MAAL: The Australian Experience

Jock McCormack, Partner, DLA Piper, SydneyJames Newnham, Partner, DLA Piper, MelbourneMatthew Cridland, Partner, DLA Piper, SydneyMelissa Lim, Senior Associate, DLA Piper, SydneyEric Ryan, Of Counsel, DLA Piper, Silicon Valley

*This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

Agenda

2

Topic Presenter

1 Introduction, welcome and overview Jock McCormack, Partner

2 Overview of MAAL and its implications

a) key technical aspects

b) principal purpose test

c) tax benefit and alternative postulate

Melissa Lim, Senior Associate

3 Dealing with MAAL

a) ATO approach and client roadmap

b) Penalties/reasonably arguable position (RAP)

c) Country-by-country reporting

James Newnham, Partner

4 MAAL-related issues

a) Interplay with treaties

b) Transfer pricing and Treasury's consultation paper

c) General anti-avoidance (Part IVA) related issues

d) Key actions now

Jock McCormack, Partner

5 Interplay with goods and services tax (GST) and Customs Matthew Cridland, Partner

6 FIN48 Eric Ryan, Silicon Valley

March 2016

Introduction, welcome andoverviewJock McCormack, Partner

Introduction, welcome and overview

4

MAAL operative since January 1, 2016

Part of Australia's general anti-avoidance Part IVA provisions

reconstruct arrangement to impute profits attributable to a notional PE in Australia

Focus on multinationals’ tax avoidance in Australia

Australian Taxation Office (ATO) identified almost 400 taxpayers that may besubject to the MAAL (Assistant Treasurer's press release, February 16, 2016)

ATO MAAL client experience roadmap

March 31, 2016: key deadline for disclosure, ATO engagement

Penalties – up to 120% of tax avoided

Interplay with other areas (e.g., treaties, transfer pricing, broader GAAR)

Cross-border GST reforms – planning

Practical actionable solutions for mitigating MAAL risks

Multi-layered service offering – economists, GST/VAT, Customs duty

Comparisons/contrasts with EC/UK – multijurisdictional approach

FIN48 opinions

March 2016

Overview of MAAL and itsimplications

Melissa Lim, Senior Associate

Context of MAAL

6

Targets “significant global entities” (AU$1 billion or more) with artificialarrangements to avoid a “permanent establishment” (PE)

Part of the general anti-avoidance Part IVA provisions

MAAL's “principal” purpose test is lower than Part IVA's “dominant” purpose test

one or more than one principal purpose to obtain a tax benefit

Australian tax benefit or an Australian tax benefit and a foreign tax benefit

tax benefit and the alternate postulate

March 2016

When will MAAL apply?

7

Does the foreign entity (either a global parent or amember of a group whose global parent) have an annual

global income of AUD1 billion or more?

Does the foreign entity make a supply of good,services, rights or property to Australian customers?

Is there an entity (either associate or commerciallydependent entity of the foreign entity) thatundertakes activities in Australia directly in

connection with the supply?

Does the foreign entity derive income from thesupply, some or all of which is not attributable to a PE

in Australia?

In entering into the arrangement, did the foreign entityhave a principal purpose of, or for more than one

principal purpose, of obtaining a tax benefit?

MA

AL

do

es

no

tap

ply

No

No

No

No

No

Yes

Yes

Yes

Yes

MAALapplies

For Co

Aus Co

Yes

$$

goods

sales support activities

March 2016

Principal purpose test

8

Principalpurpose

test

8 factors ascontained inthe Part IVAprovisions

Foreign taxbenefits

obtained underthe “scheme”

Activities thatcontribute to

bringing aboutthe sales in

Australia

1. manner

2. form and substance

3. time and length

4. result achieved by the scheme

5. financial position of taxpayer

6. financial position of another personconnected with taxpayer

7. other consequences for taxpayer and anyother related person

8. the nature of any connection between thetaxpayer and the other related person

1. what are the activitiesundertaken in relation tothe supply and whichentity conducts them?

2. are the activities split insuch a way as todeliberately fall short ofconstituting an AustralianPE?

3. does an entity have thecapacity to perform therelevant activities as partof the supply?

