On Wednesday 10.8.16, the ATO released TA 2016/8 (the 2nd of 3). It addresses the ATO’s GST concerns about arrangements being made to avoid the operation of the Multinational Anti-Avoidance Law (MAAL), where the previous foreign supplier of intangible products or services (to Australia customers) now supplies to an Australian distributor (who distributes as principal) although the foreign supplier still supplies the Australian end user (now, purportedly, ‘on behalf’ of the distributor).
The foreign supplier may even act as agent of the Australian distributor, to receive the sale proceeds on its behalf. This would leave the cash flows as they were (with customer cashflows still go to the non-resident and the non-resident still paying amounts back to the Australian distributor acting now as principal).
Previously, an Australian entity only provided support services and the foreign supplier studiously avoided this ‘support’ creating a ‘permanent establishment’ (PE) in Australia (which was precisely what the MAAL was enacted to counteract). If the foreign supplier had an Australian PE, then Australia could tax all its profits attributable to that PE (and maybe impose withholding tax on ‘royalties’ for intellectual property used in the supplies to the Australian customers).
These arrangements were discussed in TA 2016/2, which involved the same type of ‘swapping’ roles had in avoiding the amount of tax the MAAL was designed to capture and the role of the anti-avoidance provisions in possibly neutralising this ‘avoidance’ effect.
In this TA the ATO is concerned that these arrangements will not be effective in avoiding GST and are clearly inconsistent with the underlying policy intent of both the MAAL and the GST Act.
In relation to GST, we are concerned that these arrangements:
- are artificially structured to avoid the application of the GST;
- adopt inconsistent positions for the purposes of income tax and GST;
- do, insofar as they are legally effective, involve the intangible products or services being supplied through an enterprise the Australian distributor carries on in the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the GST Act;
- may, insofar as they are not legally effective, result in the foreign entity supplying intangible products or services that are connected with the indirect tax zone for the purposes of paragraph 9-25(5)(b) of the GST Act.
The inconsistent positions referred to is that the taxpayer is saying that it does have a PE in Australia for the purposes of falling outside the MAAL, whilst maintaining that it’s supplies are not connected to the ‘indirect tax zone’.
The ATO has processes in place to work collaboratively with taxpayers during the transition to MAAL-compliant structures that address, among other things, the tax liabilities arising between the commencement of the MAAL, that is 1 January 2016, and the point at which a final structure is put in place. Information on these processes can be found in the MAAL client experience roadmap.
This will only last so long, however. After this period, there will be increased scrutiny, adjustments and penalties (up to 75% of the shortfall in GST). The ATO may even look at applying civil Promotor Penalties under Div 290 of the 1st Sched to the Taxation Administration Act 1953. Taxpayers are encouraged to take action.
A New Business Tax System (Goods and Services Tax) Act 1999
(5) Supplies of anything else
A supply of anything other than goods or *real property is connected with the indirect tax zone if:
(a) the thing is done in the indirect tax zone; or
9-27 When enterprises are carried on in the indirect tax zone
(a) the enterprise is *carried on by one or more individuals covered by subsection (3) who are in the indirect tax zone; and
(b) any of the following applies:
(i) the enterprise is carried on through a fixed place in the indirect tax zone;
(ii) the enterprise has been carried on through one or more places in the indirect tax zone for more than 183 days in a 12 month period;
(iii) the entity intends to carry on the enterprise through one or more places in the indirect tax zone for more than 183 days in a 12 month period.
(2) It does not matter whether:
(a) the entity has exclusive use of a place; or
(b) the entity owns, leases or has any other claim or interest in relation to a place.
(3) This subsection covers the following individuals:
(a) if the entity is an individual – that individual;
(b) an employee or *officer of the entity;
(c) an individual who is, or is employed by, an agent of the entity that:
(i) has, and habitually exercises, authority to conclude contracts on behalf of the entity; and
(ii) is not a broker, general commission agent or other agent of independent status that is acting in the ordinary course of the agent’s business as such an agent.