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The ATO warns Taxpayers and Advisors on Profit Shifting Arrangements

On 26 April 2016, The Australian Taxation Office (ATO) released four of Tax Alerts warning multinationals and their tax advisors on potential profit-shifting arrangements that will be closely examining to identify any attempts of tax avoidance.

The tax alerts are intended to be an effective tool to stop tax advisors and taxpayers from marketing, selling and implementing these schemes. A tax alert also cautions companies and their advisors about implementing arrangements to avoid Australia’s recent Multinational Anti-Avoidance Legislation MAAL.

With these tax alerts, the ATO sets a precedent about the role of advisors when performing tax planning assignments. Likewise, the alerts highlight the importance of advising companies on paying the right amount of tax in Australia and aim to discourage advisors from setting schemes with the sole purpose of avoiding Australian Tax.

The ATO advised that it has already initiated action against certain companies identified as non-compliant in relation to the taxpayer alerts.

A brief summary of each of the tax alerts is provided below.

Taxpayer Alert TA 2016/1

Targets companies that incorrectly recognise internally generated intangible items as assets or that overvalued internally intangible assets with the objective of increasing the companies’ maximum allowable debt limit under the thin capitalization rules. The ATO is specifically focussed on those cases where the intangible asset is not disclosed or valued in the company’s financial statements.

Taxpayer Alert TA 2016/2

This alert addresses the ATO’s concerns regarding provisional arrangements that taxpayers employ to avoid the application of MAAL. The ATO is particularly focussed on those instances where foreign and Australian group members use contractual arrangements to exchange roles misidentify their core functions. For example, when an Australian operation is a distributor of the Group’s goods, or services and the foreign member is an agent of the Australian Entity.

The ATO has strongly cautioned multinationals against such practices, saying it will initiate compliance review activities if necessary to address such arrangements. Multinationals identified as non-compliant could face heavy penalties of up to 120% of the total tax avoided.

Taxpayer Alert TA 2016/3

This alert addresses related-party arrangements entered with the intention of increasing the cost of borrowing in Australia with the intention of transferring the profits out of the country and/or avoiding withholding taxes on interests. The ATO is openly challenging those schemes that result in Australian companies becoming liable to further payments to a related party located offshore.

Taxpayer Alert TA 2016/4

Targets cross-border leasing agreements which include mobile assets, such as vessels. The ATO is particularly interested in tax treaty and transfer pricing abuse in those instances where a legal entity is interposed to lease an asset from a foreign owner to an Australian operator. The ATO is developing guidance on transfer pricing and profit attribution associated with common cross-border leasing arrangements.

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