Australia launches action against disguised direct foreign investment schemes
The suspect schemes may involve a foreign investor participating in the management, control or funding of an Australian-resident business that cannot obtain debt financing on normal terms; the financing provided by the foreign investor has special features that do not resemble conventional ('vanilla') debt or equity finance; and the investor gets direct exposure to the economic return from a particular business or its assets. The ATO is examining such arrangements with a view to disallowing them under either the general anti-avoidance rules (GAAR) or the transfer pricing provisions.
Where the arrangements are 'contrived', for example where large multinational companies are diverting profits to other jurisdictions, the GAAR will be invoked to cancel any associated tax benefits. Transfer pricing regulations will be applied where the connected parties are not dealing wholly independently, including cases where the Australian entity claims corporation tax deductions in connection with the investment.
As an example, it cites a scheme in which the Australian business raises debt finance from an offshore third-party investor at a high rate of interest, with the interest payments typically being deferred until the Australian business divests some of its assets. At that point, the foreign investor receives both the interest payments and a share of the divestment proceeds, treating them as not subject to Australian tax. However, the Australian company writes them off against the asset divestment proceeds for tax purposes.
Taxpayers and advisors who enter into such arrangements will be subject to increased scrutiny, says the ATO. Where abuse is confirmed, the ATO might even refer the whole transaction to the Foreign Investment Review Board for compliance with the Foreign Acquisitions and Takeovers Act 1975, which has recently been extended to require all relevant foreign investments to be pre-approved by the Department of the Treasury. The government has powers to revoke investments found to contravene the law.
Moreover, serious penalties can also be imposed on promoters of this type of arrangement, and they may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.
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