Treasury issues paper on taxation of multinational enterprise

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Treasury has released an Issues Paper - Implications of the Modern Global Economy for the Taxation of Multination Enterprises - outlining issues relating to erosion of the corporate tax base and profit shifting by multinational enterprises.

The Issues Paper released by Treasury on 3 May 2013 outlines the broader issues associated with base erosion and profit shifting (BEPS) by multinational enterprises (MNEs) in Australia. It highlights the challenges that changes in the global economy pose to the international tax system, with the aim of raising awareness of these issues and engaging with stakeholders and the community to develop a response.

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On 29 June 2010, the then Assistant Treasurer, Nick Sherry announced that the Government would amend the Taxation of Financial Arrangements (TOFA) tax rules to further lower compliance costs and provide additional certainty to affected taxpayers. The announcement included a list of 22 policy refinements that would generally apply retrospectively from the commencement of the TOFA rules.

On 10 January 2013 the Government released Draft legislation for comment. Tax Laws Amendment (2013 Measures No 1) Bill: Taxation of Financial Arrangements (Stages 3 and 4 Part 1), is intended to give effect to the majority of the policy refinements announced in 2010.

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On 19 October 2012, the OECD released an updated discussion paper in relation to beneficial ownership. This was in response to the feedback received on the April 2011 discussion paper, as part of the OECD's aim of clarifying the concept of beneficial ownership in Articles 10, 11 and 12 of the OECD Model Tax Convention.

The highlights of the changes are: Comments in relation to the domestic law meaning of beneficial ownership being irrelevant have been removed.The previous version discussed the "full right to use and enjoy" a dividend; in the context of a conduit not being a beneficial owner as there is a legal or equitable right to pass on the payment, and does not have the "full right to use and enjoy" a dividend. The current version removes the term "full" and clarifies that where an obligation to pass on a payment exists, it must be "related" to the payment received.Access our Tax Policy Bulletin in relation to the discussion paper. The OECD is gathering feedback and comments on the discussion draft by 15 December 2012. However, it is requested that comments only relate to drafting issues, rather than on the substance of the proposals. If you wish to discuss further or would like to make a submission in relation to this discussion paper, please contact a member of your PwC team.The Business Tax Working Group has issued a 71 page discussion paper, which canvasses a number of possible ways in which a cut to the company tax rate could be funded from within the business tax system.

The Business Tax Working Group (BTWG) was established by the Government following the Tax Forum held in October 2011 to "make recommendations on how the Australian business tax system can be improved to make the most of the challenges and opportunities arising from transformations in the broader economic environment, including the patchwork economy".

Specifically, the BTWG was charged with reforming the tax treatment of business losses in the near term, and in the longer term, considering other reform options such as reducing the corporate tax rate or moving to a business expenditure tax system.

The BTWG’s report on the treatment of tax losses was released in April 2012, and led to the announcement of the loss carry back regime as part of the 2012-13 Federal Budget. Today, the BTWG has released a discussion paper as part of its consultation process on longer term reform options.

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The Australian Taxation Office issued draft taxation ruling TR 2012/D5 on 25 July 2012 regarding cross staple loans. The draft tax ruling specifically considers whether a trust is an associate ("connected entity") of the company to which it is stapled, or vice versa. If so, then one implication is that Section 974-80 of the Income Tax Assessment Act 1997 can potentially apply to result in the interest on the cross staple loan being treated as non-deductible. The draft tax ruling is narrow in its scope in that it does not deal with all the requirements in Section 974-80 which operates to deem an otherwise 'debt interest' to be equity.

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Exactly two years after the introduction of changes to the Corporations Act relating to dividends, the Australian Taxation Office (ATO) has released Taxation Ruling TR 2012/5 which sets out what these changes mean to the ability of companies to frank their dividends.

While the ATO view has "mellowed" during the course of the protracted consultation process, there remain circumstances in which companies may purport to pay a Corporations Act dividend which the ATO does not accept can be franked.

Meanwhile, still underway is an equally protracted review process being conducted by Treasury in relation to the actual dividend provisions in the Corporations Act. So there remain further chapters to be written in this saga. In the meantime, most companies will now be able to proceed to pay and frank dividends with a greater level of confidence than has been the case for the last two years.

The Ruling is stated to apply from 28 June 2010. However, it remains to be seen whether the ATO will take a pragmatic approach to those companies that paid and franked dividends since that time contrary to the views now set out in the Ruling.

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