1. foreign tax is secondaryin the sense that theremust be an Australiantax benefit also

2. can include foreign taxdeferral

March 2016

Example 3.6 from EM – MAAL may not apply

9

Foreign Co

Aus Co

• Employees of Aus Co:• identify potential customers and communicate

standard price lists• not involved in creating and recommending

business cases and product solutions toAustralian customers, or negotiating contractualterms with Australian customers

• Employees of Foreign Co:• work with Aus Co and Australian customers to

establish a business case for Foreign Co'sproducts

• communicate global price lists to Aus Co• perform credit checks on Aus customers• negotiate non-standard terms/ discounts with

Aus customers on an ongoing basis• will be able to perform these activities at the

outset and on an ongoing basis

• Conclusion:• Foreign Co may not have a principal purpose of

obtaining a tax benefit; therefore, MAAL maynot apply

Country H

Australia

Sales $$

Goods

limited sales support services

March 2016

Example 3.9 from EM – MAAL may apply

10

• Employees of Aus Co• establish a business case for Foreign Co's

products• provide customers with advice on product

optimisation, pricing and terms• deals almost exclusively with Australian customers

and• negotiates sales contracts with Australian

customers (despite not being permitted underintercompany service agreement)

• Employees of Foreign Co 1:• few and mostly clerical work• do not have the necessary capability or knowledge

to undertake any functions necessary for bringingabout sale contracts with customers and

• does not solicit customers etc.

• Foreign Co 1:• pays large IP licence fee to Foreign Co 2 (in no tax

jurisdiction) so no tax paid on royalties received byForeign Co 2

• Conclusion:• Requisite purpose exists such that MAAL may

apply. Tax benefit may include Australian salesattributable to PE and royalty withholding tax

Foreign Co 1

Country B

Australia

Aus Co

Foreign Co 2

Country CRoyalty $$

Sales $$

Goods

substantial sales support services

March 2016

What happens if MAAL applies?

If MAAL applies, it will amount to a scheme to which Part IVA applies

Commissioner has the power to cancel the Australian tax benefit (not theforeign tax benefit) obtained in connection with the scheme

Tax benefit requires a comparison of the tax effects of the scheme and thoseof an “alternative postulate”

11March 2016

What happens if MAAL applies?

12

• what might reasonably be expected to have occurred• alternative postulate must be reasonable• e.g., supplies made through an Australian PE of the

foreign entity

1. Determine the scopeof the alternative

postulate

• an amount not being included in the assessableincome of the taxpayer (PE attribution rules)

• a taxpayer not being liable to pay withholding tax(WHT) on an amount (e.g., royalty WHT)

2. Work out the taxeffects of the alternative

postulate

• Commissioner's discretion – if it is fair and reasonable• e.g., deductions for royalty expenses if WHT is paid

3. Compensatingadjustments

March 2016

Dealing with MAAL

James Newnham, Partner

ATO client experience roadmap

Process for taxpayers looking to engage with ATO on MAAL

Identified 5 categories of MAAL taxpayers:

14

MAAL taxpayer Description

Category A

Taxpayer under current review

Taxpayer has current compliance activity: taxpayer is in scope of theMAAL and has a PE/TP/Part IVA risk currently under review by the ATO

Category B

Responsive taxpayer

Taxpayer is contacted by the ATO by March 31, 2016: taxpayer ispotentially in the scope of MAAL, is contacted by the ATO and engageswith the ATO within 28 days of notification

Category C

Voluntary disclosure taxpayer

Taxpayer contacts the ATO by March 31, 2016: Taxpayer voluntarilyapproaches the ATO by March 31, 2016 seeking to restructure theirarrangements in response to the MAAL

Category D

Subsequently identifiedtaxpayer

Taxpayer is identified as being in scope of the MAAL after March31,2016: Taxpayer does not approach the ATO and are identified as beingin the scope of MAAL after March 31, 2016. Taxpayers in Category B whodo not respond within 28 days are also included in this category

Category E

Out of scope taxpayer

Taxpayer is outside the scope of the MAAL: Taxpayers are notcontacted by the ATO and can obtain confirmation that they are outside thescope of MAAL by private ruling or risk assessment

March 2016

ATO client experience roadmap

Process will differ depending on category of taxpayer

15

Earlyengagement

and riskphase

Assessmentphase

Settlementphase

Post-settlement

phase

March 2016

Penalties and RAP

Unless there is a RAP, penalties doubled for significant global entities (AU$1billion or more) that enter into tax avoidance

Tax avoidance schemes include schemes to which MAAL or Part IVA applies

RAP

objective standard

about as likely to be correct as incorrect or more likely to be correct than incorrect

Unlimited time period for ATO to amend an assessment that is subject toPart IVA (s177G)

16March 2016

Country-by-country reporting

With effect from January 1, 2016

Unless an exemption applies, significant global entities (AU$1 billion ormore) to provide three statements to the ATO:

Statements due 12 months from end of financial year

All entities must continue to maintain specific TP documentation to maintaina RAP on TP

Practical issues:

what exemptions are available?

duplication with existing TP documentation requirement?

what if parent entity is in a jurisdiction with no CbC requirement?

