Taxation Principles and Planning

Executive Summary of Taxation Principles

The current study has focused on the legislation of Australia that is formed to combat tax avoidance, money laundering and fraud. Specifically, it has discussed about the intent of MAAL designing and its operations. Along with that aim and mechanics of Diversion Profit Tax and its success has also been discussed in the study. The objective and scope of Country by Country Reporting and the reason behind Australia adopting the same has also been discussed.

Table of Contents

Introduction and purpose

Analysis and discussion of issues

(i) Discuss the intent of the MAAL legislation and how it is designed to operate.

(ii) Examine the aims and mechanics of the Diverted Profits Tax (DPT) and discuss whether you think it will be successful or not

(iii) Analyse the objectives and scope of CbC reporting and why Australia has adopted it

Conclusion

Appendices

Bibliography

Introduction and Purpose to Taxation Principles

Elements like globalization and digital disruptions are creating challenges for nations such as Australia and others as these are developing new opportunities for avoiding taxes, fraud and money laundering. A publication of 2017, “Paradise Papers” has illustrated this issue where a massive documents leaking has been detected that revealed a host of data regarding extensive use of tax havens, deals of offshore and breaching of trusts around the world. GAAR or Part IVA is a strong domestic tax regime of Australia that enforces rules regarding anti avoidance and transferring of prices.

The role of MAAL Multinational Anti-Avoidance Law in strengthening these rules and other associated factors are critically discussed in the current report. The aim of this research report is to analyse the current taxation issue mentioned above with a collection of references from relevant academic journal articles and websites of Australian Taxation Office. The contents of this research are the intent of the MAAL legislation, aims and mechanics of the Diverted Profits Tax (DPT) and the objectives and scope of CbC reporting.

Analysis and Discussion of Issues 

(i) Discuss the intent of the MAAL legislation and how it is designed to operate.

The Multinational Anti-Avoidance Law or MAAL legislation has become effective from the year 2015 and it has applied general rules and regulations after 1st January 20161. It intends to apply legal provisions to the issues under it or related to it. The MAAL is applicable to only certain global entities. These entities can be defined as Australian Headquartered Entities and the local foreign multinationals that operates locally2.

The MAAL intends to ensure the retention of the profits within resident Australian companies, striving to prevent the systematic erosion of the federal tax base fuelled by the large scale multinational entities3. The introduction of Schedule 2 amended “Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)” and introduced a new section namely 177DA, that is referred to as MAAL through which the tax-avoidance provisions are enforced. There are certain conditions under which the commissioner can cancel the tax benefit of the Tax payers under the Part IVA. These conditions include the following:

  • The tax payer should be a significant global entity that can be defined as having a high annual income globally, or the group’s global income under which the entity operates and the income should outnumber $1billion4.
  • That entity must obtain tax benefit based on a scheme, where the avoidance of income attribution with regards to an establishment permanent to Australia. The scheme must be beneficial for the entity in terms of gaining tax benefits or both the tax benefit and reduction in the liability to foreign tax5.

(ii) Examine the aims and mechanics of the Diverted Profits Tax (DPT) and discuss whether you think it will be successful or not.

The Diverted Profit Tax applies to the aspects on profits diverted from Australia. The Australian DPT includes the following aims:

  • The major aim of DPT is to ensure the reflection of the taxes paid by the significant global entities on the economic matters of the activities within Australia6.
  • It aims to prevent the profit diversion offshore by the developed arrangements that involve relevant parties.
  • Another aim of the DPT is to encourage the Significant global entities in submitting sufficient information of the office of Australian Taxation (ATO) so that the tax disputes can be resolve on a timely basis.

In the year 2017, the Australian Taxation Office (ATO) enforced a guideline that applies to the implementation of Diverted Profit Tax that is potentially applied upon the significant global entities. After the conduction of DPT assessment is conducted, several steps are taken under consideration. The taxes payable to ATO is recovered, a DPT statement is provided. The DPT assessment is reviewed in a cycle of 12 months.

It can be argued that DPT is a tougher legislation overall and depending on this, the Australian Taxation Office enjoys broader power of compliance related to the transactions that takes place across borders by the significant global entities. The amount of administrative penalties seems to increase after the enforcement of this law in case of non-compliance. It indicates that the companies failing to comply with the regulations of providing their taxation documents It has also increased difficulties of the SGEs due to high penalty attachments with compliance of timely lodgement of the taxation documents7. However, it can be stated that taxpayers that seem to delay or uncooperative in providing information regarding their tax benefits will be forced to provide the same within short period of time. This will be successful in stopping diversion of the profits by the large multinationals.

However, at the end of the review period (12 months) the DPT assessments can be challenged formally and SGEs can appeal against the assessments of DPT under Federal Court within a period of 60days. On the basis of this, the taxpayer will be allowed to refuse admitting into evidencing information that was to be provided to the commissioner. Therefore, this limits the role of commissioner to force the delaying taxpayers to provide full information of their tax benefits.

(iii) Analyse the objectives and scope of CbC reporting and why Australia has adopted it.

