The OECD’s new approach to tackling multinational tax avoidance has been backed by the Federal Parliament’s Joint Standing Committee on Treaties. The Committee supports the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI) and recommended that binding treaty action be taken. The MLI will only apply to Australia’s bilateral double taxation agreements (DTAs) with those parties that have also ratified the MLI. The Committee noted that possible disputes over the interpretation of the combination of the MLI and a bilateral DTA “should not occur because the bilateral treaty will only be modified to the extent agreed by the parties to the bilateral treaty”. The Committee’s views are contained in its Report 175, tabled today.

While the Committee said it understood why the approach to adopting the MLI is complex, it considered that the Australian Government “should take some care to ensure that implementing the Treaty does not result in onerous compliance costs”.

The Committee noted that the MLI targets a range of tax avoidance activities, including:

  • the use of ‘fiscally transparent entities’ for tax avoidance purposes. A ‘fiscally transparent entity’ is a trust or partnership of an entity based in another jurisdiction that is used to minimise the entity’s taxation obligations in the jurisdiction were it is based;
  • ‘dual resident entities’. A ‘dual resident entity’ is an entity with a presence in two jurisdictions which shifts profits from one jurisdiction to another for tax minimisation purposes. The Multilateral Tax Treaty has expanded the current definition of a dual resident entity (called the ‘place of effective management test’) to allow consideration of other relevant factors in determining where the entity is actually located;
  • treaty abuse, referring to treaty shopping by entities to find the most favourable tax arrangement for their needs;
  • dividend transfer transactions, referring to the opportunistic purchase and sale of shares in a jurisdiction where an entity is not based for tax minimisation purposes;
  • avoiding capital gains taxes on the sale of shares or entities deriving their principal value from immovable property. This means preventing foreign entities from minimising capital gains tax by adding non-immovable assets to a land rich asset shortly before sale of that asset;
  • anti-abuse rules for permanent establishments situated in a third jurisdiction. This will prevent an entity from using a bilateral double taxation treaty to avoid tax obligations by declaring income in one of the bilateral treaty jurisdictions that was actually derived in a third jurisdiction.
For example, an entity based in Australia cannot move profits derived in one jurisdiction with which Australia has a bilateral double taxation agreement to another jurisdiction with which Australia has a bilateral double taxation agreement because the double taxation arrangements between Australia and the third jurisdiction are more favourable for the entity;
  • the artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies. This will prevent entities from using arrangements that enable it to sell products in a jurisdiction while technically avoiding having an actual presence in the jurisdiction;
  • the artificial avoidance of permanent establishment status through the specific activity exemptions. This will prevent an entity from fragmenting its activities, for example by shipping manufactured goods to another country for packaging and warehousing, specifically to minimise taxation;
  • splitting up of contracts. This provision prevents entities from dividing building or construction related contracts into discreet parcels to avoid time related taxation rules. For example, an entity established to construct a manufacturing plant in a foreign country cannot avoid taxation by splitting the construction process amongst several related entities.

The MLI is the most significant reform in international efforts to prevent tax avoidance in many years, said Committee Chair, Stuart Robert MP. Australia has already made a number of preliminary reservations to the MLI.

The MLI will allow the new measures to be applied swiftly using Australia’s existing tax treaties. The new measures will initially apply to 30 of Australia’s 44 bi-lateral tax treaties, Mr Roberts said.

[APH Committee website – Multi-Lateral Treaty Report; LTN 227, 27/11; Tax Month Nov 2017]

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