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In a landmark decision on 8 March, the Full Federal Court (FFC) sided with the taxpayer, Minerva Financial Group Pty Ltd, against the Commissioner of Taxation, clarifying the application of general anti-avoidance rules within Part IVA of the Income Tax Assessment Act 1936.
This ruling underscores the nuanced interpretation of Part IVA, particularly concerning discretionary distributions by trustees, and marks a significant victory for taxpayers navigating the complexities of tax law.
The court’s decision offers several crucial insights into Part IVA’s operation:
Taxpayers are reminded of the importance of documenting the reasons behind their arrangements. While Part IVA’s test is objective, understanding the context can help determine the dominant purpose.
It’s essential to consider all eight factors outlined in section 177D(2) collectively, rather than in isolation, to ascertain a scheme’s dominant purpose.
Part IVA does not merely assess if a different course of action would have been taken without the tax benefit, emphasizing that a dominant purpose of obtaining a tax benefit must involve more substantive evidence.
Transactions within a commonly owned group, even if they involve intra-group loan account entries instead of cash transfers, are not inherently indicative of a scheme’s dominant purpose to secure a tax benefit.
The FFC’s ruling further clarified the legality of certain structures and practices:
The case centered around the Liberty group’s restructuring into corporate and trust silos, aimed at optimizing for an IPO.
This restructure led to significant profits being distributed in a way that incurred a lower withholding tax rate, prompting the Commissioner to apply Part IVA, suggesting these distributions were primarily for tax avoidance.
The FFC meticulously dissected the application of Part IVA, focusing on the intent behind the distributions and the structure of the Liberty group.
The court’s analysis, particularly on how the scheme was executed and the financial implications for the involved entities, led to a conclusion that favored the taxpayer.
The decision stresses that the presence of a tax benefit alone is insufficient to prove a dominant purpose of tax avoidance.
This ruling is a pivotal moment for taxpayers and legal practitioners, offering clarity on Part IVA’s interpretation and its application to complex financial structures and distributions.
It serves as a reminder of the critical balance between tax planning and avoidance, reinforcing the need for a comprehensive evaluation of arrangements under the lens of tax law.
The victory of Minerva Financial Group in this case not only provides a roadmap for similar cases but also reassures taxpayers that legitimate business arrangements, even those resulting in tax benefits, can withstand scrutiny under Australia’s general anti-avoidance rules.
If you have any queries about the Minerva case, or any other Australian tax matter, then please get in touch.
In a significant move to clamp down on tax evasion, the Internal Revenue Service (IRS) unveiled a new initiative on February 29, aimed at individuals who have neglected to file their income tax returns for 2017 and subsequent years.
This program, powered by the financial backing of the Inflation Reduction Act, represents a continuation of the IRS’s intensified efforts to scrutinize the tax compliance of large corporations, partnerships, and high-net-worth individuals, a strategy highlighted in a GT Alert from September 2023.
This initiative also aligns with the IRS’s ongoing operations to recover taxes from millionaires who owe substantial amounts in back taxes.
Thanks to these concerted efforts, the agency has successfully recuperated nearly $500 million to date.
The current non-filer campaign specifically targets taxpayers who earned between $400,000 and $1 million from 2017 to 2021.
The IRS plans to dispatch over 100,000 compliance letters to this demographic, sending out between 20,000 and 40,000 letters (CP-59) each week.
Additionally, for those with incomes exceeding $1 million, over 25,000 individuals will receive compliance notifications.
The IRS identifies potential non-filers in these income brackets using third-party data, including information from W-2s and 1099 forms, among other sources.
The IRS has issued a stern warning to these high earners, urging them to promptly rectify their filing status to avoid further notices, escalating penalties, and the possibility of criminal prosecution.
Taxpayers who disregard the initial compliance letters will face additional notifications and could be subjected to audit and collection enforcement measures.
In extreme cases, the IRS has the authority to prepare a Substitute for Return (SFR) for non-filers, using only reported income information.
This action could lead to a higher tax liability for the taxpayer, as it doesn’t account for any deductions or exemptions they may be entitled to.
Such individuals might then find themselves compelled to either settle the increased tax debt or challenge the IRS’s assessments in court.
