As in any other industrialized tax jurisdiction, averting the possibility of being inadvertently caught by the provisions of Australia’s tax laws requires that the non-resident corporate taxpayer exercise a high degree of prudence in its tax affairs. Since the penalties for breach of the tax laws could be severe, close attention to all the tax rules governing dealings with other Australian residents is essential.
Generally speaking, the tax obligations of non-residents deriving income from Australia appear to be no more onerous than in other OECD Member countries. Indeed, the ATO has several programs in place that serve the purpose of reducing the possibility of any significant controversy between the administration and taxpayers. These include the tax rulings program (including advance pricing agreements) and annual compliance arrangements.
However, it is still possible that the manner in which certain provisions of the tax laws are intended to operate or are in fact implemented could give rise to difficulties for non-residents doing business in Australia and/or using Australia to structure cross-border business. Two of these, which have been the subject of much debate in recent times, are the actual or proposed changes to the general anti-avoidance rule and the transfer pricing rules.
In relation to the first issue, there is the question of the degree to which tax planning arrangements or strategies are likely to be viewed and challenged by the ATO through the application of the general anti-avoidance rule. As observed earlier, the government is currently in the process of making amendments to the rule with the view to strengthening its impact in combating perceived tax avoidance, following a string of court cases involving a challenge of the application of the rule by the Commissioner that were held in favour of the taxpayer. For taxpayers, there is a degree of uncertainty as to what impact the proposed changes are likely to have on tax planning. In particular, the concern is that such proposed changes would have the effect of enabling the Commissioner to strike down arrangements that legitimately take advantage of available opportunities in their ordinary commercial affairs.
As regards transfer pricing, it is feared that changes made to the transfer pricing provisions in 2012 (permitting, among other things, adjustments to be made exclusively on the basis of the business profits and associated enterprises provisions of an existing tax treaty), but given retroactive effect from 1 July 2004, could adversely affect non-resident companies doing business in Australia, including the possibility that related party transactions entered into from 1 July 2004 on the basis of the existing law could now be adjusted with effect from that date to reflect the amended law.
In a recent transfer pricing ruling, the Australian Federal Court rejected taxpayer’s argument for treating it as a hypothetical orphan in determining the arm's length rate for intra-company loan. The Court observed that considering Australian company as orphan would undermine the purpose of substituting as a comparable a real world arm’s length rate that could predictably have been agreed to. The Court held that the taxpayer incorrectly priced an intra-company loan received from its U.S. subsidiary to shift profits offshore and avoid tax on Australian income.