I love “Taxpayer Alerts” as they sound like some robot warning us of impending danger. But what they really are is a lot more exciting (to me at least).
When the Commissioner finds people acting in ways he thinks are contrary to the tax laws he quickly releases one of these Taxpayer Alerts to say that he knows this is happening, that he is concerned it is happening and he is going to review taxpayers who are acting in this way.
Recently he released four of these alerts on one day (a new record for the Commissioner). And these are great examples of what he uses these Taxpayer Alerts for.
In the first Taxpayer Alert the Commissioner states he has become aware of manipulation of the thin capitalisation rules. This is being done by entities making choices to inappropriately recognise and value (do not comply with the recognition criteria contained in the relevant accounting standards) internally generated intangible items as assets for thin capitalisation purposes. By increasing the value of these assets they increase the equity section of the balance sheet (revaluation reserves) and avoid the thin capitalization provisions applying. Some of the arrangements the Commissioner is focusing on include:
- Generic material such as internal policies, internal meeting protocols and procedures being valued;
- The application of unsupportable or questionable management assumptions from an asset revaluation perspective;
- The double counting of the same value across multiple intangibles items; and
- Entities not impairing assets where the fair value or the cash generating unit has declined.
In the second Taxpayer Alert the Commissioner raises concerns about “lease in lease out arrangements”. These are where a foreign resident wants to lease substantial equipment into Australia, like a ship. To avoid having a Permanent Establishment in Australia (leasing substantial equipment into Australia will make this happen) they lease the ship to a shell foreign company first and the shell company leases the ship into Australia. Now only the shell company has a PE in Australia.
The Commissioner is concerned this could still leave the initial foreign resident with a PE in Australia. He is also concerned the rates being charged by these related entities may not meet the arms length rule in the Transfer Pricing provisions.
In the third Taxpayer Alert, large businesses are trying some crazy schemes to avoid the new Multinational Anti Avoidance Law. The scheme involves the foreign and Australian entities swapping their roles via contracts. These contracts purport to make the Australian entity the distributor of the products or services and the foreign entity an agent of the Australian entity, collecting the sales revenue from customers on its behalf. This is despite no changes being made to the underlying functions performed by the entities.
This arrangement purports to result in no supply being made by the foreign entity and, potentially, the foreign entity becoming a permanent establishment of the Australian entity in the foreign entity’s jurisdiction, which opens an opportunity to argue that income from the Australian sales should continue to be returned in the foreign tax jurisdiction.
The final of the four Taxpayer Alerts… well lets just say it is complex and I was not surprised that at the bottom of a Taxpayer Alert that covers “related party foreign currency denominated finance with related party cross currency interest rate swaps” is the name of the Deputy Commissioner who is, in my simple opinion, the best person in tax in this country.