The message from the IRS is clear: with enhanced resources and a firm commitment, the agency is actively pursuing high-income individuals who have failed to file their tax returns.
This initiative underscores the importance of staying compliant with tax filing obligations and consulting a trusted tax professional if you’ve missed filing returns for 2017 or later years.
If you have any queries around this article, or US tax matters more generally, then please get in touch with us.
The Netherlands’ recent update to its list of low-taxed and non-cooperative jurisdictions for 2024 has notably excluded the United Arab Emirates (UAE), marking a shift in tax policy.
This change follows the UAE’s introduction of a federal Corporate Income Tax (CIT) regime, setting a standard tax rate of 9% for financial years beginning on or after 1 June 2023.
Of course, this blacklist has nothing to do with Raymond Reddington.
Instead, the Dutch tax blacklist is a list of jurisdictions that facilitate abusive tax structures through minimal or non-existent taxation rates, defined as less than 9%.
The presence on this list subjected entities in blacklisted jurisdictions to stringent domestic anti-abuse measures in the Netherlands.
These included conditional withholding taxes on cross-border payments and limitations on obtaining tax rulings for transactions involving blacklisted jurisdictions, alongside the application of Controlled Foreign Corporation (CFC) rules that impacted the taxable income of Dutch entities.
The removal of the UAE from this blacklist alleviates several challenges for UAE-based businesses operating in the Netherlands.
Previously, the anti-abuse measures introduced a layer of complexity and uncertainty for transactions between the two nations.
Now, the reclassification signals a positive development, potentially enhancing economic connections and fostering a more favorable environment for cross-border investments and collaborations.
The UAE’s proactive adjustment of its tax regime to introduce a CIT rate aligns with global tax standards and demonstrates a commitment to fostering a transparent and cooperative financial landscape.
This adjustment has directly influenced its standing with the Netherlands, removing barriers that once complicated financial and corporate engagements.
For businesses within the UAE with Dutch interests, this development opens doors to new opportunities and simplifies operations, heralding a phase of strengthened economic ties between the UAE and the Netherlands.
This move is anticipated to encourage a smoother flow of trade, investment, and financial services between the two countries, reinforcing their positions in the global market.
If you have any queries about this article on the UAE being off the Dutch Blacklist, or UAE matters more generally, then please get in touch.
In a significant development for the British Virgin Islands (BVI), the European Union (EU) has officially removed the BVI from its list of non-cooperative jurisdictions for tax purposes.
This is important news for the BVI, a prominent offshore financial centre, and reflects its commitment to adhere to international standards, particularly those set by the OECD Global Forum regarding the exchange of information on request.
The EU press release regarding this development stated that the British Virgin Islands had been removed from the list due to amendments made in its framework concerning the exchange of information on request, specifically criterion 1.2.
The EU further noted that the BVI would be reassessed in line with the OECD standard. While this reassessment is pending, the jurisdiction has been placed in Annex II.
The EU’s list of non-cooperative jurisdictions for tax purposes was established in December 2017 as part of the EU’s external taxation strategy.
Its primary goal is to support worldwide efforts in promoting good tax governance.
The EU Council has established a set of criteria by which jurisdictions are evaluated.
These criteria encompass areas like tax transparency, fair taxation, and the implementation of international standards aimed at preventing tax base erosion and profit shifting.
The code of conduct group’s chair engages in political and procedural dialogues with relevant international organizations and jurisdictions as needed.
The BVI’s journey towards removal from the EU’s list of non-cooperative jurisdictions began when, on 9 November 2022, the OECD Global Forum published its second-round Peer Review Report on the BVI.
This report revealed that the BVI’s rating had been downgraded from ‘largely compliant’ to ‘partially compliant.’ Importantly, a rating below ‘largely compliant’ automatically led to a jurisdiction being placed on the European Union’s list of non-cooperative jurisdictions for tax purposes.
The ‘partially compliant’ rating assigned to the BVI encompassed the period from 1 March 2016, to 30 June 2020, considering exchange of information requests received during this timeframe.
It also factored in a ‘block period’ from 17 September 2017, to 31 December 2018, which was due to the disruptive impact of Hurricane Irma. Furthermore, the report assessed the legal and regulatory framework in place as of 9 September 2022.
