Question

You have recently commenced work for the Australian taxation division of YE International LLP an international accounting partnership. A partner in the Houston Texas office has contacted you and stated that one of his clients has a partly owned subsidiary in Australia that has asked him questions about four Australian Tax law cases, and accordingly he has told them that he would obtain an analysis of the cases. He is accordingly requesting you to provide the analysis for him to pass to the client. The cases are:

1^st Tax Case: SNF (Australia) Pty Ltd v FC of T (2011) 193 FCR 149                                               

2^nd Tax Case: Resource Capital Fund IV LP v Commissioner of Taxation [2019] FCAFC 51      

3^rd Tax Case: Burton v Commissioner of Taxation [2019] FCAFC 141.                                          

4^thTax Case: Chevron Australia Holdings Pty Ltd (CAHPL) v Commissioner of Taxation [2017] FCAFC 62

                                                                                                                                                                    

In providing your analysis, the following 5 points must be addressed:

1^st The arguments and Facts of the case.

2^nd What did the taxpayer say?

3^rd What was the main issue?

4^th What was the Commissioner’s argument?

5^th What did the Judges say?

In your answer refer to Legislation, ATO and OECD Material.

Answer 1

IN CASE OF A PARTLY OWNED SUBSIDIARY IN AUSTRALIA THAT CONTROL IS MORE THAN A NUMBER. WHAT ACCOUNTANT SAW IS THAT WHILE YOU HAVE 51% VOTING RIGHTS, IN THIS CASE. THERE ARE OTHER FACTORS WHICH COULD IMPACT THE PERCENTAGE SHARES REQUIRED TO HAVE A CONTROLLING INTEREST, SUCH AS REGULATIONS IN THE JURISDICTION WHERE THE COMPANY WAS ESTABLISHED OR AGREEMENTS BETWEEN THE SHAREHOLDERS.

OWNERSHIP OF LESS THAN 50% = EQUITY INVESTMENT

AN EQUITY INVESTMENT IS WHEN A COMPANY OWNS A PORTION OF THE SHARES OF ANOTHER COMPANY, BUT LESS THAN 50%. WHILE THE COMPANY MAY CERTAINLY HAVE INFLUENCE, AND POSSIBLY EVEN A LOT OF SAY INTO HOW THE OTHER COMPANY IS RUN, IT IS NOT A CONTROLLING INFLUENCE.

1^ST TAX CASE:

THE CASE CONCERNED WHETHER THE TAXPAYER PAID MORE THAN THE ARM'S LENGTH PRICE FOR PRODUCTS ACQUIRED FROM OVERSEAS RELATED PARTIES SO THAT THE COMMISSIONER COULD APPLY THE TRANSFER PRICING RULES TO ADJUST THE PURCHASE PRICE FOR INCOME TAX PURPOSES. THE FULL FEDERAL COURT FOUND FOR THE TAXPAYER.

THE GOVERNMENT HAS ANNOUNCED THAT IT INTENDS TO INTRODUCE LEGISLATION TO REFORM THE TRANSFER PRICING RULES. SUBJECT TO THE NEED TO GIVE EFFECT TO ANY AMENDING LEGISLATION, THE COMMISSIONER WILL CONSIDER WHETHER CHANGES OUGHT TO BE MADE TO HIS PUBLIC RULINGS IN LIGHT OF THE COURT'S DECISION, INCLUDING THESE:

· TAXATION RULING TR 94/14 - INCOME TAX: APPLICATION OF DIVISION 13 OF PART III (INTERNATIONAL PROFIT SHIFTING) - SOME BASIC CONCEPTS UNDERLYING THE OPERATION OF DIVISION 13 AND SOME CIRCUMSTANCES IN WHICH S 136AD WILL BE APPLIED

· TAXATION RULING TR 97/20 - INCOME TAX: ARM'S LENGTH TRANSFER PRICING METHODOLOGIES FOR INTERNATIONAL DEALINGS

· TAXATION RULING TR 2010/7 - INCOME TAX: THE INTERACTION OF DIVISION 820 OF ITAA 1997 AND THE TRANSFER PRICING PROVISIONS

· TAXATION RULING TR 2011/1 - INCOME TAX: APPLICATION OF THE TRANSFER PRICING PROVISIONS TO BUSINESS RESTRUCTURING BY MULTINATIONAL ENTERPRISES.

