A Week in Review

Administrative approach agreed with our Cousin’s

For those of you who know the script of the Australia/NZ double tax treaty agreement (“DTA”) inside out, or at least its residency Article (Art.4), you will appreciate that a company which is considered tax resident of both jurisdictions under their respective domestic corporate tax residency rules, is then deemed in accordance with the DTA to be tax resident in the jurisdiction within which the company’s centre of effective management (“COEM”) is deemed to be situated.

In scenarios where the company cannot determine its COEM, Art.4.3 of the DTA suggests that the IRD and the ATO should then determine the issue by mutual agreement, post consideration of a number of listed factors.

With both Australia and NZ having signed the Multilateral Convention (“MLI”) demonstrating a commitment to address BEPS risks and ensure a better functioning international tax system, they have now signed MLI Article 4(1), which sets out Australia and NZ’s administrative approach, when faced with dual resident companies making COEM self-determinations in accordance with Art.4.3 of the DTA.

The point of MLI Article 4.1, is to use a measured risk based approach to provide some certainly and therefore minimise potential compliance costs for taxpayers, by way of the two Revenue authorities essentially agreeing to leave COEM self-determinations alone, where the particular taxpayer satisfies the eligibility criteria set out in the MLI Article. The eligibility criteria are broken into three separate tranches – structure, financials and compliance activities.

Naturally, where a taxpayer cannot make their own COEM determination, or they are uncertain about or do not meet the eligibility criteria, then an application should be lodged with the appropriate Authority.

OECD Secretary-General expresses concern

Hard on the heels of our Government’s digital tax discussion document release, the OECD Secretary-General has delivered a report to G20 Finance Ministers and Central Bank Governors, which sets out a programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy.

The report identifies two pillars of work considered necessary to close existing loopholes used by MNE’s:

• Pillar One focuses on the allocation of taxing rights, and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules.
   
• Pillar Two focuses on the remaining Base Erosion and Profit Shifting (BEPS) issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

The present target is to arrive at a consensus solution and to produce a final report by the end of next year.

The current report expressed the concern of the Secretary-General, of the risk that not delivering a consensus solution within a reasonable timeframe, would result in further jurisdictions just going off and doing their own thing. I think the following narrative is useful reading in this regard:

“A growing number of jurisdictions are not content with the taxation outcomes produced by the current international tax system, and have or are seeking to impose various measures or interpretations of the current rules that risk significantly increasing compliance burdens, double taxation and uncertainty. One of the focal points of dissatisfaction relates to how the existing profit allocation and nexus rules take into account the increasing ability of businesses, in certain situations, to participate in the economic life of a jurisdiction without an associated or meaningful physical presence. An unparalleled reliance on intangibles and the rising share of services in cross border trade are among the causes typically identified. This dissatisfaction has created a political imperative to act in a significant number of jurisdictions. Cognisant that predictability and stability are fundamental building blocks of global economic growth, the Inclusive Framework is therefore concerned that a proliferation of uncoordinated and unilateral actions would not only undermine the relevance and sustainability of the international framework for the taxation of cross-border business activities, but will also more broadly adversely impact global investment and growth.”

A full copy of the report can be found at www.oecd.org/tax/oecd-secretary-general-tax-report-g20-finance-ministers-june-2019.pdf.