Crucially, this rating did not account for the legislative changes introduced in 2022, which included the BVI Business Companies Amendment Act 2022 and the BVI Business Amendment Regulations 2022, both of which came into effect on 1 January 2023.
The removal of the British Virgin Islands from the EU’s list of non-cooperative jurisdictions for tax purposes is a significant milestone for the BVI and its reputation as a financial center.
It reflects the dedication of the BVI government and stakeholders in aligning with international standards and demonstrating a commitment to transparency and cooperation.
This development not only bolsters the BVI’s status but also highlights the importance of maintaining adherence to global tax governance standards in an increasingly interconnected world.
If you have any queries about BVI removed from blacklist, BVI matters in general, or any tax matters, then please get in touch.
Yesterday, Guernsey, Jersey, and the Isle of Man announced their intention to implement the OECD’s Pillar Two global minimum tax initiative.
The three Crown Dependencies have said that they will implement an “income inclusion rule” and a domestic minimum tax to ensure that large multinational enterprises (MNEs) pay a minimum effective tax rate of 15% from 2025.
Pillar Two is a new set of international tax rules that seek to address the problem of base erosion and profit shifting (BEPS).
BEPS is a practice by which MNEs use complex structures to shift profits to low-tax jurisdictions, thereby avoiding paying taxes in high-tax jurisdictions where the profits are generated.
The income inclusion rule is one of the two main components of Pillar Two. The income inclusion rule requires MNEs to pay a top-up tax in high-tax jurisdictions where their effective tax rate is below the 15% minimum.
The domestic minimum tax is the other main component of Pillar Two. The domestic minimum tax requires MNEs to pay a minimum tax in each jurisdiction where they operate, regardless of their effective tax rate.
The implementation of Pillar Two is a significant development in the global fight against BEPS. The rules are expected to raise billions of dollars in additional tax revenue for governments around the world. The rules are also expected to make it more difficult for MNEs to avoid paying taxes.
The announcement by Guernsey, Jersey, and the Isle of Man to implement Pillar Two is a positive development.
The three Crown Dependencies have a reputation for being tax-efficient jurisdictions. However, they have also been criticized for being used as tax havens by MNEs.
The implementation of Pillar Two will help to ensure that MNEs pay their fair share of taxes in the jurisdictions where they operate.
The implementation of Pillar Two will have a number of implications for MNEs. MNEs will need to review their global tax structures to ensure that they are compliant with the new rules.
MNEs may also need to increase their tax payments in high-tax jurisdictions.
The implementation of Pillar Two is a significant development for the global tax landscape. It will be interesting to see how MNEs respond to the new rules.
The rules will help to ensure that MNEs pay their fair share of taxes in the jurisdictions where they operate.
However, it is important to note that the rules are complex and will require careful implementation.
If you have any queries relating to the three Crown Dependencies’ implementation of Pillar Two, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Over a year ago, we wrote an article called “She sells corporate shells” about the EU Commission’s proposal for a directive imposing new rules to prevent the misuse of shell entities for tax purposes.
In January 2023, the European Parliament approved the European Commission’s draft directive known as ATAD 3 to prevent the misuse of shell entities for tax purposes.
The directive includes several indicators of minimum substance to assess if an entity has no or minimal economic activity, which could result in the denial of certain tax benefits based on treaties or EU directives.
Unlike Pillar 2, ATAD 3 is not limited to international or domestic groups with global revenues exceeding EUR 750 million, meaning it will impact many small and medium-sized enterprises with an EU presence, increasing the administrative burden.
The European Council is not bound by the amended text and may still amend or decide not to issue the directive.
The Council will have the final vote, and ATAD 3 will be on the agenda of the European Council Ecofin meeting of 16 May 2023.
Member States are meant to transpose ATAD 3 into domestic law by 30 June 2023, and the directive would apply as of 1 January 2024, although the European Commission may relax the timeframe in light of the short timeframe for final adoption and implementation.
ATAD 3 targets passive undertakings that are tax resident in an EU Member State and deemed not to have minimum substance.
The directive aims to bring more entities into scope by lowering some gateway thresholds but clarifies that the intra-group outsourcing of the administration of day-to-day operations and decision-making on significant functions is not considered a gateway.
