provide annual report to the FIRB of its compliance with the abovementioned conditions.

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1 Australia Conditions to be imposed on foreign investment into Australia The Australian Government announced on 22 February 2016 that it will apply new requirements on foreign investment applications to ensure that foreign investors in Australia pay the required amount of tax. The Treasurer confirmed that a standard set of conditions will be applied to clearance of investment proposals presented to the Foreign Investment Review Board (FIRB). In summary, these conditions require an applicant to do, and use best endeavours to procure its associates to do, the following in relation to an investment proposal: comply with Australian tax law in relation to the proposal and associated transactions; provide information to the Australian Taxation Office (ATO) in relation to the application or potential application of Australian tax laws to the proposal or associated transactions; notify the ATO of any material transactions or dealings it has or will enter into in connection with the proposal or associated transactions, in which the transfer pricing or anti-avoidance provisions of the Australian tax law may apply and the ATO have not been previously notified; pay any outstanding tax debt which is due or payable at the time of the proposal; and 6 Asia Pacific Tax Notes provide annual report to the FIRB of its compliance with the abovementioned conditions. The Treasurer has foreshadowed the imposition of two additional conditions where a significant tax risk is identified. In this case, an applicant may be required to: engage in good faith with the ATO to resolve any tax issues in relation to the proposal; and provide information specified by the ATO on a periodic basis, including a forecast of tax payable. The changes highlight the increasingly important role of the ATO for investors seeking clearance of foreign investment proposals. In particular, FIRB s approvals will now, in part, depend upon the administrative interpretation of tax laws by the ATO. The Treasurer said in his media statement that a breach of these conditions could result in prosecution, fines and potentially divestment of the asset. Introduction of multinational antiavoidance legislation The Australian Government enacted the new multinational anti-avoidance law (MAAL) on 3 December 2015 which implements a targeted antiavoidance regime for multinational enterprises (MNEs) with an annual global revenue of AUD1 billion or more. The MAAL applies from 1 January 2016 and is designed to counter the erosion of the Australian tax base by multinational entities through using artificial or contrived arrangements to avoid the creation of a taxable presence in Australia. The MAAL amends Australia s anti-avoidance law for multinationals that supply goods or services to Australian customers and derive revenue from overseas sales. The MAAL applies when an Australian related entity of a foreign seller performs activities connected with the sales (e.g. marketing services) and it is concluded that the arrangement was entered into with a principal purpose of avoiding tax in Australia or reducing their foreign tax liability. The MAAL was originally intended to target 30 unnamed multinationals (predominantly operating in the technology sector), but the number of taxpayers who will be impacted is likely to be much higher than this. Where the MAAL applies, the foreign entity will be taxed as if it had made the sales through an Australian permanent establishment (PE). This means it will be subject to Australian tax on the notional profits attributable to the deemed PE, as well as withholding taxes on royalty or interest expenses attributable to the deemed PE. Penalties will also apply on top of these taxes, generally at a rate of 100%. TAX MAAL is designed to counter erosion of Australian tax base by multinational entities.

2 Introduction of country-by-country reporting Consistent with Action 13 of the Organisation for Economic Cooperation and Development (OECD) s Base Erosion and Profit Shifting (BEPS) Action Plan, Australia has passed a legislation implementing country-by-country (CbC) reporting. The CbC reporting law applies for income years beginning on or after 1 January 2016, which is in line with the OECD s recommendations. All Australian and foreign groups with an Australian presence and a global turnover of more than AUD1 billion will need to submit the master file and local file to the ATO. The CbC reports are expected to be filed by the parent company of the group with their home tax authority, so Australian headquartered multinationals will need to file the CbC reports with the ATO. On 17 December 2015, the ATO issued a Law Companion Guideline on CbC reporting to provide preliminary guidance on how the ATO administers the CbC reporting regime, covering the following: Expectations for Australian subsidiaries where the parent company is not required to prepare the country-bycountry reports and master file The ATO recognises that it may be outside of an entity s control to provide the ATO with the required information given that other countries have yet to implement CbC reporting as recommended by the OECD. The ATO encourages entities encountering difficulties in providing information to contact the ATO and discuss whether an exemption is appropriate. For example, where a parent company is not yet required to provide a CbC report and/or master file, the ATO intends to exempt its subsidiaries for the first year from producing the CbC reports and master file. However, the entity will still need to provide a local file. Local file information requirements The ATO proposes three different types of local files: a full local file; a simplified local file; and a short form local file. The eligibility criteria of and specific contents to be included in each type of local file will be covered in later guidance. Possible exemptions The ATO will only exercise its discretion to provide exemptions in very limited circumstances. When considering a request for an exemption from lodging a statement in a particular instance for a specified period, the relevant factors the ATO will take into account include: the entity s risk profile, including the amount of its overseas dealings; the compliance burden on the entity; and whether the ATO will receive the relevant statement(s) by alternative means (e.g. via exchange of information). Approved forms and periods for lodgement The statements for CbC reporting must be lodged electronically in the approved form within 12 months after the end of the income year or the replacement reporting period to which they relate. For expediency, an entity may choose to lodge one or more of the required statements with their income tax return at the same time. Changes to financial reporting of significant global entities Australia enacted new legislation requiring significant global entities (i.e. entities forming part of a group with global income of more than AUD1 billion) to prepare general purpose financial statements for their Australian operations. The new financial reporting requirements will apply for reporting periods beginning on or after 1 July While some Australian subsidiaries and branches of multinationals may have already prepared general purpose financial statements, others may have prepared special purpose financial statements (which contain more limited disclosures, particularly in relation to related party transactions), and some do not prepare Australian financial statements at all. Australia 7

