Taxation Law Report: Residency Rules and International Tax Avoidance

This report is a comprehensive analysis of taxation law, focusing on two key areas: residency rules and international tax avoidance. Part A examines the residency status of Catherine, a working holiday maker in Australia, and determines her assessable income as both an Australian and foreign re...Read More

TAXATION LAW

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART A ..........................................................................................................................................1
Issue ............................................................................................................................................1
Rules............................................................................................................................................1
Application ..................................................................................................................................3
Requirements ..................................................................................................................................3
I) Assessable income of Catherine in Australia considering her as Australian resident. ..........3
II) Considering Catherine as Foreign Resident of Australia........................................................4
PART B :International Tax Avoidance ..........................................................................................5
Minimization and tax avoidance by multinational corporations is of significant concern for the
tax administrators and governments............................................................................................5
Methods used by multinational corporations for avoiding the tax in Australia. .........................7
Comparison of Australian Rules with Rules of USA................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Countries earn their revenues through the taxes from individuals and corporates. Incomes
earned by the assessees are chargeable to tax. Income tax of Australia is taxed under the Income
Tax Assessment Act, 1997 and all the applicability of relevant legislations is guided by
Australian Taxation Office. Multinational corporations with their emergence over global level
have increased the tax burdens. Companies began to involve in tax avoidance activities for
reducing their tax liabilities. Companies were shifting their profits to countries with lower tax
jurisdictions. The report is covered in two parts. Part A will cover the understanding about the
residency rules for working holiday makers and their assessable income. Part B will cover the
research assignment on International Tax Avoidance. This will be giving understanding about
the multinational corporations avoiding tax through tax planning and arrangements.
PART A
Issue
In the present case Catherine is a 22 year born in Cardiff, Wales. She arrived Brisbane on
a working holiday. Prior to this she was residing with parents in Wales. She was working in
Cardiff before leaving for Australia. Most of her possessions were left with parents in Cardiff.
She lived in hostel for 2 weeks in Brisbane and visited the tourists locations Sunshine coast,
Gold Coast and Tourists attractions. After that she lived in shared houses with holiday makers.
She also worked in Brisbane in hotel and cafe as casual employee. She went to central
Queensland as she was required to work in rural areas as per the visa requirements. She worked
in cattle station for 2 months. She went bask to Brisbane in same house for living in same shared
house. She returned back to Cardiff on July 16, 2019 and lived with her parents. The case is to
identification of residency rules for Catherine in Australia for year 2019. The assessable income
in Australia and while she worked in Wales. The rulings for foreign resident and taxation rulings.
The case is related to the assessable income of foreign residents working in Australia.
Rules
The rule is related to the taxation laws related to residency. To understand the tax situation it is
important to identify whether individual is considered as foreign resident or Australian resident
for the tax purpose. Rules of Home Affairs are not using the same rules.
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 A person without being permanent resident or Australian citizen could be resident of
Australia for tax purpose.
 A person may have visa to visit Australia, but may not be Australian resident for purpose
of tax (Ingram, 2016).
Checking out the residency status for individuals who visit Australia for working holiday or visit.
Generally who are entering Australia on working visit or holiday are not the residents of
Australia. They are categorised into two that are 462 or 417 visas ( backpackers). They visit
without any intention of staying but to work during their stay (Foreign Resident, 2019).
Income earned in Australia by backpackers are taxed at the rate decided for working
holiday makers of 15% to the level of $ 37000 in the income year without considering any
residency status.
Residential status for tax purpose.
It includes purpose of visit in Australia way of living in Australia and whether have home in
other country.
For being Australian resident one of the conditions should be met.
1. Living & working arrangements should be consistent to make Australia home.
It includes developing habits and routines of lifestyle in Australia is same like before visiting
Australia. Individual is working and living in Australia as settled life and not just as tourist or
visitor.
2. Living in Australia for six months or more in tax year of Australia and also in other
country no have place where individual lives or intends of taking residence in
Australia(McClure, Lanis and Govendir, 2016).
