Stopping tax revenue erosion

09 December 2013 By Chris Kinsella

The ATO and overseas tax agencies are looking to crackdown on global companies taking advantage of international tax rules, writes Maddocks partner Chris Kinsella

The ATO and overseas tax agencies are looking to crackdown on global companies taking advantage of international tax rules, writes Maddocks partner Chris Kinsella

The Australian Taxation Office (ATO) has recently assigned resources to explore the Base Erosion and Profit Shifting issue, one which governments all around the world are focusing on in the post GFC environment of large government budget deficits.

Base Erosion and Profit Shifting (BEPS) sees the ATO, OECD and the G20 countries focusing on cross border tax issues around intangibles, funding structures, one-off transactions and the documentation of these.  Of particular concern is the possibility of businesses taking advantage of asymmetries in domestic and international tax rules.


When looking at transfer pricing and cross border intragroup loans, new division 815 of the Tax Act means that not only is the pricing of cross border intragroup loans at risk of being challenged, but the entire cross border funding transaction may be re-characterised.

For example, it is no longer the case that the Commissioner is limited to disallowing an Australian subsidiary a deduction for the full amount of interest paid by it to an overseas related company, it may even re-characterise the loan as an injection of equity and so deny the interest deduction entirely.

Currently in transfer pricing, there is little judicial and ATO guidance on the 'arm's length test', its content and how to satisfy it with evidence. In regards to debt financing, when looking for comparable transactions to justify the pricing of intragroup debt, we should consider if the “comparables” involve a comparable borrower, comparable lender, comparable size of financing, comparable currently, comparable duration, comparable security and comparable general terms and conditions.

Additionally, when looking at pricing intragroup guarantees, some important questions need to be asked:
How is the Australian subsidiary's affiliation with its foreign parent to be recognised and when?
Does it affect the credit rating of the Australian subsidiary?
What factors should be considered and are they qualitative as well as quantitative?

The May 2013 announcement to repeal section 25-90 and then the November 2013 announcement that it would not be repealed but rather the Government will proceed with targeted a integrity measure to apply from 1 July 2014, created much upheaval.

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Section 25-90 allows a tax deduction for expenses (including interest and funding costs) incurred in deriving offshore dividend income even where that dividend income is exempt from Australian tax. 

In navigating the challenges companies face in minimising their vulnerability in a changing global economy, in house financial professionals may adopt many different strategies to manage tax risks including, Advance Pricing Agreements, Private Rulings, having a good corporate tax governance framework in place, and also, where necessary, independent advice to gather evidence and be prepared to effectively defend tax positions that come under scrutiny of the ATO.

Chris Kinsella (pictured) is a partner in Maddocks' Tax Controversy team. Last month he spoke on tax developments in corporate financing at the Finance and Treasury Association 2013 Congress in Brisbane

Stopping tax revenue erosion
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