17

Statement Summary description

Master file Overview of group business, functional analysis etc

Local file Specific transactions between reporting entity and associatedenterprises in other countries, transfer pricing analysis etc

Country-by-country (CbC)report

Information on global allocation of enterprise's income and taxespaid, role of each entity in the group etc

March 2016

MAAL-related issues

Jock McCormack, Partner

Interplay with treaties

MAAL is not overridden by tax treaties

MAAL introduces a new PE standard with a lower purpose threshold

Interplay with OECD's proposed amendment to definition of PE (Action 7)?

Australia/Germany tax treaty; revised DTA signed November 12, 2015

“preparatory or auxiliary” activities – exception

authority to conclude contracts

anti-treaty shopping provisions

royalties – and domestic royalty withholding tax rules, including PE concept

future of DTA policy in Australia

impact of OECD actions and recommendations

19March 2016

Australian domestic TP rules

Subdivision 815-C deals with PEs

Focuses on arm's length profits attributed to PE

Allocation of income and expenditure

As if PE were a distinct and separate entity

Notional separate entity/PE

Arm's length conditions

Use OECD model convention/commentary or OECD TP Guidelines –consistent with:

TP reconstruction powers – section 815-130

TR 2014/6 and PS LA 2015/3

20March 2016

Treasury's consultation paper on TP

Current Australian TP legislation

amended in 2012 and 2013 to be aligned with OECD's TP Guidelines forMultinational Enterprises and Tax Administrations (2010)

time limit for ATO to amend assessment is 7 years

October 2015 – OECD released report “Aligning Transfer Pricing Outcomeswith Value Creation”

in response to Action Items 8, 9 and 10 of the BEPS project to update andstrengthen the OECD 2010 TP Guidelines

to look at the substance of transactions and address issues with appropriatelyallocating returns for risk and capital functionality

provides further explanation on core elements of the arm's length principle in Article9 of the OECD Model Tax Convention

specific guidance on application of arm's length principle in relation to intangibleassets, intra-group services and cost contribution agreements

21March 2016

Treasury's consultation paper on TP

February 11, 2016 – Treasury released consultation paper

proposes to adopt the above guidance in the 2015 OECD Report directly intoAustralian TP law (Div 815)

but no update to TP laws relating to PE (as this is subject to ongoing OECD work)

if adopted, amendments to apply to income years starting on or after July 1, 2016

22March 2016

Key actions now

Best practices:

holistic approach – deep connection to client's business and operational objectives

practical actionable solutions for mitigation of MAAL risks

operational guidelines

multi-layered service offering – economists, GST/VAT, Customs duty

broad legal skills/capability is important – e.g., IPT, consumer/competition law

multijurisdictional approach

client legal privilege is critical

FIN48 opinions

23March 2016

US GAAP: ASC 740-10 / FIN 48

For MNEs who meet the thresholds and conditions of the MAAL, it is likely that,until confirmed with the ATO, an uncertain 2016 tax position will exist

The current MNE structure and filing position in Australia likely meets the MLTNthreshold to book tax benefits (part 1 of test)

However, it will be important to review the “alternative postulate” positions in order toquantify a reserve level (part 2 of test)

Likely consider Australia buy-sell distribution models as a PE of the foreign supplier

Other models? Licensed distributor? Distributor with marketing intangibles? Profit split?

Attribute typical operating margins to the deemed PE (say, 2% - 3% OM)

Select the alternative settlement position where cumulative probability > 50%

FIN 48 reserve level related to category of taxpayer and may change withphases

Key point: MAAL base penalty of 100% is variable, depending uponaggravating factors / disclosures and whether RAP exists (25%)

Include discussion for RAP in FIN 48 position itself

Likely one penalty percentage applied to all of the tax settlement positions, butpossibly the variable penalties are themselves different settlement positions

24March 2016

Key actions now

Review of group structure and intra-group transactions

Convert to buy-sell distributor? MAAL will not apply

Ensure arm's length transfer pricing?