Example : Person visiting Australia on working holiday of 8 months and also have home in other
country where it will be returning than individual will not be resident of Australia for tax
purpose.
Factors to be considered are
 Purpose of being in Australia
 Manner of living life in Australia. Settled and routine habits as before visiting Australia.
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Other factors include
 Living Arrangements
 Connections of individual in Australian Community
 Location of valuable assets – Household assets, care and Bank account.
 Family ties in Australia.
Application
Residential Status of Catherine
Applying the above tax residency rules for working holiday makers rules Catherine
cannot be considered as resident of Australia. She do not satisfies any of the condition given for
tax residency of Australia. Catherine do not have intention of living in Australia she is only had
the purpose of adventure. She also do not satisfies the second condition of living life in Australia.
She did not developed habit or routine of way of life in Australia. As she lived few weeks in
hostel, few months in shared house and also central Queensland for working at cattle station as
visa requirements (Lam, and Whitney, 2016). She returned back to Cardiff Wales to her parents
house in July 2019 after expiry of 12 months visa.
Requirements
I) Assessable income of Catherine in Australia considering her as Australian resident.
Australian Resident
Particulars Amount
1. Salary from Employment in Wales 5500 Taxable
2. Salary from working in Australia 36000 Taxable
3. Prize in contest in Queensland 250 exempt
4. Interest on Australian bank account 50 not taxable
5. Interest on Wales bank account 160 Taxable
6. Sale of personal holding on ebay 350 exempt
Total Assessable Income 41660
Interpretation
1. 1. As per the ITAA' 97 and guidelines given by ATO every foreign income of Australian
Resident is taxable including overseas employment.
2. Salary from employment in Australia is taxable as ITAA, 1997.
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3. Prize is exempt as it is not earned as regular appearance in game show and Catherine also
did not received any appearance fees.
4. Interest on Bank account is taxable when the tax amount is more than $ 120 as per ATO.
Withholding tax is also not charged as below the threshold limit.
5. Interest earned on foreign bank's saving account is taxable under Australian taxation.
Deduction for withholding tax paid in Wales can be claimed (Interest deduction, 2019).
6. Sale of personal holdings below $ 10000 are exempt under taxation law.
II) Considering Catherine as Foreign Resident of Australia.
Foreign Resident
Particulars Amount
1. Salary from Employment in Wales 5500 exempt
2. Salary from working in Australia 36000 Taxable
3. Prize in contest in Queensland 250 exempt
4. Interest on Australian bank account 50
10% if more
than $120
5. Interest on Wales bank account 160 exempt
6. Sale of personal holding on ebay 350 exempt
Total Assessable Income 36000
Interpretation
An individual on working holiday to Australia is required to pay tax only on income earned in
Australia.
1. It is earned outside Australia.
2. Income from employment in Australia is taxable of foreign residents as per ATO.
3. Same as above.
4. Same as above. Only the interest would be taxable at straight 10 %.
5. Interest on account in Wales is exempt.
6. Sale of personal holding are tax free for non residents as it was sold prior to visit in
Australia.
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PART B :International Tax Avoidance
Minimization and tax avoidance by multinational corporations is of significant concern for the
tax administrators and governments.
Tax Avoidance is a practice where the firms operating at international level adopts
different tax planning tactics that makes them avoid the payment of tax in a legal manner. This
has been a major concern for government all over the world because it leads to loss in the
revenue generation for the respective countries and also leads to decreased accountability of the
firms (Xin and Ling, 2019). The governments all over the world have been regularly trying to
develop those practices that would assist them in minimizing such tax avoidance and also help
ion increasing the transparency between the different practices that have been adopted by the
companies. OECD i.e. Organisation for Economic Cooperation and Development is working on
international levels where 34 prosperous economies formulate the part of Global Forum on
which it is operating and they are basically operating in order to develop aggressive tax planning
norms and also develop mechanisms of tax information exchange.
