The Australian Taxation Office (ATO) warned multinationals against profit shifting with cross-border “round robin” financing and restructurings made in response to the Multinational Anti-Avoidance Law (MAAL).
“We are being clear about the areas where we think taxpayers may be tempted to push the boundaries, because we prefer a ‘prevention before correction’ approach,” Deputy Commissioner Jeremy Hirschhorn said.
Cross-border round robins
The ATO is concerned with arrangements where an Australian company claims interest deductions on a loan from an overseas related party that’s financed by the Australian company “investing” in the overseas related party. Deductions are then claimed, but income arising from this round-robin investment is subject to little or no tax.
The ATO is reviewing such deals involving the movement of funds where:
- An entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party,
- The loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, with an investment by the entity claiming the deductions or its Australian associate, and
- The return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a nontaxable or concessionally taxed form.
Restructures in response to the MAAL
The ATO also said it is reviewing arrangements put into effect that are related to the MAAL. That law applies to multinational groups that avoid a taxable presence in Australia by booking their profits offshore.
The ATO says it remains concerned that some taxpayers are entering into artificial and contrived arrangements in attempts to evade the law. One scheme involves interposing an entity described as a partnership between a foreign entity making supplies to Australian customers and the Australian customers. The partnership has one resident corporate partner with a minority interest in the partnership and thus claims the partnership as an Australian entity. Agreements entered into claim to make the partnership the distributor of the products or services and the foreign entity its agent. These arrangements have little, if any, commercial basis and no changes are made to the underlying functions.
By claiming the partnership is Australian, the scheme seeks to artificially circumvent the MAAL by contending there’s no supply being made or income being derived by a foreign entity.
ATO cautions against tax-avoidance schemes
The ATO reiterates that taxpayers should work with it on arrangements they are considering in response to the MAAL. Additionally, the ATO cautioned intermediaries to make sure they aren’t promoting a scheme to avoid tax.