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26 June 2018 Australia issues guidance on foreign companies' central management and control test of Australian residency On 21 June 2018, the Australian Taxation Office (ATO) issued three guidance documents regarding whether foreign companies are Australian residents under Australia's central management and control (CMAC) test of corporate residency:
International businesses should assess the Australian residency status of their companies or foreign collective investment vehicles (CIVs) to identify any risks and remedial action which may be required.
The ruling largely follows the earlier draft TR2017/D2, despite submissions by professional bodies, including EY's submission. In this respect, where boards of foreign companies merely rubberstamp or "mechanically implement" decisions which are made by Australian controllers, parent companies, etc. without due consideration, the foreign companies run a significant risk of being treated as an Australian resident because their CMAC is in Australia. The ruling is far less concessional than earlier ATO interpretations and looks to multiple recent judicial authorities. For example, it indicates that a foreign company's "day-to-day conduct and management of a company's activities and operations is not ordinarily an act of (the company's) central management and control. Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers." The Draft PCG sets out how to identify the circumstances where foreign incorporated companies that are influenced or controlled by Australian controllers, directors, etc. will be treated as being Australian resident. The Draft PCG contains practical guidance on the matters covered by the ruling. It discusses a range of issues and provides various illustrative examples, including:
When finalized, the Draft PCG is proposed to apply from 21 June 2018. Submissions on the draft PCG are due by 20 July 2018. The Draft PCG outlines the proposed ATO transitional compliance approach. The Commissioner will not apply his resources to disturb a foreign incorporated company's status as a nonresident during the transitional period if it meets certain criteria. These are quite specific, including that the foreign company is an ordinary company and is not a foreign hybrid. The transitional period is to end on 13 December 2018 – six months from the issuance date of TR 2018/5. The Draft PCG provides the Commissioner's acknowledgement that unplanned or unintended circumstances may arise from time to time which cause the location of CMAC to be questioned. The Draft PCG outlines that the Commissioner will not normally apply his resources to disturb a foreign incorporated company's status as a nonresident merely because part of the company's CMAC is exercised in Australia, i.e., where directors regularly participate in board meetings from Australia using modern communications technology and certain criteria is satisfied on an ongoing basis. Australian funds management firms will often be associated with foreign CIVs which have arrangements with Australian investment managers. Australian investment managers associated with foreign CIVs will want to undertake an immediate prudential review of the governance and operations of the foreign CIVs, to confirm that they will be adequately protected under the Draft PCG. Some relevant examples in the draft PCG are helpful, but further clarification is needed. Australian outbound businesses (whether foreign-owned or Australian-owned) with significant or mature operations/businesses and/or subsidiaries in foreign jurisdictions will want to undertake an immediate prudential review to identify whether:
Some businesses might consider that, for certain foreign subsidiaries which are not currently undertaking significant business or profitable activities, there are currently few tax risks even if they were treated as an Australian resident. However, any future transaction which might crystallize significant increased value in the foreign subsidiary, or involve significant financing, capital injection, or joint ventures, might result in a taxable event and a dividend from the foreign subsidiary which would not be treated as NANE income for Australian tax purposes. Accordingly, the risk of inaction needs to be carefully understood and documented, given the potential for significant tax costs. A prudential review should be integrated into year-end tax accounting, risk management and assurance processes, to identify the actions needed before the expiry of the Commissioner's transitional period. Document ID: 2018-5801 |