They have identified what are the common strategies that are being adopted by the
companies that are operating at such international levels and then company specific strategies are
developed so that the practice of tax avoidance can be minimized (International collaboration to
end tax avoidance, 2019). OECD BEPS is another base erosion and Profit sharing where they try
to match the taxation policies that are being adopted by different organisations so that what are
those practices that are being adopted by different countries regarding tax evasion can be
identified and appropriate decisions and policies can be developed and framed by the
organisation for all the member countires.
Australian Government has also developed certain measures that they can use in order to
minimize the tax evasion and generate as much revenue as possible form the companies that are
trying top evade tax payment in a legal manner. Tax Avoidance taskforce is one such initiative
that has been developed by the Australian government where they target mainly the
multinational corporations, large public and private businesses ensuring that the amount paid by
them is correct, and they are not adopting those policies that is causing unnecessary evasion of
tax. This taskforce as first established in 2016 and they try to interpret and identify the tax
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avoidance arrangements that the companies might have entered into (Joshua Aronmwan and
Okafor, 2019). Their major objective is to detect those companies that are adopting the tax
avoidance policies and increase the transparency levels, improve the risk identification and
assessment techniques. They try to make the organizations declare voluntarily if they have
adopted those practices that have led to the tax avoidance and this helps them in scrutinizing that
how these practices are being adopted and what are the sources that are encouraging and
educating businesses about such tax avoidance practices.
The government is not the only concerned party in this and there are tax regulators and
administrators as well who try to regulate the tax practices that are being adopted by the
companies by implementing different laws and other similar strategies so that the organisations
or companies that are engaging in such tax avoidance practices can be identified and rectified
(Braithwaite, 2017).
MNC cover a large part of GDP of the world and intra firm trade are growing with large
proportions. These companies are operating at international levels with integration of supply
chains and centralised functions. Digital economy is accounting for performance of distant
activities. Taxes are levied for funding the public spendings. Taxes are laid under corporate
income tax of country. Multinational firms are planning their taxes and exchange of tax
informations.
MNC''s are not looked as whole for tax purpose. International tax regime was established
by the nations by coming together. This was to avoid the double taxation of growing MNC's.
They have created more than 2500 tax agreements have been framed with common standards and
shared principles between countries. They were developed to avoid the double taxation. These
arrangements at the same time also gave rise tax avoidance or no taxation. The practice was
increasing among the multinational corporations. Increase in tax competition further increased
the tax avoidance practices. Countries are having different tax rates and rulings for attracting
investments. Some countries were not charging at all the profits of MNC's making investment.
Multinationals every year are moving around 16 billion dollars from Australia to the tax
heavens. This is seen as countries are pushing down the corporate tax rates to compete for harder
productive capital. Tax rates are driven lower by these multinationals that shifts profit to tax
heaven and government fails to curb the practice (Susanti, Nasir and Sukardianti, 2017). Country
is cutting down the tax rates as economic integration is making the location of capital more
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sensitive for tax differences. The government is having serious concerns for the issues related to
the tax avoidance. This is affecting the tax policies of countries. Companies are shifting their
profits to countries and regions with lower tax rates. This is causing the distress in the taxation
regime of countries. The have to adopt for adequate actions and taxation policies for companies.
Lowering the tax rate will influence the businesses to invest in Australia. The lower tax rate will
give rise to unemployment and increased burden over the other residents of Australia and small
businesses. It is important for government to have effective control over the tax planning and
arrangements made by the multinationals.
The tax avoidance is decreasing the tax revenues of countries around 20% and that
amounted to around $ 5.4 billion in 2017. Government has not been capable in stopping the
shifting of profits from one country to another. The tax heavens are required to be as it provides
the low tax regions to the multinationals that attract the investment within the country.
It is essential for the business enterprises to reduce their costs to minimum. Managers are
given instructions to operate their functions in countries with minimal tax rates. They plan their
functions in such manner that helps them to reduce their tax to minimum. Profit from
jurisdictions are shifted where economic activities that create them are taking place (King, 2016).