Certain entities, including UCITS, AIFs, AIFMs, and certain domestic holding companies, will benefit from a carve-out and be exempt from reporting obligations. However, entities owned by regulated financial undertakings that have as their object the holding of assets or the investment of funds did not retain the proposed amendment to introduce a carve-out.
If an entity passes all three gateways, it will have to report certain information regarding indicators of minimum substance through its annual tax return.
Failure to comply with the reporting obligation triggers a penalty of at least 2% of the entity’s revenue, and for false declarations, an additional penalty of at least 4% of the entity’s revenue would be due.
If an entity lacks substance in one of the indicators or fails to provide adequate supporting documentation, that entity is presumed to be a shell entity. However, an entity has the right to rebut this presumption.
If the entity cannot rebut the presumption, it will not receive a certificate of tax residence from its EU Member State of residence, resulting in the disallowance of any tax advantage gained through bilateral tax treaties of the entity’s resident jurisdiction or through EU Directives.
Regardless of whether the entity is classified as a shell, the reported information will be exchanged automatically.
Additionally, the European Commission is working on a new taxation package, including the Securing the Activity Framework of Enablers initiative and the FASTER proposal, aiming to introduce a new EU-wide system for withholding tax to prevent tax abuse in the field of withholding taxes.
The implementation of ATAD 3 and other initiatives to restrain the use of shell entities and aggressive tax planning may have an important impact on existing structures, and entities should be carefully checked on a case-by-case basis before the relevant date of entry into force.
If you have any queries about this article, or the matters discussed more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
On March 28, 2023, Canada’s Finance Minister presented budget materials suggesting major modifications to the country’s General Anti-Avoidance Rule (GAAR).
These alterations will lead to considerable uncertainty, elevate corporate tax risks, and generate volatility in the Canadian tax disputes domain.
The three most critical proposed GAAR changes involve:
Other important suggestions encompass the introduction of a new preamble to GAAR and a revision of the purpose test required for GAAR application.
The proposed “economic substance” analysis amendments deviate significantly from the Canadian standard, as Canadian courts have typically taxed transactions based on their legal form.
The economic substance aspect is incorporated as a factor in determining transaction abusiveness, rather than as an independent test to deny benefits.
The amendments list non-exhaustive factors to determine if a transaction lacks significant economic substance.
However, the budget materials emphasise that not all transactions without economic substance are abusive, and existing GAAR jurisprudence remains relevant when a transaction does not lack economic substance.
The budget materials propose a 25% penalty on the tax benefit when GAAR applies to undisclosed transactions.
This penalty should be considered by taxpayers when determining the level of aggressiveness in future Canadian tax planning.
The budget suggests extending the limitation period for the CRA to apply GAAR by three years if a transaction was not disclosed.
This extension would result in a possible GAAR reassessment issuance up to seven years after the original assessment, matching the statutory limitation period for transfer pricing rule reassessments.
Two more significant GAAR changes are proposed:
The Department of Finance has requested feedback on these provisions by May 31, 2023. Following this, revised legislative proposals will be published, and the application date for the amendments will be announced.
If the final legislation reflects current proposals, taxpayers will face substantial uncertainty in compliance. Economic substance will become a legislated factor, alongside a 25% penalty, that Canadian taxpayers must consider when assessing GAAR risk.
Though some pitfalls may be avoided through increased disclosure, the proper role of these new provisions will remain unclear until a comprehensive jurisprudence is established.
If you have any queries about GAAR changes in Canada or other Canadian tax matters then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
The Australian Taxation Office (ATO) has announced that a new Register of Foreign Ownership of Australian Assets is set to come into effect on 1 July 2023.
This Register will create several new reporting obligations for foreign investors and Australian entities that become “foreign persons”, in relation to certain interests in Australian land, entities and businesses.
Foreign investors will be required to provide notice to the Commissioner of Taxation (the Registrar) of certain events relating to interests in land, entities and businesses in Australia. Such events include acquisitions, disposals, lease arrangements, options to purchase or lease arrangements, as well as the creation or transfer of interests in a trust.