3 The general purpose financial statements must be submitted by the taxpayers to the ATO by the time they file the income tax returns for the relevant period if they have not previously been filed with the Australian Securities and Investments Commission (ASIC). The ATO will be required to share the financial statements it receives from ASIC. Documents filed with ASIC are available to the public while CbC reporting only requires information to be provided to tax authorities. This change is intended to increase public transparency over the financial affairs of certain multinationals Australian operations. Penalties for non-compliance are based on the administrative penalties that taxpayers can incur for failing to lodge their returns, in addition to any reputational impact that may arise from non-compliance. Federal Court of Australia rules on seminal transfer pricing case: Chevron Australia Holdings Pty Ltd v Commissioner of Taxation The Federal Court announced its ruling in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) [2015] FCA 1092 on 23 October The Federal Court dismissed the taxpayer s appeal against the Commissioner s deemed objection decisions (dismissing the taxpayer s objections) in relation to the amended income tax assessments and administrative penalty assessments issued to the taxpayer in respect of each of the financial years Fundamentally, the dispute focused on the application by the Commissioner of the Australian transfer pricing rules. In this case, the Commissioner sought to apply the transfer pricing rules in Division 13 of the Income Tax Assessment Act 1936 for each of the financial years , and Subdivision 815-A of the Income Tax Assessment Act 1997 (ITAA 1997) for each of the financial years Under the amended assessments, the Commissioner disallowed deductions claimed by the taxpayer in respect of interest incurred on loans provided to the taxpayer by a related company resident in the United States. The amended assessments were issued to the taxpayer based on the Commissioner s view that the interest rate applying to the loan exceeded the arm s length rate, and thus the deductions claimed were excessive. The Court ruled in favour of the Commissioner as it found that the taxpayer did not satisfy the onus of proving that the Commissioner s assessments were excessive. The Court held that the requirement that the arm s length consideration must be assessed by reference to the total consideration provided by the taxpayer under the cross-border loan agreement. This includes not just the promise to repay principal and interest, but also financial covenants, security and guarantees provided. This analysis enabled the Court in considering the pricing of the interest payable on the loan based on its actual terms and conditions to also have regard to whether those other terms and conditions were consistent with the evidence accepted by the Court as to what an independent party in comparable circumstances would have agreed to. The Court decided that the consideration provided was inconsistent with what would have been agreed between independent parties. Specifically, the Judge concluded that an independent borrower would have included security, operational and financial covenants in the loan terms, which would have resulted in a lower interest rate although he accepted that the loan would have been denominated in AUD. The Judge did not consider the hypothesising of all the terms and conditions that make up the arm s length consideration to be a reconstruction or recharacterisation of the transaction. The hypothesising of arm s length terms and conditions has implications not only for the pricing of debt transactions, but also for other transfer pricing arrangements where the Commissioner may form a view that the actual terms are uncommercial, and/or exclude terms that may be found in arm s length transactions. The taxpayer has appealed the Federal Court s decision to the Full Federal Court. The appeal is expected to be heard later this year. Board of Taxation Consultation on proposed anti-hybrid rules The Board of Taxation (the Board) released its discussion paper on the implementation of the anti-hybrid rules on 20 November Under the terms of reference issued by the government on 14 July 2015, the Board has been requested to undertake consultation on the implementation of 8 Asia Pacific Tax Notes