Double taxation transactions are having permanent establishments. Tax administrator have to
take actions as this causing the MNC's to shift their profits using various methods.
Over last 2 years the avoidance has been increased and this is causing the companies to
avoid tax in source countries where profits are actually made. Big examples of tax avoidance are
companies like Starbucks, Google and amazon. This led to inquiry in minimisation of taxation
practices. There has been lower of tax avoidance by multinational corporations in Australia.
Rising of digital economy as well as importance of the intangibles presents challenge to
corporate taxation base in jurisdictions of Australia (Anouar and Houria 2017). Government has
passed strict legislations to restrict transfer pricing relating to the cross borders transfer pricing
under income tax laws. If the considerable steps are not taken by the government than it may
further tend to lose revenues. These revenues are transferred to the public welfare and the
infrastructure of country.
Methods used by multinational corporations for avoiding the tax in Australia.
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There are various methods used by multinational corporations through which they are
successfully avoiding the taxation. These are profit shifting strategies, transfer pricing , hybrid
entities and mismatches, corporate debt equity methods and payments for intangibles. Transfer
pricing is mainly used by multinational corporations for tax avoidance.
Transfer Pricing
It is accounting practice used by multinationals that represent that one department of
company charge the other department for the goods & services that are provided internally. This
allows establishment of the prices of goods and services that are exchanged between the
subsidiaries, affiliates or companies having common control. Transfer pricing helps in saving the
tax by multinational enterprises (Transfer pricing, 2018).
This is an accounting and taxation practice allowing the pricing transactions to work
internally within the enterprises. This exists also between the subsidiaries operating under the
common controls or ownership. This practice of transfer pricing exist and extends to even cross
borders. Department determines the cost that is required to be charged from other departments ,
subsidiaries, holding companies for the goods or services that are rendered. Prices are generally
charged over the ongoing prices of market. Transfer pricing is also applied over the intellectual
properties like patents, research and royalties.
MNC's have legal authority to use the methods of transfer pricing to allocate the earnings
among its number of subsidiaries and affiliated companies which are the part of parent
organisations (Berg and Davidson, 2017). This practice is largely misused by multinationals to
reduce their overall tax liabilities by altering the income. Companies are shifting their profits by
establishing their subsidiaries in jurisdictions with low tax rates.
Intra group trade have been increased with emerging global chains and expansing
activities of MNC's. It includes not only larger organisations but also the organisations operating
on smaller scales but having global presence. Organisations establish entities in one or more
countries that have lower or not taxation. The company usually transfers the prices of products to
their subsidiaries established in other countries. They were using digital technology for showing
transferring the products over countries for just showing the transactions without actually
moving and transferring the goods and services (Stewart, 2017). The transactions were
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increasing used by the management of companies to avoid tax through alteration of revenues
between establishments in more than one jurisdictions.
Transfer pricing by managers are used for genuine accounting & for the economic
reasons like performance measurement and profit maximisation. This has been promoted mainly
by companies after the expansion to global scales. Transfer is different concept that is used for
tax reduction and is not referred as taxation frauds. Corporates have been taking benefits from
these methods to avoid tax.
Arms lengths principle
To avoid erosion of corporate tax base government of the country has scrutinised policy
of transfer pricing of MNC operating in the jurisdictions. Members of OECD countries use
principle of arm's length to determine appropriateness of cross borders transfer prices. Principle
is based over rationale that business units have view of is own interest only for acquiring assets
or service from other related unit where purchase price is equal or lower than the costs charged
by the unrelated suppliers (Hashimzade and Epifantseva, 2017). It conversely applies in relation
to the enterprises providing goods that would be sold rationally only to unrelated suppliers at
prices higher or equal to those charged to unrelated suppliers.
