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Australia Flags Contrived Tax Avoidance Arrangement

by Mary Swire,, Hong Kong

28 May 2020

The Australian Taxation Office (ATO) has issued a Taxpayer Alert on mischaracterized arrangements and schemes connected with direct foreign investment into Australian businesses.

The ATO said that it is concerned that these arrangements are deliberately structured to avoid Australian tax that is payable on the return to the foreign investor, or to obtain a tax deduction for the Australian entity. The ATO is reviewing these arrangements and is engaging with taxpayers who have already entered into, or who are considering entering into, these arrangements.

The Taxpayer Alert explains that the relevant arrangements typically display one or more of the following features:

  • The Australian resident entities are unable to obtain capital from traditional external debt finance sources on normal terms;
  • The foreign investor either already participates in the management, control, or capital of the Australian entity at the time of investment, or begins to do so;
  • The investment has features not consistent with vanilla debt or equity investments;
  • The investment may provide the foreign investor with direct exposure to the economic return from a particular business or assets exploited therein (whether ongoing profit or a gain on disposal).

The ATO said that it will review the characterization adopted by the taxpayer and test its appropriateness, having regard to the factual circumstances, relevant tax laws, and applicable tax treaties.

The ATO will consider applying the general anti-avoidance rules in circumstances where arrangements are contrived to reduce the amount of taxable income or the amount of withholding tax payable by a taxpayer. It will consider applying the transfer pricing provisions in the taxation law where parties are not dealing wholly independently in relation to the terms or conditions of the arrangements, including as it affects amounts deducted by the Australian entity in connection with the arrangements.

TAGS: compliance | tax | investment | business | tax compliance | tax avoidance | revenue guidance | law | equity investment | Australia | tax authority | transfer pricing | withholding tax | Tax | Tax Evasion | BEPS

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