These reporting obligations are in addition to the approval processes and reporting obligations that already apply under Australia’s Foreign Acquisitions and Takeovers Act (FATA).
In anticipation of the Register’s commencement, Treasury has released an exposure draft of amendments to the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) which is open for consultation until 31 March 2023. The ATO, which will administer the Register, has also released draft data standards prescribing how and what information must be reported for inclusion in the Register.
When a “registrable event” occurs, foreign investors must give notice to the Registrar within 30 days of the “registrable event day”. This day varies depending on the type of event but is generally the date on which the notifiable event occurs, or when the person is aware or should have been aware that the relevant event has occurred.
The ATO will be launching a new online platform through which investors will be able to report interests for the new Register. A third party will also be able to be authorised by a foreign investor to give notice on behalf of the foreign investor. Civil penalties will apply for a failure to give notice within the requisite 30-day period.
The Register will not be public. The information on the Register will be subject to similar rules as those that apply to other information relating to foreign investment in Australia under the FATA. That is, the information can be disclosed to other government bodies to enable them to perform their functions or exercise their powers under the FATA.
Information on the Register will also be permitted to be disclosed to a person to whom information on the register relates.
Under the FATA, a person must notify the Treasurer within 30 days of taking certain actions approved under a no objection notification or an exemption certificate, as well as certain notifiable situations after the action has been taken. These situations include when the relevant interest ceases or changes, or the entity or business the interest relates to ceases to exist.
From 1 July 2023, these circumstances will also need to be notified to the Registrar in order to be recorded on the new Register. To reduce duplication, the draft regulations provide that by giving a notice to the Registrar of a registered circumstance, this will also satisfy any other equivalent reporting obligations to the Treasurer under the FATA in relation to the same action.
On commencement of the new Register, the registers maintained by the ATO, including the Register of Foreign Ownership of Agricultural Land, the Register of Foreign Ownership of Water Entitlements, and the Register of Residential Land, will be repealed, and all information will be incorporated into the new Register. All circumstances required to be reported in relation to these registers will instead be reported to the Registrar and recorded on the new Register.
The Register of Foreign Owners of Media Assets maintained by the Australian Communications and Media Authority and the Register of Critical Infrastructure Assets administered by the Cyber and Infrastructure Security Centre will continue to operate
These key dates related to the new Register of Foreign Ownership of Australian Assets:
If you have any queries about the New Register of Foreign Ownership , or Australian tax issues or tax matters in general, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
This article discusses a rather unexpected move by the Australian Treasury to tighten tax rules on multinational corporations operating in the country.
Specifically, the Treasury has proposed changes to the way that companies can deduct interest expenses incurred in capitalizing or buying foreign subsidiaries.
Under current rules, Australian companies can deduct interest on money borrowed onshore to invest in foreign subsidiaries or acquire shares in other companies.
However, the proposed changes would remove the ability to deduct interest expenses for investments that generate non-assessable, non-exempt (NANE) income.
This would effectively repeal a provision that has been in place for the past 20 years.
The proposed changes are part of a wider effort to combat profit-shifting by multinational corporations, and are designed to prevent excessive levels of debt being carried by Australian operations.
The changes were unexpected, as they were not part of previous policy proposals or announcements. They are likely to have significant implications for multinational corporations operating in Australia.
Overall, the article provides a comprehensive overview of the proposed changes and their potential impact on multinational corporations operating in Australia.
If you have any queries about this article, or Australian tax issues or tax matters in general, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
On February 14, 2023, the Council of the European Union made changes to the list of countries that do not cooperate with the EU on tax matters.
This is called the “EU blacklist”.
Four new countries were added to the list:
With these additions, the EU blacklist list now has 16 countries on it. The other countries are as follows:
The Council gave reasons for adding these countries.
For example, the Marshall Islands was added because they have a tax system that encourages businesses to move profits offshore without any real economic activity.
Costa Rica was added because they do not provide enough information about tax matters, and they have tax policies that are considered harmful. Russia was added for the same reason.
The Bahamas was previously removed from the EU blacklist in 2018 but was added back in 2022 and remains on the list.
The new list will be officially published in the Official Journal of the EU, and the next revision will take place in October 2023.
If you have any queries relating to the EU Blacklist or tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.