2^ND TAX CASE:

DOUBLE TAXATION AGREEMENT – RESIDENCE OF LIMITED PARTNERSHIP – DIVISION 855 OF THE INCOME TAX ASSESSMENT ACT 1997 (CTH) – TAXABLE AUSTRALIAN REAL PROPERTY – MINING, QUARRYING OR PROSPECTING RIGHT – WHETHER LIMITED PARTNERSHIPS COULD BE RESIDENTS OF THE UNITED STATES – WHETHER LIMITED PARTNERSHIPS COULD RELY ON TAXATION DETERMINATION TD 2011/25 FOR PROTECTION FROM AUSTRALIAN INCOME TAX – WHETHER GENERAL PURPOSE LEASES AND A MISCELLANEOUS LICENCE ISSUED PURSUANT TO THEMINING ACT 1978 (WA) WERE TAXABLE AUSTRALIAN REAL PROPERTY BECAUSE THEY EACH CONSTITUTED A “MINING, QUARRYING OR PROSPECTING RIGHT” – WHETHER GENERAL PURPOSE LEASES WERE A LEASE OF LAND.

3^RD TAX CASE:

ART 22(2) OF THE DOUBLE TAX CONVENTION BETWEEN AUSTRALIA AND THE UNITED STATES – WHERE ART 22(2) OF THE DOUBLE TAX CONVENTION BETWEEN AUSTRALIA AND THE UNITED STATES REQUIRES AUSTRALIA TO ALLOW AS A CREDIT AGAINST AUSTRALIAN TAX THE US TAX PAID “IN RESPECT OF INCOME DERIVED FROM SOURCES IN THE UNITED STATES” – WHETHER THE GAIN CONSTITUTES “INCOME DERIVED FROM SOURCES IN THE UNITED STATES” – WHETHER THE GAIN “IN RESPECT OF” WHICH TAX IS PAID REFERS TO THE WHOLE OF THE GAIN TAXED IN THE UNITED STATES OR THE DISCOUNTED GAIN TAXED IN AUSTRALIA – WHERE THE DOUBLE TAX CONVENTION WAS INCORPORATED INTO AUSTRALIAN LAW PURSUANT TO S 5 OF THE INTERNATIONAL TAX AGREEMENTS ACT 1953 (CTH) – WHETHER THERE IS AN INCONSISTENCY BETWEEN ART 22(2) AND S 770-10 OF THE INCOME TAX ASSESSMENT ACT 1997 (CTH)

4^THTAX CASE:

THE ASSESSMENTS IN DISPUTE WERE BASED ON TRANSFER PRICING DETERMINATIONS MADE UNDER DIVISION 13 OF THE INCOME TAX ASSESSMENT ACT 1936 (FOR 5 YEARS IN QUESTION) AND UNDER DIVISION 815-A OF THE INCOME TAX ASSESSMENT ACT 1997 (IN RESPECT OF THE LAST 3 YEARS). ALTHOUGH BOTH OF THESE PROVISIONS HAVE NOW BEEN REPEALED, THE CHEVRON CASE HIGHLIGHTS THE DIFFICULT STATUTORY INTERPRETATION QUESTIONS WHICH ARISE IN TRANSFER PRICING DISPUTES. THE CASE ALSO HIGHLIGHTS COMPLEX MATTERS OF EVIDENCE INCLUDING ISSUES IN ENSURING EXPERT OPINIONS ARE ADMISSIBLE, PROBATIVE AND RELIABLE.

THE DECISION OF THE FULL FEDERAL COURT IS A STRONG ONE FOR THE COMMISSIONER. THERE ARE IMPORTANT LESSONS ARISING FOR MULTINATIONALS INVOLVED WITH CROSS-BORDER FINANCING AND THOSE QUESTIONS ARE NOT LIMITED TO AN AUSTRALIAN TAX CONTEXT. THERE HAS BEEN CONSIDERABLE INTEREST FROM OVERSEAS JURISDICTIONS IN THE ISSUES DISCUSSED IN THIS CASE.