An Addendum to Law Companion Guideline LCG 2015/2 (Section 177DA of the ITAA 1936: Schemes that limit a taxable presence in Australia) was issued on and with effect from Wed 27.1.2016.

LCG 2015/2 explains how the ATO will apply the new multinational anti-avoidance law (‘MAAL’) in s 177DA of Pt IVA of the ITAA 1936, which commenced on 1 January 2016. The Guideline includes examples of high risk and low risk scenarios and questions for taxpayers to consider in assessing the application of s 177DA to their arrangements.

The Addendum updates LCG 2015/2 to provide that the ATO has developed an internal framework for transitional arrangements for the application of s 177DA, including a client experience road-map (which does not form part of LCG 2015/2 and is therefore not a binding public ruling). Taxpayers can obtain a copy of the road-map by emailing the MAAL project team at

[LTN 16, 27/1/16]

High risk example – introduced in the Addendum

  1. The parent entity for the multinational group owns the intellectual property and the respective rights. The parent entity’s consolidated accounts indicate annual global income for the group that is well in excess of A$1 billion. The parent entity has entered into a cost sharing agreement with a subsidiary in a jurisdiction where no income tax is levied and which does not have intellectual property protection laws (‘Sub A’). Sub A’s contribution to the cost sharing agreement is cash, and all the decisions regarding the ongoing development of the intellectual property are made in the parent entity’s home jurisdiction. Sub A sub-licences its rights to another subsidiary (‘Sub B’) in a jurisdiction which has agreed to provide it with a lower tax rate than its headline corporate tax rate. Sub B pays a royalty to Sub A for access to Sub A’s intellectual property rights. The royalty is calculated on territorial sales, including Australian sales. Revenue from Australian customers is returned by Sub B.
  2. Sub A has no employees. Sub B has 20 employees who manage all the Asia Pacific sales and also engages third party contractors.
  3. Sales of the tangible product and related services to Australian customers are made directly by Sub B through several channels. Sub B sells to various third party/unrelated partners who are authorised to re-sell the product (channel partners). Sub B also sells directly to corporate customers. Channel partners sell to smaller resellers and retailers who then on sell to end customers. Corporate customers are required to contract with Sub B directly.
  4. An Australian subsidiary who is a member of the multinational group does not itself make any sales in Australia. The Australian subsidiary has 50 employees and provides support and services to the various types of customers in Australia. The Australian subsidiary has a role in identifying the channel partners authorised to re-sell products, but the formal decision to engage them is taken by Sub B. Australian staff also meets with channel partners from time to time to support their business and convey any key corporate messages from Sub B via the parent entity. Sales teams within the Australian subsidiary work with corporate customers to renew their existing contracts or engage in mid-cycle selling with customers to upsell into higher value products and buy add-ons. Australian staff sometimes also assists channel partners in placing orders through the automated ordering process for the group. The Australian subsidiary’s operating costs are reimbursed by Sub B (including a mark-up on these costs).
  5. Once a channel partner or corporate customer contract is ready for signing, the Australian staff directs them to submit the contract through an electronic portal for Sub B to sign.


  1. This hypothetical scenario highlights a fact pattern that suggests ‘high risk’ in terms of likely application of the MAAL. It would appear that the preconditions for the existence of a scheme under the MAAL are met. It would be necessary for a Group in the same or similar circumstances as those outlined to consider factors relevant to the principal purpose of the scheme and whether they have obtained a tax benefit in connection with the scheme.
  2. In particular this would include the fact that the activities of the Australian subsidiary (an associate of the parent entity) contribute to bringing about the contract for the supply to Australian customers directly and through the channel partners, and to renewing (and adjusting) existing contracts with Australian customers. A Group in the same or similar circumstances will need to consider whether a reasonable alternative postulate to this arrangement would be that a member of the Group would have included an amount in their assessable income in Australia because they would have had business profits attributed to a permanent establishment in Australia (and whether withholding tax would have also been payable on the royalty payments incurred in carrying on business in Australia at or through that notional permanent establishment in Australia).
  3. Also relevant to the principal purpose of the scheme is the sub-licencing of the intellectual property rights to a jurisdiction providing a tax rate lower than its headline corporate tax rate, with the royalty in respect of the sub-licence calculated on territorial sales (including Australian sales) paid to a jurisdiction where no income tax is levied. In comparing the scheme to alternative possibilities that existed, a Group in the same or similar circumstances will also need to consider whether a member of the group has reduced their liability to tax under a foreign law as result of the scheme. For example, under this hypothetical scenario a reasonable alternative may involve the parent entity, Sub A or Sub B being liable to pay more tax under a foreign law (whether on a greater amount of income or at a higher rate of tax than the rate paid by Sub B under the scheme).
  4. A Group in the same or similar circumstances may have commercial reasons for structuring their global business in such a manner. For example, the parent entity in the hypothetical scenario may argue that Sub B was established primarily to centralise management functions to improve management practices and reduce corporate risk and not to obtain tax advantages. The parent entity may also argue that because Sub B pays tax in that jurisdiction they do not have a purpose of reducing their foreign tax. While the Commissioner will take these commercial reasons for the location of Sub B into account, as explained above, the Commissioner will consider all ten matters referred to in subsection 177DA(2). However, the fact that some foreign tax is paid by a member of the group does not necessarily mean there is no purpose of reducing a foreign tax liability.
  5. Taking all of these matters into account, in this hypothetical scenario it is highly likely there is the requisite principal purpose given:
  • the combined Australian tax benefits and the reduction in the foreign tax liabilities
  • a comparison of the form and substance of the scheme, including the fact that Sub A has no employees and does not contribute to the ongoing development of the Group’s intellectual property, and
  • the Australian subsidiary (not Sub B) undertakes most of the activities necessary to bring about contracts with Australian customers.

The consequences of a conclusion as to principal purpose will include, as noted above:

  • determining the tax benefit and its amount for the scheme, which involves income tax (including profit attribution) and withholding tax issues, and
  • determining appropriate compensating adjustments.