Peter Costello

Media Releases

Tax Avoidance: Foreign Tax Credit Schemes

NO. 078

TAX AVOIDANCE: FOREIGN TAX CREDIT SCHEMES

I am announcing today that the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 will be amended with immediate effect in relation to schemes entered into after this time which are designed to acquire or generate foreign tax credits that can be used to shelter low-taxed foreign source income from Australian tax.

These transactions generally are structured to yield little or no economic profit relative to the expected Australian tax benefits. Typically they involve the acquisition of an asset that generates an income stream subject to foreign withholding tax. An illustrative example of one such arrangement is attached.

The Commissioner of Taxation does not accept the efficacy of these arrangements, and proposes to challenge them under the existing law in the courts.

The Government, recognising the potential erosion to the revenue base by the substantial amounts of tax at risk through these and similar avoidance arrangements, therefore considers it essential to extend Part IVA in the manner described above.

These types of arrangements have also been identified in the United States and the United Kingdom and remedial action has swiftly been taken in both those countries.

CANBERRA

13 August 1998

Contact officers, ATO:

Ken Hare
(02) 9374 1457

Robert Puckridge
(02) 6216 1486


Attachment:

Step 1:

Foreign Resident Company (For Co2) owes royalty payment to Foreign Resident Company (ForCo1) for the use of intellectual property.

Step 2:

ForCo1 & AusCo enter into assignment agreement under which the right to receive the income stream in respect of the intellectual property is assigned to AusCo.

Step 3:

AusCo makes payment to ForCo1 for the right to receive the income stream.

Step 4:

The assigned income is paid to AusCo by ForCo2. Country B withholds 10% tax on the royalty.

AusCo includes the income stream in its assessable income. After "grossing up" to reflect the foreign tax, and claiming a deduction in respect of the cost of acquiring the income stream, only a small amount of net income is included in AusCo’s taxable income. AusCo claims a foreign tax credit for the full amount withheld by Country B. This amount is greater than the amount needed to offset the tax in respect of the net foreign income. The excess credit is used to reduce the Australian tax payable on other foreign income of the same class.

13 Aug 1998

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