MAAL planning/risk assessment

Voluntary disclosure to the ATO by March 31, 2016?

RAP – penalties minimization strategy

ATO review/rulings

Documentation – TP records, RAP, functional analysis

Legacy/past years strategy

25March 2016

Interplay with GST and Customs

Matthew Cridland, Partner

GST and Customs – direct sale

March 2016 27

Foreign Co

Aus Co

Country H

Australia

Sales $$

Goods

support services

• GST and Customs on Importations• Which party is the importer of record and

responsible for clearing the goods throughCustoms?

• What incoterms will be agreed by the parties?• Is the deferred GST scheme available?

• GST and Support Services• Who do local customers contract with for their

support services?• Does Foreign Co contract for the services and

outsource performance to Aus Co?• Does Aus Co contract directly to provide those

services?

• GST and Sales and Marketing Services• Does Aus Co export sales, marketing and

support services to Foreign Co.

• GST Grouping• Consider benefits of GST grouping• Aus Co must be the Representative Member• One consolidated GST return for the group

GST and Customs – buy and sell

March 2016 28

Foreign Co

Aus Co

Country H

Australia

Sales $$

Goods

Sale of goods and supportservices

• GST and Customs on Importations• Aus Co most likely importer of record• Is the deferred GST scheme available?

• GST and Support Services• Aus Co contracts directly for supply of support

services

• GST and Sales and Marketing Services• No sales and marketing services supplied to

Foreign Co.

• GST Grouping• Unlikely to be necessary if Aus Co acquires title

to goods outside of Australia. No other suppliesconnected with Australia

Netflix tax – direct sale

March 2016 29

US supplier

Australianconsumer

Intangible Supply – Place ofSupply is US

US

Australia

• Netflix tax summary

• Applies from July 1, 2017

• Impacts all intangible supplies made to “Australianconsumers”

• Relevant for digital content, IP, insurance, contractualrights, services performed remotely from outsideAustralia, etc.

• Broadly speaking, “Australian consumers” are entitiesthat are resident in Australia and which are notregistered for GST purposes

• The tax is not limited to supplies made to individualsand is relevant for supplies made to other non-GSTregistered entities, including companies, partnershipsand trusts. For example, holding companies andholding trusts that are not GST registered are“Australian consumers”

• Non-resident suppliers are liable to the tax, subject toimportant exceptions

• GST registration compulsory if GST turnover fromsupplies connected with Australia exceeds AU$75,000in a 12-month period

Netflix tax – sale via digital platform

March 2016 30

US supplier

Australianconsumer

Intangiblesupply

US

Australia

• Netflix tax summary

• An important exception to the general rule that thesupplier is liable for GST is for sales via digitalplatforms. The platform operator, not the supplier, isliable for the GST

• Example – sale of a smartphone app by a US supplierto Australian consumer via online app store. The appstore operator will be liable for the GST

• Note: The AU$75,000 GST registration thresholdapplies to all sales made via the relevant platform

• If suppliers or platform operators are of the view that asale has been made to an entity which is not an“Australian consumer,” supporting evidence should beretained where possible. For example, customersmay be asked to confirm their residency status, and toprovide their Australian Business Number if GSTregistered, when completing a purchase order via anonline store

• In key supplier contracts in a B2B context, GSTclauses should include a provision in which thecustomer confirms it is not an “Australian consumer”for GST purposes

Digital platformoperator

Intangiblesupply

Questions?

MAAL: The Australian ExperienceAgendaIntroduction, welcome and overviewIntroduction, welcome and overviewOverview of MAAL and its implicationsContext of MAALWhen will MAAL apply?Principal purpose testExample 3.6 from EM – MAAL may not apply Example 3.9 from EM – MAAL may applyWhat happens if MAAL applies?What happens if MAAL applies?Dealing with MAALATO client experience roadmapATO client experience roadmapPenalties and RAPCountry-by-country reportingMAAL-related issuesInterplay with treatiesAustralian domestic TP rulesTreasury's consultation paper on TPTreasury's consultation paper on TPKey actions nowUS GAAP: ASC 740-10 / FIN 48Key actions nowInterplay with GST and CustomsGST and Customs – direct saleGST and Customs – buy and sellNetflix tax – direct saleNetflix tax – sale via digital platformQuestions?