4 new tax laws to neutralise hybrid mismatch arrangements (anti-hybrid rules), pursuant to the recommendations of the G20 and OECD under Action 2 of the BEPS Action Plan, and to examine how best anti-hybrid rules can be implemented in the Australian legal context. In particular, the Board has been asked to identify an implementation strategy regarding the following: delivering on the objectives of eliminating double non-taxation, including long-term tax deferral; economic costs for Australia; compliance costs for taxpayers; and interactions between Australia s domestic legislations (e.g. the debt/ equity rules and regulated capital requirements for banks), international obligations (including tax treaties) and the new antihybrid rules. Unlike the OECD s final report, the Board s consultation paper is a much shorter document developed to facilitate discussion on the best way to implement these rules into the Australian domestic laws and to identify any issues associated with the implementation. The consultation paper does not contain any options or express the Board s preliminary views as to how the Australian Government should proceed with these rules. However, it provides a summary of the concepts and recommendations in the OECD report and identifies some Australian specific examples that will likely be caught should the rules be implemented (e.g. US general partnership with Australian partners, limited partnerships, redeemable preference shares, security lending arrangements). The Board was requested to report to the government by March 2016 to allow this issue to be considered as part of the 2016 Federal Budget (which will be announced in May 2016). Consultation on the tax transparency code The Board released a consultation paper on the voluntary tax transparency code (TTC) on 11 December The paper contains the Board s preliminary recommendations for additional disclosure of tax information by large businesses (with Australian turnover of at least AUD500 million) and slightly less disclosure for medium businesses (with Australian turnover of at least AUD100 million but less than AUD500 million). The government commissioned the Board to develop the TTC as a way to improve community confidence in the tax system and to encourage all businesses to adopt a low-risk approach to their tax affairs through enhanced public disclosure. In designing the TTC framework, the Board identified three categories of potential users of the information. They are: general users the person in the street ; interested users shareholders, analysts, investors, social justice groups, media and politicians; and revenue and regulatory authorities ATO and ASIC. The TTC was explicitly designed for the first two categories of users, recognising that the ATO already has access to all of the information it needs through tax returns, supporting schedules and information obtained directly from businesses. Information to be disclosed under the tax transparency code The Board s preliminary recommendations include: medium businesses should adopt Part A, which involves improvements to tax disclosures in financial statements; and large businesses should adopt both Part A and Part B, which is the preparation of an annual taxes paid report. The recommendations in Part A and Part B are summarised below. Part A 1. Reconciliation of accounting profit to tax expense and income tax paid/ payable 2. Identification of material temporary and non-temporary differences 3. Accounting effective company tax rates for Australian and global operations Part B 1. Qualitative description of the approach to tax policy, tax strategy and governance 2. Total tax contribution summary of corporate taxes paid 3. Qualitative information about international related party dealings, financing and tax concessions Australia 9

5 How disclosures should be made The Board recommends companies that prepare Australian general purpose accounts to include the Part A disclosures as part of their accounts. Businesses that do not prepare general purpose accounts are expected to include the Part A disclosures in a separate document. The taxes paid report is separate from the financial statements and is expected to be made public. The Board does not intend to prescribe a standard template or form for the report. It is anticipated that many businesses will publish more than the minimum standard of content required under the TTC due to their corporate approach to transparency, international transparency requirements or their particular circumstances warrant further explanation. There is no proposed timeframe for the preparation of the taxes paid report, but it is recommended to apply from financial year 2015/16 reporting period. Written submissions in relation to the consultation paper were due on 29 January 2016 and the Board will release its final report by May Legislation implementing Common Reporting Standard The Tax Laws Amendment (Implementation of the Common Reporting Standard) Bill 2015 was passed by Federal Parliament on 29 February This legislation implements the OECD s Common Reporting Standard (CRS) in Australia. It requires reporting financial institutions (RFIs) in Australia to identify account-holders using prescriptive due diligence procedures. Once Australian financial institutions have identified the relevant account holders, they will be required to report to the ATO the information on financial accounts held by foreign residents. The ATO will then provide the information to the relevant foreign residents tax authorities. At the same time, the ATO will receive information on Australian residents with financial accounts overseas. RFIs generally include banks and other deposit-taking institutions. However, retirement and pension accounts and some non-retirement savings accounts are generally treated as excluded accounts and therefore excluded from reporting under the CRS regime. The CRS will apply to Australian financial institutions from 1 July 2017, with a first reporting deadline of 31 July 2018 (in respect of the six-month period from 1 July 2017 to 31 December 2017). 10 Asia Pacific Tax Notes