The objectives of CbC reporting includes combating avoidance of taxes through understandable information exchange between the countries. The “Action 13 provided by OECD/G20 Base erosion and profit shifting action plan” is implemented by the CbC reporting.

Australia has adopted the CbC reporting in order to increase the economic transparency and reducing tax avoidance. The scope of this CbC reporting includes increase in the disclosure level of international taxation and deals by Australian multinationals8. The Australian Taxation Office has taken under consideration the CbC reporting in order to keep a track upon the revenue generated by the significant global entities, tax paid by these entities and accrued, number of employees of the organization currently working. The capital invested, retained earnings of those organizations, their tangible assets and activities conducted by the organizations. This helps in conducting tax assessments and filing and works as evidence against the companies that delay proving tax or documents unnecessarily9.

The guidance provided by the OECD for CbC reports are comprehensible in nature and it provides extensive knowledge about the procedures following which the effectiveness of the risk assessment procedures can be increased. These guidelines are valuable to the tax authorities as this improves the reciprocation of the taxation information with the SGEs10. The guideline sets a standard for filing taxation information and identifying certain Capital Requirements Directive or governmental requirements under the prepared standards against which the transparency initiative can be taken by the taxation office. The taxation office of Australia can also gain information regarding the operational activities of the SGEs11. The CbC reports provide opportunity to the tax authorities to gain knowledge though existing data sources along with the information regarding taxation.

The information that CbC reports provide can be considered consistent in nature SGEs’ efforts to breakdown the tax jurisdictions indicates towards their capability to understand various tax risks. Specific groups cannot be directly compared by using the reports of CbC12. It is also advantageous for Australian Taxation office to use the aggregated data for implying on particular population group. The potential risks to the economy can also be detected through the OECD CbCR guidelines that help the taxation office to maintain their position to hold the economic condition of the country intact.

Conclusion on Taxation Principles

In conclusion, it has been identified from the current study that the MAAL legislation has significantly increased understanding if the intents of the Significant Global Entities in avoidance of taxation. The Schedule 2 amended “Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)” has incorporated rules and regulations applying which the Australian Taxation Office can prevent erosion of the taxes or tax avoidance by these organizations. The law has typically and clearly identified the associated economic risks with the tax avoidance, tax havens and money laundering that increased the in-depth understanding of the taxation implementation.

The role of Diverted Profit Tax has also aimed at forcing the businesses of SGEs that are intentionally or wrongly avoiding submission of the tax information and delaying the tax payment. The purpose of this is to reduce the negative economic impact of the tax diversion. The mechanics included in the tax filing and tax assessments provided adequate understanding to the tax-payers about their part of business.

However, it has been identified that the withholding of taxation information by the SGEs can be evidentially brought down in the Federal Court within the 60 days of completion of the taxation review period. Along with this, the study has also found the objectives and mechanics of the CbC reporting in the context of Australian Taxation and the reason behind adopting such reporting structure. Overall it has been identified that it helps keeping tracking the company information such as revenue, earnings, significant operations, tangible assets and others.

Bibliography for Taxation Principles

"Combating Multinational Tax Avoidance - A Targeted Anti-Avoidance Law", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Doing-business-in-Australia/Combating-multinational-tax-avoidance---a-targeted-anti-avoidance-law/>

"Country-By-Country Reporting", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/Country-by-Country-reporting/>

"Country-By-Country Reporting", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/Country-by-Country-reporting/#WhoCbCreportingappliesto>

"Deferred Tax Assets And Deferred Tax Expense Against Tax Planning Profit Management" (2018) 2(2)

"Diverted Profits Tax", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Doing-business-in-Australia/Diverted-profits-tax/?=redirected_DPT>

"Legal Database", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/law/view/view.htm?docid=%22PSR%2FPS20172%2FNAT%2FATO%2F00001%22#P5>

Donayre, Luiggi and Ariuna Taivan, "Causality Between Public Debt And Real Growth In The OECD: A Country-By-Country Analysis" [2015] SSRN Electronic Journal

MacCarthy, John, "The Anti- Tax Avoidance Legislation And The Operations Of Multinational Companies In Ghana: The Way Forward For The Multinational Companies" [2016] SSRN Electronic Journal

Oecd.Org (Webpage, 2020) <http://www.oecd.org/tax/beps/country-by-country-reporting-handbook-on-effective-tax-risk-assessment.pdf>

Pitcher.Com.Au (Webpage, 2020) Tax Newsletter Country-by-Country Reporting <https://www.pitcher.com.au/sites/default/files/downloads/Tax%20Newsletter_CBC%20Reporting_ 200217.pdf>

Pratama, Rizki Adhi, "ANTI-AVOIDANCE AND PROFIT SHIFTING IN ASEAN MULTINATIONAL ENTERPRISES: IS IT EFFECTIVE?" (2020) 4(1) INFO ARTHA

Pwc.Com.Au (Webpage, 2020) <https://www.pwc.com.au/tax/taxtalk/assets/alerts/diverted-profits-tax-21dec17.pdf>

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