Factors to Be Considered in Order to Be Treated as a Non-Resident of Australia - Assignment Example

Topic: international taxation Name: Lecturer: Course name: Course code: Date Q1).Factors to be considered in order to be treated as a non-resident of Australia Every state worldwide enforces tax on income resulting from within their jurisdiction and that revenue that is generated from the overseas states by a nonresident will be taxed at source. Resident can be taxed on their worldwide income but they will be given a relief where the country has a double taxation relief agreement with that country in which the resident generate income from. For tax purposes, resident is defined as individual with a permanent home in the country and derives his or her income locally or where an individual is a resident in both states, then it shall deemed to be a resident in that state in which interest is focused on. (Cch, Australian Master Tax Guide 2011, 2011) The tax law is clear that, where an individual do not have a clear definition of residence in both contracting states and also the effective management is not determined, subsequently two tax authorities of the contracting countries shall conclude in compliance with article 25 of the contracting states where an individual is deemed to be the resident. Lack of this would make an individual or company not to be permitted to relief or tax freedom provide by contracting state agreement. Therefore for ken and marry to be treated as non-residents, some of the following factors need to ascertain. The reside test For ken and Mary to be treated as non- resident, they need to ensure that they dispose all non taxable assets at their market value at the time of ceasing being a resident and also establish a permanent home outside the country. It is evident that they will be at out of the country for more than 183 days. Also, their usually place of abode is important. This is the place of residence you will be generating income having satisfy the resides test, Then they will be regarded a temporary no- Resident The domicile test Ken will be having an enduring place of abode outside Australia since he will be out of the country for three years, his family will accompany him and also he will establish a permanent home in Nigeria. Also ken need to rent his house in Australia instead of letting the house for his daughter. In order to satisfy the rules of domicile, all this measures need to be upheld. The superannuation test The superannuation act of 1990 or 1976 both includes the enduring or transitory workers in their meaning of associate or entitled employees and therefore, to be a non – resident, you must be a non-employee or a non contributing member of the scheme. This is the third legal assessment as far as domicile and residency in taxation is concerned. For tax purposes, you will be deemed as a non-resident in Australia if you no longer become a member or employee of the scheme or where your spouse is not a recipient or your children who are 16 years and above of age are no longer beneficiary to the scheme. (Sandler, Tax Treaties and Controlled Foreign Company Le, 1998) Ignoring the capital gain or loss when you stop to be a resident In order to be deemed as a non- resident of the country as far as CGT is concerned, you need to dispose all non taxable assets at their market value and any capital gain or loss from disposal should be ignored because disposal of property will be considered as taxable Australian property as well as any changes in asset disposal when ceasing to be a resident to the next CGT occasion will be included in your assets when working for your capital gain or loss and it will be reflected when you are filing your tax returns. Q2).transfer pricing Transfer pricing in Australia is used to determine an incidence of underpayment of tax by international corporations. This is achieved by necessitating that the corporation to value the interrelated global transactions in accordance to what really autonomous corporation act devoid of undue influence as if that company could have done in the same circumstance. Where a company prices their product other than prescribed Australian transfer pricing, this would be deemed as international profit shifting, From the above scenario, a transfer pricing exists. This is because the head office is giving a license worth AUD 20 million and 10 million to its subsidiary. This amount is deemed to large and thus the head office might be trying to evade paying tax. An income earned at arms length is that precedes which has no connection with other related company’s returns for tax purposes. This should be given attention has it is a source of tax evasion by many multinational companies. (Roger Hamilton, 1998) Austech co receives loan from Vanco co, this act is covered under the property act section 136AD .Austech co made an international agreement with Vanco company since the contract is evident on the ground that Vanco a foreign company supplied the property under the contract to Austech co a resident company and that there exist no relationship with the business that is being carried on by a Vanco company in Australia through a permanent establishment of foreign company in Australia. Repayment of loan would amount to consideration and this amount surpasses the arm’s length threshold in respect to purchase consideration. Therefore, it is evident that Austech loan repayment is deemed the purchase consideration because the Consideration is the same to the arm’s length consideration. Section 136AD provides that some factors need to be ascertained by the commissioner of income tax before concluding on whether the repayment of loan would merely amount to part of purchase consideration. Some of these factors include whether the international agreement contract exists and whether such accord is of the delivery of property or purchase o the property under the agreement. And that there is no transaction or consideration at arms length as much a connection exist between the two corporations Earning at arm’s length would lead to tax allowable and thus it is considered relevant to clearly determine whether arms, length exist between the associates company where a corporation derives its income from another business in which it control its voting right. The income derived will not be treated as earning at arm’s length but merely income received in the ordinary course of business and thus it will be subject to tax. Some of the methodologies in determining the transfer pricing are A) The profit split method This approach uses