Friday, 28 October 2016

Australia's ATO targets certain restructurings and cross-border related party loans

The Australian Taxation Office (ATO) released two taxpayer alerts on 15 September 2016 that identify tax issues that the ATO currently has under risk assessment. One alert deals with certain arrangements entered into by taxpayers to avoid the application of the Multinational Anti-Avoidance Law (MAAL), while the other relates to cross-border related-party loans.

Arrangements to avoid MAAL 
The MAAL generally applies where there has been an avoidance of permanent establishment status by a foreign entity, the foreign entity makes supplies to Australian customers and there is a relevant “principal purpose” to obtain a tax advantage.

The arrangement identified by the ATO in the alert involves the following circumstances:

  • A partnership is substituted for the foreign entity in an arrangement, so that, thereafter, it is the partnership that makes supplies to Australian customers.
  • The partnership comprises a newly incorporated Australian resident company (as a minority partner) and a newly incorporated foreign company.
  • The partnership enters into agreements that make the partnership the supplier of the goods or services to Australian customers. The foreign entity may act as an agent for the partnership, to minimize the impact from the customer viewpoint.

The ATO views such an arrangement as lacking a commercial basis and considers that no changes have been made to the underlying functions of the parties involved.

Since the partnership comprises an Australian resident partner, the partnership is technically an “Australian entity” for tax purposes and, on this basis, the MAAL would not apply.

The ATO is of the view that such structures are likely to be “artificial and contrived,” ineffective in avoiding the MAAL’s application and likely to result in closer scrutiny from the ATO. (

Cross-border related party loans 
In the alert relating to cross-border related party loans, the ATO targets arrangements involving the funding of an overseas entity or operations by an Australian entity, where the funds are subsequently loaned back with interest to the Australian group in a manner that generates Australian tax deductions while not generating Australian assessable income. Typically, the income from the interest flows is not taxed offshore. The alert provides three examples of the arrangements the ATO is reviewing, including situations involving the use of a US Delaware general partnership and the use of a UK limited liability partnership.

The ATO has indicated that related party cross-border financing is a key focus area, which raises a range of issues (including transfer pricing, thin capitalization, interest withholding tax and the general anti-avoidance rule, among others). The ATO’s position has been strengthened by a series of recent court decisions relating to such issues. 

Source: Deloitte