ATO goes after two new multi-national tax avoidance tricks

Less than nine months after the government attempted to stamp out tax avoidance by multinationals, the Australian Tax Office has vowed to review any new offshore arrangements it thinks are "artificial" and "contrived".

On January 1, the federal government brought in the Multinational Anti-Avoidance Law (MAAL) in response to concerns overseas corporations were booking local profits in low corporate tax jurisdictions such as Ireland and Singapore, to minimise their Australian tax bill.

Google, Apple, Microsoft, and Amazon are some of the multinationals that have already caught the attention of ATO and tax authorities overseas.

But despite the publicity around multinational corporations'  tax habits, the ATO has warned some may still try to find loopholes to get around the MAAL.

In its Taxpayer Alert 2016/11, ATO said it is concerned that some entities "are entering into artificial and contrived arrangements in attempts to avoid the application of MAAL."

One such arrangement involves creating a middleman entity that is described as partnership between a foreign corporation that supplies Australian customers, and a resident partner with a minority interest.

This purports the middleman to be an Australian entity for the purposes of the MAAL.

The local entity in turn would become the products or services distributor, with the foreign entity its agent which does not supply anything, or derive income from the arrangement, the ATO said.

ATO warned if these arrangements have little or no commercial basis, and no changes are made to underlying functions, the partnership setup will be seen by the agency as a tax avoidance scheme.

"... we caution intermediaries to make sure they are not promoting a scheme to avoid tax. Again, working with the ATO on arrangements being developed can ensure this does not happen." the ATO said.

A second alert, TP 2016/10 cautions against "cross-border round-robin financing arrangements" by multionationals.

These arrangements see an Australian entity fully funding an overseas, related company, only to receive back the money. The return of the money generates Australian tax deductions, without correponding local, assessable income.

Australian companies would typically claim interest deductions on loans from overseas companies under the scheme - even if the overseas company is being funded by the Australian entity, which is "investing" in the foreign corporation. 

Deputy commissioner Jeremy Hirschhorn warned multinational companies not to try their luck.

“Taxpayers should be very cautious about schemes which create interest deductions out of thin air, simply by shuffling funds around a group, or through simply making some book entries," Hirschhorn said.

“Where we identify a scheme, our first priority is to stop the scheme spreading. We then seek to identify the creators and promoters of the scheme, and any taxpayers that they have advised to adopt the scheme,” the commisioner said.

Hirschhorn advised multinationals to work with ATO on any restructuring in response to the MAAL, or face the consequences.

“For those companies which have already entered into a transaction covered by a taxpayer alert, it is the ideal time to approach the ATO to discuss how to resolve their taxation position, rather than wait to be identified through compliance activities,” Hirschhorn said.

ATO has contacted 175 companies to since the MAAL came into effect in January, to assist with compliance and to identify high-risk issues.