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International Taxation Issues to Consider – Part 2

Posted by Northadvisory on January 12, 2018

The legislation in relation to international tax is complex and has been amended significantly across recent years. Most international tax issues tend to focus around the fundamental concepts of tax residence, source and derivation. We explore the taxation considerations surrounding  ‘outbound’ business expansion from Australia.

  1. International Tax consequences are not only applicable to multinational clients and should be considered for clients that:
    • Has or are looking to expand overseas
    • Are a non-resident looking to acquire an asset in Australia
    • May change their residency status e.g. leaving or moving to Australia
  2. Various structures that may be used by clients expanding overseas include:
    • Establishing a foreign subsidiary company
    • Operating a branch with a Permanent Establishment
    • Operating a branch without a Permanent Establishment
    • Using a foreign trading trust structure
  3. Company tax residence considerations:
    • Central management and control (CMC) occurs where directors meet to determine high level decisions of the company
    • A company with operational activities e.g. trading, manufacturing, mining, provision of services carries on the business where those activities are located, not where the CMC is located
    • An investment or holding company e.g. managing subsidiaries is considered to carry on its business where the decisions are made
  4. Company dual residency:
    • If a company is a dual resident, e.g. a company incorporated in Australia but has CMC in another country, it will need to refer to the DTAs to allocate a single place of residence. This is usually the place of effective management
    • DTA overrides domestic law, and the primary right to tax is with the resident country
    • Source country may tax a transaction connected to economic activities in the source country
    • Source country cannot tax business profits unless the business is carried on in a permanent establishment (PE)
  5. Controlled Foreign Companies (CFCs):
    • An anti-avoidance provision that applies tax to Australian shareholders on an accruals basis on “tainted income” of the foreign company, unless the income is comparably taxed overseas
    • The attributed income refers to:
      • Tainted income derived by CFCs resident in “unlisted” countries, and
      • Eligible Designated Concession Income derived by CFCs resident in any of the 7 “listed” countries (not taxed or concessionally taxed)
    • Tainted income is generally passive income from investments and related party transactions (sales and purchases)
    • If the active income test is passed (company derives >95% of income from genuine business activity) then CFC rules do not apply
    • 3 control tests to consider (strict control, assumed controller, de facto control)
  6. Tax Considerations on Funding Operations:
    • Debt Equity Rules:
      • May deduct interest paid on loans if the loans qualify as “debt interests”
      • If it is not a debt interest, it may be classed as a “non-share equity interest” where the payments on the instrument are frankable
    • Thin Capitalisation rules limit the amount of interest that may be claimed when using debt interest to fund the operations
      • De-minimus rule – no thin capitalisation rules apply for debt deductions less than $2million for the entity & all related entities
      • Maximum allowable debt is 60% of average value of assets
    • Favourability of Withholding tax on dividends vs interest for the Australian resident funding the operations
  7. Repatriation of profits:
    • Dividends – non-portfolio dividends received by an Australian company are non-assessable non-exempt income (at least 10% participation interest)
    • Loan interest – may be deductible in the foreign country, foreign tax credits on withholding tax
    • Royalties – may be deductible in the foreign country, foreign tax credits on withholding tax
    • Management fees – must consider international transfer pricing rules when setting the price, and the character of the management fees e.g. what they were charged in relation to.

If you have questions on any of the above issues raised, please do not hesitate to contact us.

Kim Edwards
Accountant
T: 02 9984 7774
E: kime@northadvisory.com.au