Tax Reform Working Group Update

Marc Lewis, Head of the Tax Reform Working Group (TRWG)

 

Purpose

To provide a summary of the recent activities undertaken by the TRWG and other relevant emerging issues.

 

Revenue Authority Engagement

Finalised Central Management and Control Publications

As previously advised, the Australian Taxation Office (ATO) had released the following draft publications for consultation:

  • a draft version of its revised ruling on the “Central Management; and Control” residency test – subsequently finalised as TR 2018/5; and
  • a related draft Practical Compliance Guideline (PCG) – subsequently finalised as PCG 2018/9 in December 2018.

The concern with these publications is that the ATO is empowered to regard a foreign incorporated company as tax resident in Australia even if it has no trading, investment or other business operations in Australia. This provides the ATO with considerable flexibility on tax residence issues – meaning more uncertainty for Australian headquartered multinational groups. The ATO set out how it would apply its compliance resources in the related draft
PCG, making use of an extensive number of examples which did not always provide the clarity sought by taxpayers. Accordingly, a joint submission, supported by the G100 amongst other industry and professional associations, was made in July 2018.

Following this joint submission, an important administrative concession for certain public groups has now been set out in the now finalised PCG 2018/9. In this regard, the ATO will regard the risk of a foreign incorporated company being tax resident in Australia as low when strict conditions have been fulfilled. This means that the ATO will not “normally” apply resources to review the non-tax resident status of such a company.

In brief, the conditions may only be fulfilled by “ordinary” foreign companies (not incorporated in a tax havens) which:

  • are legitimate foreign listed entities (including subsidiaries of such entities) or Controlled Foreign Companies of Australian listed parent companies; and
  • have a substantial majority of their strategic decisions made at board meetings:
    • based outside of Australia; or
    • where the majority of directors are not located in Australia during those meetings; and
  • have not undertaken any of a series of avoidance type behaviours.

Despite the administrative concession, the TRWG has become aware of recent ATO activity aimed directly at ascertaining the tax residency of foreign incorporated companies.

 

Large BusinessStewardshipGroup (LBSG)

The TRWG will be represented at the next LBSG Meeting to be held on 28 March in Canberra. Members have been invited to provide their input.

 

Advocacy

Australian Labor Party (ALP) Thin capitalisation policy

In 2015, the ALP announced its intent to significantly amend the thin capitalisation laws in Australia. These laws provide limits to the tax-deductibility of interest costs. If carried out as announced, the policy would further limit such tax deductibility. This is because the limit would be determined with reference to a global gearing ratio which is likely lower than the current gearing levels observed in Australia. In addition, the global gearing ratio would be a single test; the thin capitalisation safe harbour and arm’s length debt tests would be removed. A consensus is emerging that such a policy could not be sustained by many sectors across the Australian economy. The TRWG will be working with other industry bodies representing investors in large scale Australian capital projects (including the Corporate Tax Association, the Minerals Council of Australia, The Australian Petroleum Production & Exploration Association, and the Australian Private Equity and Venture Capital Association) to co-ordinate future engagement, on a confidential basis, with the ALP. Discussions with these industry bodies remains ongoing.

 

Emerging Issues

Post implementation review of the Tax Transparency Code

The Board of Taxation (the Board) is conducting a post-implementation review of the Tax Transparency Code (TTC). A Consultation Paper on proposed changes to the TTC is to be released shortly.

As part of this post-implementation review, the Board has been meeting with stakeholders and collecting feedback on the TTC. In the view of the Board there
remains strong support for a voluntary code in its current form. This review is, therefore aimed at identifying approaches by which:

  • the adoption of the TTC may be increased; and
  • the usability and content of the TTC may be improved; and
  • the tax transparency reporting obligations (i.e. under both the ATO mandatory disclosures and the TTC) may be streamlined; and

The Board has further indicated that global tax transparency developments such as those of the Global Reporting Initiative (GRI), United National Principles for
Responsible Investment (PRI) and The B Team will be investigated as part of this review.

The concern with this review is that tax transparency reporting obligations may nevertheless become increasingly onerous and complex.

 

Membership Update

Gavin Marjoram, from the Commonwealth Bank of Australia has left the TRWG and has not yet been replaced.