Real example of multinationals using transfer pricing include
Coca Cola
Company because of marketing, production and sale of company concentrates over
number of overseas. Company successfully defended amount of $ 3.3 billions using the transfer
pricing of the royalty agreement. IP values were transferred by company to its subsidiaries in
Europe, Africa and also South America in between 2007 to 2009. The litigations are still pending
between the company and IRS and case has not been resolved (Australian tax avoidance, 2018).
Facebook Inc.
Other case with high stake is of Facebook that transferred 6.5 billion dollars of intangible
assets. They were transferred to Ireland cutting down the tax bill over a great extent. Facebook
can have obligation to pay around $ 6 billion excluding interests and penalties. Trial is still
pending under courts for settling the matter with IRS compliance.
Steps by Australian Government
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For addressing the issues related to the tax avoidance government of Australia has
established new legislations and actions. Parliament of Australia has passed the legislations for
three years to tighten transfer pricing rules in cross borders. BEPS declaration has stated that
MNC's will be taxed over jurisdictions in which economic activities will derived and operation
are performed and also the value has been created. Action plan of OECD has been endorsed for
addressing the issues of tax avoidance by transfer pricing. Australia has also established Tax
Avoidance Taskforce for identifying the tax avoidance by MNC's. Tax Transparency Code is
created and refers to standards and principles guiding medium and big businesses to have the tax
information public disclosure. It has established protection for the whistle blowers disclosing the
avoidance of tax by corporates. Penalties have been increase by the government for multinational
corporations with more than 1 billion of income (Corporate tax avoidance by MNC's, 2017).
Diverted Profits Tax helps to ensure multinationals have correct tax deposits over profits made in
Australia (Stewart, 2016). This provide increased profits to ATO for dealing with the
multinationals.
Comparison of Australian Rules with Rules of USA.
Australia has the most strongest regime related to tax and also this regime is been
implemented on various corporate groups. These tax regimes are underpinned by a robust
general anti-avoidance rule and ruling related to transfer price. Australia can be considered as
fortunate as they are the part of few countries who have the benefit of specific rules which is
being associated with general anti avoidance rule(GAAR) (Eccleston and Smith, 2016). This
measure is being used by the Australian government to provide protection to the integrity of
system related to tax. This rule is only applied when tax payer enters the arrangements that has
been set just to avail the tax benefits. This the only purpose the tax payer to enter the
arrangement.
In past years, some Full Federal Court of Australia cases revealed a weakness in the
capacity of the GAAR to determine a tax advantage gained from an arrangement. This law
makes sure that the multinational corporations are engaged in paying the fair amount of tax on
the benefits that has been earned. Risk associated with each tax payer within GAAR is been
assessed by them. Certain compliant arrangement is also being made in GAAR. The benefits of
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law are being derived after 1 January 2016. In this the objectives of task force are to identify the
avoidance that has been made on tax so that the revenue can be protected and integrity in tax
system can be maintained. They have also focused on increasing the transparency and making a
better understanding of drivers that are commercial and industry in which payers of tax operates.
On the other hand, United states has the section code 7201 that provides that any
individual who engages in avoiding tax will be imposes by penalty or can also be convicted. The
fine charge cannot more $100,000 ($500,000 in the case of a corporation). An individual must
not be prosecuted for more than 5 years (Thampapillai, 2016). The voluntary compliance rate
which is being paid on time is nearly around 81%. It can be considered as one of the highest rate
in world. It has been analyzed that people who are engaged in not paying the tax on time is male
who are under the age of 51. Also it has been identified that civil and criminal penalties can be
imposed on individuals who have invaded tax in long run.
It has also been analyzed from various cases that tax payer may have declined their
project which is not commercial so that the tax can be avoided on it. This regulation makes sure
that the tax officials are allowed to not make the tax benefits , if the deal which is being made by
them is not for commercial purpose (Stewart, 2016). In this the benefit related to double taxation
must be avoided. Tax evasion can be considered as lowering down the tax bill so that huge
amount of tax benefits can be gained. Avoidance in tax is totally legal and beneficial. Tax
avoidance is basically done to reduce one burden in tax.
