TD 2018/12 – Scope of MAAL: when related party ‘activities’ are “directly in connection with” the foreign entity ‘supply’ (viz: ‘permanent establishment’ avoidance)

On Wednesday 4.7.2018, the ATO issued Taxation Determination TD 2018/12 on the meaning of “directly in connection with” in s 177DA(1)(a)(ii) of the ITAA 1936, which is part of the Multinational Anti-Avoidance Law (MAAL) for significant global entities, in s177DA. This Determination finalises TD 2018/D1 and contains the same views as the draft.

The phrase ruled on, is pivotal to the ambit of the MAAL, which neutralises any ‘tax benefit’ that large ‘foreign entities’ might get, by avoiding its supply being made through an Australian ‘permanent establishment’. And the central test, of there being this kind of avoidance, is that related parties have undertaken ‘activities’, in Australia, that are “directly in connection with the supply“.

The Commissioner rules that the phrase: “directly in connection with”, should be construed broadly, having regard to the context and purpose of s 177DA (to ensure that foreign multinationals cannot escape the attribution of business profits to Australia by avoiding a taxable presence).

• There must be a connection between these related party ‘activities’ and the ‘supply’ by the foreign entity, and it must be ‘direct’. [para 5]
• But, the required connection can be wider than just executing the contract under which the supply is made. [para 7].
• The connection does not have to be ‘temporal’.  [para 8].

Needless to say, this will require both the ‘supply’ and the ‘activities’ to be identified, perhaps with some precision (as well as assessing the connection between them).

The Commissioner gives examples of the activities that might have the necessary ‘connection’ to the foreign supply [in para 9].

1. contribute to bringing about the contract for the supply (see Examples 1 and 5 of this Determination).
2. attract new customers or maintain existing customer relationships (see Examples 1, 2 and 5 of this Determination).
3. relate to the ability to supply the goods or service, or the manner in which it is supplied (see Example 4 of this Determination).
4. support the ongoing execution of a supply under an existing supply arrangement (see Example 1 of this Determination).
5. actively procure demand for sales (see Examples 1 and 4 of this Determination).

An interested reader can refer to these examples, in the Determination.

DATE OF EFFECT: The determination applies retrospectively and prospectively (being the Commissioner’s opinion about how this law has operated and will operate).

FJM 14.7.18

[LTN 126, 4/7/18; Tax Month – July 2018]

Comprehension questions (answers available)

1. Does this determination relate to the scope of the MAAL, by defining when there is, effectively, ‘permanent establishment’ avoidance?
2. Is the relevant ‘direct connection’ between the related party ‘activities’ and the foreign entity ‘supply’ limited to facilitating contract under which the supply is made?
3. Is the relevant ‘direct connection’ limited to activities at the same time as supply contract?
4. Does the Commissioner provide examples of when there is the relevant ‘connection’?
5. Does the Ruling only apply prospectively?