The Board of Taxation opened a consultation concerning potential reforms to the corporate tax residency rules.
There is general consensus that the current administration of the “central management and control” test to determine Australian corporate tax residency is uncertain and possibly creating practices that are costly. In some cases, key decisions about the operations or investments of foreign companies within Australian multi-national groups are made by the board or management of the Australian controlling company within Australia. The practice of holding a board meeting in a foreign jurisdiction under the current tax administrative practice to consider and approve those decisions could itself be seen as contrived, when a majority of the directors are Australian residents that could attend the meeting from Australia, using modern communication technology. The uncertainty is even greater when the board members of the foreign company are also directors or senior management of the Australian controlling company that made the operational or investment decision that the foreign company is to implement.
The current “central management and control” approach in an environment when businesses have increasingly become more complex with digitisation has meant the test has also become increasingly difficult for taxpayers and the tax administration to apply.
A sole-incorporation test would be a simple solution—one that is easy to comply with and simple to enforce administratively. A number of consultation submissions to the Board of Taxation advocated for this approach.
However, there are “pressure points” and concerns raised in the Board of Taxation’s consultation paper in adopting a sole-incorporation test. These pressure points include the following:
With international tax rules placing priority on re-establishing the link between taxation and the location of economic activities, there may be less emphasis on issues with residence and source in the long term. A sole incorporation test accompanied by a review of the current international integrity measures or putting in place an additional “stateless” income integrity measure that operates as a last resort is an option worth considering to simplify the Australian corporate tax residency rules.
For more information, contact a KPMG tax professional in Australia:
Jenny Wong | + 61 2 9335 8661 | email@example.com
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