Australian taxation of offshore hubs: an examination of the law on the ability of Australia to tax economic activity in offshore hubs and the position of the Australian Taxation Office
Martin FryAllens, 101 Collins St, Melbourne, Vic. 3000, Australia. Email: martin.fry@allens.com.au
The APPEA Journal 57(1) 49-63 https://doi.org/10.1071/AJ16014
Accepted: 7 April 2017 Published: 29 May 2017
Abstract
The obvious commercial benefits of centralising operational functions mean that commercial ‘hubs’ within multinational enterprises will continue to proliferate. More and more so, this will create challenges for the revenue authorities of the high tax jurisdictions such as Australia and the United States, and also the ‘hub-destination’ jurisdictions such as Singapore. For the Australian revenue authority, the challenges are heightened by the fact that the Australian public debate on these issues occurs, it seems, within a framework of suspicion that multinational enterprises set about to avoid paying their ‘fair share’ of tax.
As there is ultimately only one value chain spread across more than one tax jurisdiction – whether that be from the hydrocarbons under an Australian sea bed through to a customer sale in North Asia, or the purchase of crude in Singapore through to a point of retail distribution in Australia – it is essential that the tax laws arrive at an international organising principle that fairly allocates taxing rights between the tax jurisdictions affected by a global value chain. Double taxation will arise and economic efficiencies will be destroyed if multiple tax jurisdictions seek to tax the same parts of the single global value chain. That organising principle should be the ‘arm’s length principle’, the fundamental basis upon which Australia enters into double tax treaties with its trading partners.
This paper analyses the manner in which the Australian tax laws attempt to deal with the advent of offshore centralised hubs. It argues that the Australian tax laws overreach and, as such, create an environment for double taxation and dispute between competing revenue authorities and between revenue authorities and multinational enterprises. The tax laws are complex, incomplete and, at the time of writing, evolving at a speed not often witnessed in the field of taxation.
Keywords: arm’s length conditions, arm’s length principle, attributable income, controlled foreign companies, diverted profits tax, double tax agreement, economic double taxation, Hubs Paper, insufficient economic substance, mutual agreement procedure, permanent establishment, transfer pricing.
Martin Fry is head of the Tax Group at Allens. He has over fifteen years of experience advising foreign and Australian-owned groups in the resources sector, which in recent years has entailed extensive involvement in transfer pricing and exploration matters. Martin’s recent work has been at the forefront of the development of law and strategy in relation to the taxation of centralised hubs located offshore and in Australia. Martin is a Fellow of The University of Melbourne Law School, where he lectures in the post-graduate Taxation of Major Projects course. |
References
LegislationIncome Tax Assessment Act 1997 (Cth).
Income Tax Assessment Act 1936 (Cth).
Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1969] ATS 14; [1975] ATS 18; [1981] ATS 31; [1989] ATS 26.
Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth).
Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 (Cth).
Finance Act 2015 (UK).
Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149.
General Electric Capital Canada Inc. v Her Majesty the Queen 2009 TCC 563.
Re Roche Products and Federal Commissioner of Taxation (2008) 70 ATR 703.
SNF (Aust) Pty Ltd v Federal Commissioner of Taxation (2010) 79 ATR 193.
DSG Retail Ltd v Commissioners for her Majesty’s Revenue and Customs (2009) 11 ITLR 869.
Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092.
Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404.
Other material
The treasury, income tax: cross-border profit allocation – review of transfer pricing rules consultation paper February 2016.
OECD public discussion draft, BEPS Action 7, Additional Guidance on the Attribution of Profits to Permanent Establishments 4 July to 5 September 2016.
OECD public discussion draft, BEPS Action 8–10, Revised Guidance on Profits Splits 4 July to 5 September 2016.
Australian Taxation Office, PCG 2017/1, ATO compliance approach to transfer pricing issues related to centralised operating models involving procurement, marketing, sales and distribution functions.
Explanatory Memorandum, Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 (Cth)
OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 22 July 2010.
Practice statement law administration PS LA 2015/4.
Taxation ruling TR 2000/16.
Explanatory Memorandum to the Tax Laws Amendment (Cross Border Transfer Pricing) Act (No. 1) 2012.
Assistant Treasurer press release 14 December 2013.
Taxpayer alert TA 2015/5.
