Doing business outside Australia can be an important way to grow an enterprise. But in the wake of the Panama Papers scandal there is a new tax landscape, with complex issues that both taxpayers and tax practitioners need to manage.
Doing business internationally raises a number of complex tax issues, ranging from a taxpayer’s residency to where their income is sourced, double tax agreements, foreign income tax offsets and transfer pricing. Given how complex these issues can become, it may be prudent for practitioners unfamiliar with international tax to refer clients to suitable experts or subcontract to such experts.
International tax is being shaped by increasing interconnectedness between economies. While this makes it easier to do business and invest across borders, it has also increased concerns over profit shifting between jurisdictions. Indeed, the OECD’s Base Erosion and Profit Shifting project (BEPS), undertaken at the request of the G20, has led to unprecedented cooperation between tax authorities.
An improved information exchange between tax authorities is making it difficult for certain taxpayers to hide their affairs. The Australian Taxation Office (ATO) has entered into dozens of tax information exchange agreements with jurisdictions including the British Virgin Islands and the Cayman Islands. And the number of agreements will only increase.
It’s important that practitioners understand when taxpayers or transactions fall within Australia’s tax jurisdiction and how this may interact with the taxation regimes of other jurisdictions.
Whether a taxpayer or a transaction is subject to Australian tax depends on if the taxpayer is a resident of Australia for income tax purposes, and if the amount has its source in Australia. When a taxpayer is a resident of Australia for income tax purposes, they are assessable on income from all sources. However, when a taxpayer is a non-resident, they are generally only assessable on Australian-sourced income.
"While [Interconnectedness] makes it easier to do business and invest across borders, it has also increased concerns over profit shifting between jurisdictions."
Different tests apply to determine the residence of individuals, companies, trusts and partnerships. For example, a company established outside Australia can still be considered an Australian resident if it does business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.
Transfer pricing has received a lot of attention in recent years and can be an issue for businesses of all sizes. Australia’s transfer pricing regime attempts to counter the underpayment of tax in Australia by requiring businesses to price related-party international dealings in the same way an unrelated third party would in the same situation.
Practitioners should take care with the terms and conditions of any related-party international dealings to ensure the appropriate allocation of income and expenses between Australia and the other jurisdictions.
GST and cross border transactions
They should also ensure that the documentation a taxpayer retains for their transfer pricing arrangements meets legal requirements. Failure to keep such records can be costly. If the Commissioner makes a transfer pricing adjustment against the taxpayer and there is no adequate transfer pricing documentation, the law will treat the taxpayer as if their transfer pricing treatment was not reasonably arguable for penalty purposes.
Acknowledging the burden this can impose on smaller businesses, the ATO has stated it will not allocate resources or take other compliance action to examine transfer pricing records of smaller businesses that meet certain conditions (see Taxation Ruling TR 2014/8). Those businesses have a significantly reduced risk of being hit with a failure to take reasonable care penalty for not keeping the required transfer pricing documentation.
The ATO’s simplified transfer pricing record-keeping options is available for:
- taxpayers with an aggregated turnover of less than A$25 million
- istributors with an aggregated turnover of less than A$50 million
- intra-group services of less than A$1 million or less than 15 per cent of aggregated expenses/revenue; and
- a combined cross-border loan balance of A$50 million or less.
In addition to these requirements, there are further restrictions on which entities can access the simplified transfer pricing document treatment. Taxpayers who meet the designated criteria need to inform the ATO of their eligibility through a disclosure on their International Dealings Schedule.
The ATO accepts that such taxpayers take their self-assessment obligations to prepare and retain adequate records seriously, and acknowledges that this demonstrates a willingness to comply. Record-keeping requirements under these circumstances would relate to the general requirements in Section 262A of the Income Tax Assessment Act 1936, together with evidence of the relevant eligibility criteria.
Tax trade toolkit
ATO tax residency calculator for individuals recently arrived in Australia
ATO determination of residency for those individuals intending to leave or who have left Australia
General ATO information for determining residency of a business
Taxation Ruling 2014/8 Income Tax: Transfer Pricing Documentation and Subdivision 284-E
OECD Base Erosion and Profit Shifting project
Gavan Ord is CPA Australia’s policy adviser, business environment