CONCLUSION
The research carried out in the report above helps in concluding that the taxation laws are
an important part in determining how the companies are operating and they also play a major
role in determining how that whether the companies are paying the mount due correctly or not.
The report concluded that the government and international organisation all over the world have
developed different measures for controlling the practice of tax avoidance and increasing the
transparency between different activities that are adopted at worldwide level. It was Identified
that IOECD is a major international organization and additionally, the Australian Government
also developed a series of controlling measure. The report also identified that what are the
legislations and laws tat are adopted and implemented in Australia and how Australian
government tries to control the taxation policies and filing strategies that companies that are
operating at international level. In there report, the Internation Tax Avoidance was selected as
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the legislation which is to be discussed and the critical evaluation was done regarding the
different strategies that were being adopted so that it could be analysed whether the practices that
were being adopted are correct or not. The report analysed that what are the different rules that
are adopted in Australia and these were then compared to other countries which were
prominently with the USA rules and regulations related to taxation. It can be concluded that the
taxation rules that are adopted in the Australian economy are adequate and there need not be any
major modification in the rules. However, it can be concluded that the taxation policies needed to
be implemented in a more stricter way and the penalties need to be increased.
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REFERENCES
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Magazine, (129), p.24.
Berg, C. and Davidson, S., 2017. " Stop This Greed": The Tax-Avoidance Political Campaign in
the OECD and Australia. Econ Journal Watch, 14(1), p.77.
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Evidence from Moroccan Groups. International Journal of Economics, Finance and
Management Sciences, 5(1), p.57.
Susanti, I., Nasir, L.A. and Sukardianti, V.P., 2017, December. Implementation of Tax
Regulations on Internet-based Business Activity Case Study: Google's Tax Avoidance In
Indonesia. In 1st International Conference on Administrative Science, Policy and
Governance Studies (ICAS-PGS 2017) and the 2nd International Conference on Business
Administration and Policy (ICBAP 2017). Atlantis Press.
Mikler, J., Elbra, A. and Murphy-Gregory, H., 2019. Defending harmful tax practices: mining
companies’ responses to the Australian Senate Inquiry into tax avoidance. Australian
Journal of Political Science, pp.1-17.
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Stewart, M., 2017. Australia’s Hybrid International Tax System: Limited Focus on Tax and
Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer,
Cham.
Eccleston, R. and Smith, H., 2016. The G20, BEPS and the future of international tax
governance.
Thampapillai, D.J., 2016. Foreign Employment Income and Double Tax Avoidance Agreement:
Australia's Possible Governance Failure. Lee Kuan Yew School of Public Policy Research
Paper, (16-03).
Eccleston, R. and Elbra, A. eds., 2018. Business, Civil Society and the ‘New’Politics of
Corporate Tax Justice: Paying a Fair Share?. Edward Elgar Publishing.
King, M., 2016. Offshore hubs: Developments in multinational corporate tax anti-avoidance.
Australian Resources and Energy Law Journal, 35(2), p.142.
Ingram, P., 2016. Tax files: More than meets the eye-the new'foreign resident capital gains tax
withholding regime'. Bulletin (Law Society of South Australia). 38(5). p.36.
Lam, D. and Whitney, A., 2016. Taxation and property: Practical aspects of the new foreign
resident CGT witholding tax. LSJ: Law Society of NSW Journal. (21). p.84.
McClure, R., Lanis, R. and Govendir, B., 2016. Analysis of tax avoidance strategies of top
foreign multinationals operating in Australia: An expose.
Joshua Aronmwan, E. and Okafor, C., 2019. Corporate Tax Avoidance: Review Of Measures
And Prospects. International Journal of Accounting and Finance (IJAF). 8(2). pp.21-42.
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Xin, X.I.N. and Ling, S.U., 2019. Summary of Research on Internal Transfer Price of Related
Transactions. Journal of Shangqiu Vocational and Technical College. (4). p.11.
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