exposure Draft – May? Explanatory Memorandum – July

Clarification of operation of TARP rules Treaty negotiation program – Netherlands, Singapore etc G20 and Australian chair Project Do IT ATO TP Taxation Rulings and PSLAs

Where are we going?

Concept of “fair” amount of tax being paid by multinationals

Tax emerging 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

Where are we going?

Targeted replacement for repeal of section 25-90 (Noza) Thin capitalisation arm’s length debt test ATO audit trends

? BEPS and TP focus/impact? Data management and exchange

Future Treaties? With whom and under what model?

© Mathew Chamberlain 2014

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.