The Australian Taxation Office (‘ATO’) and Ampol have finally settled a 10 year tax dispute on the application of the Controlled Foreign Company (‘CFC’) and transfer pricing rules to Ampol’s operations in Singapore.
While most Australian taxpayers will not be party to a dispute with the ATO in their lifetime, this news can provide the following key takeaways for Australian taxpayers:
1 – An Australian taxpayer with a significant interest in a foreign company may be required to pay Australian tax on its profits made offshore – even if no dividend has been paid
Australian taxpayers who hold a significant interest in a foreign company may be subject to Australian tax on the profits made by that company under Australia’s CFC regime. The CFC rules apply to direct and indirect interests in a foreign company, even where the business has legitimate operations overseas. Australian tax may be payable if the foreign company:
- Sells goods and services to an Australian business;
- Sells goods to customers that were originally purchased from an Australian business; or
- Derives dividend, interest, royalties or rental income.
In house accounting and tax teams of businesses with offshore procurement hubs and their advisors should assess the Australian taxpayer’s CFC risk rating in accordance with PCG 2017/1. Further, any Australian taxpayer which owns at least 10% of the shares in a foreign company should consider the application the CFC rules when preparing the Australian tax return each year.
2 – Transfer pricing documentation is important
If an Australian taxpayer has dealings with its international related parties, but is not be subject to the CFC rules, it is still important to consider the arm’s length principle and, where appropriate, to document that no transfer pricing benefit has been received. This is because the existence of transfer pricing documentation can serve as a reasonably arguable position that can be taken into account by the ATO when considering a reduction of penalties should it find a transfer pricing benefit has been received.
The documentation of Ampol’s transfer pricing arrangements and compliance with the arm’s length principle would have been an important factor in the ATO’s decision to not impose penalties in reaching the settlement. It is therefore important that any transfer pricing documentation prepared meets the Australian transfer pricing guidelines – and in particular that refers to the Australian transfer pricing legislation and focuses on the Australian business. We can assist multinational groups in reviewing and updating its transfer pricing documentation so that its Australian businesses can reduce its transfer pricing risk.
3 – Multinationals are still very much on the ATO’s radar
The collection of over $AUD 30 billion of additional taxes in settlements from large multinationals such as Rio Tinto, BHP, Ampol and Google in recent years may only be the tip of the iceberg. While the CFC rules and transfer pricing’s arm’s length principles are relatively well established concepts, the proposed changes to Australia’s international tax framework including:
- Changes to safe harbour tests under thin capitalisation rules,
- The denial of deductions for intangibles for Significant Global Entities; and
- Pillar II (often referred to as the global minimum tax)
are on the horizon for multinationals.
Mazars in Australia are specialists in providing tax advice around international business and tax issues and have advised many Australians taxpayers on such issues. If you require any advice in this area of tax law, please contact Lauren Hill on +61 2 9922 1166, your usual Mazars adviser or your local tax specialist via the form below or on:
Author: Lauren Hill