28 March 2018

Crackdown on tax avoidance

The Turnbull Government has introduced legislation to further ensure the integrity of Australia’s international tax arrangements, building on our strong measures to ensure if profit is earned here, it is taxed here.

The legislation gives the force of law in Australia to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Convention).

The Convention, also known as the OECD Multilateral Instrument, is a key outcome of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, which aims to ensure that profits are taxed where economic value is created or added.

More specifically, and from an Australian perspective, it will include rules designed to: 

  • Ensure that income derived through fiscally transparent entities (such as partnerships and trusts) will only be eligible for treaty benefits, such as reduced taxation, in appropriate circumstances;
  • Prevent entities from changing their jurisdiction of residence for tax purposes in order to obtain treaty benefits;
  • Ensure that tax treaty-based relief from double taxation does not result in double non-taxation (that is, no tax paid in either jurisdiction);
  • Clarify that Australia’s tax treaties are not intended to facilitate tax avoidance or evasion;
  • Provide Australia and its treaty partners with specific treaty-based anti-avoidance rules;
  • Prevent entities from inappropriately increasing their shareholdings in Australian companies in order to obtain reduced taxation on dividends; 
  • Prevent entities from avoiding capital gains tax by diluting their ownership interests in Australian land-rich entities shortly before disposing of those interests;
  • Clarify that Australia’s tax treaties do not restrict its right to tax its own residents;
  • Prevent entities from fragmenting their business-related activities or engaging in contract-splitting to avoid having a permanent establishment (a taxable presence) in Australia or in a treaty partner.

This allows jurisdictions to efficiently and effectively modify their bilateral tax treaties to implement new integrity rules in order to protect tax treaties from being exploited for tax avoidance purposes and to improve tax treaty-based dispute resolution mechanisms.

Currently, Australia is one of 78 signatories to the Convention. Another six jurisdictions have expressed their intent to sign the Convention.

Introduction of the legislation also complements other Government initiatives tackling multinational tax avoidance, which include the Diverted Profits Tax, the Multinational Anti-Avoidance Law (MAAL) and the strengthening of Australia’s transfer pricing rules to align with OECD BEPS recommendations.

These measures are delivering results for Australian taxpayers with the Australian Taxation Office raising over $4 billion in income tax liabilities in 2016/17 against large public groups and multinationals, and collecting $2.9 billion in cash to date. As part of the more than $4 billion, E-commerce companies were billed $1 billion in assessed tax, of which $800 million has already been collected.

The Multinational Anti-Avoidance Law (MAAL) alone has seen additional sales of $7 billion each year now being returned to Australia, hundreds of millions of extra dollars in additional GST revenue now being paid, and 38 multinational entities have changed, or are in the processing of changing their tax affairs, to bring their Australian sourced sales back onshore in compliance with the MAAL.