the net margin method and thus the methodology is deemed vital as it can be used in solving complex transaction and connection of the company with others .therefore in using this approach as a tool for transfer pricing, a company should split the profit cost-effectively which estimates the profits segments that could have been predicted and revealed in a contract made at arm’s length. Based on contribution analysis profit split, the merged whole profit out of the controlled transaction made by all cooperation that is party to group structure are divided among the corporations on the basis of comparative value of the purpose that each company bear. This approach is deemed relevant as compared to cost plus method because it will not require the detailed analysis of degree of completion in which to apportion the relevant cost before getting the allocated net profit. (Sandler, Tax Treaties and Controlled Foreign Company Legislation:, 1998) B}.Residual breakdown In this approach of profit split as a form of transfer pricing, total profit made by the linked company is deemed. Each company is given relevant and adequate profits to offer it with fundamental proceeds relevant to the functions conceded by the respective company. Any profit or loss remaining after allocation of the proceeds will be divided suitably amongst the relevant associates. This allocation should be based on an investigation of how the outstanding proceeds would have been split between the 3rd parties while considering the bargaining influence and exclusive involvement of each associate Therefore, in using the profit split approach in determining the transfer price, it is deemed relevant to have full knowledge and understanding concerning the overall business of each associates and their profit as well. The manner in which profit is split should be based on the objective statistics reminiscent of autonomous sales, evident by relevant internal information (Roger Hamilton, 1998) B). the cost plus method This is a traditional approach in transfer pricing. This method is considered relevant where there is work in progress and the goods have been transferred to the next department. The department will ascertained all the relevant cost of production before the goods were transferred to the next division and add a certain degree of mark up on the product. Care should be taken when separating the cost because not all department or companies classifies cost in the same approach as other companies. Where Van Co is a subsidiary of Austech Ltd then a de facto relationship will exist because Austech ltd is a resident company and controls the voting right of Van co. which is a foreign subsidiary company. Some of the adjustment the commissioner of taxation would make include assessing the designated source of income and concluding on the exact source whether it is in contrary to the entity’s prescription. The commissioner will have the power to determine whether a transaction at arms length exist after assessing the designated source of income and thus will inflict the necessary tax consequence of transaction that is deemed at arm’s length. The commissioner will further the price of the same goods and service involving dissimilar party in an equivalent situation. For example, the in Vanco and Austech Company the commissioner will assess the lending interest rate existing at Vanuatu bank or any other bank situated in Vanuatu .if the commissioner will discover a lower interest lending rate, he will under section 136AD command the Austech company to apply the lower rates and thus the company will claim a deduction of the lower rate and hence the withholding tax rate will be at the lower rate prevailing in the market. (Sandler, Tax Treaties and Controlled Foreign Company Le, 1998) Where Vanco is a Branch of Austech limited, a transfer pricing will still exist because the company are inter-related and thus transaction of associates is deemed the transaction of the head office as much as a permanent establish of the branch as well as the an international contract is depicted as wee as a transaction at arms length will not exit because the two companies are related. Having satisfied all this element that constitute a transfer pricing, the relationship and operations between the Vanco and the Austech Company will comprehensibly depicts a transfer pricing. Q3).Thin capitalization This is depicted where the company’s capital structures comprise of too much debt in relation to equity and hence the companies operation will be financed majorly by debt. The net effect is that the company will be paying a lot of cash inform of repayment and interest abroad and hence remaining with little amount as profit and reducing amount to be paid as corporation tax. (Roger Hamilton, 1998) Austech co. will be entitled to thin capitalization up to a maximum of the safe harbor prescription of 3; 1 because cay co is a non lending institution or where the test of arms length is sufficient .this is always assessed by concluding on the entity financial support and activities to verify whether a theoretical sum which is deemed to be rationally predictable to be the company’s utmost obligation on financial support of Austech co Under the provisions of ITAA97 Div 820, two unique characteristics are depicted. That it’s relevant to the Australian operations of inbound and outbound shareholder as well as limiting the subtraction concerning the whole liability of the Australian practice of those stakeholders instead of overseas money owing only. Therefore to avoid this provision, Austech co. need to go for loan from locally financial institution as well as the purpose of the loan should be for the furtherance of business in Australia or to avoid this provision totally, the company need to apply the thin capitalization de minmis rule whereby all unit in spite of their character of trade operation either as independent or group ought to claim debt deduction of less than $250,000 per annum. If the de minmis rule is not upheld, then Austech co. would not qualify for exemption of thin capitalization and thus will be entitled to tax on the excess amount paid as debt and interest because it is deemed that the company is planning to evade paying the tax by understating the net retained earning in which tax is assessed. Withholding tax on interest paid by Austech co to Cay co is not a final tax and is entitled to further taxation, This due to the fact that interest paid by non financial institution is a non qualifying interest. (Preview ) Where dividend is derived from a foreign company, the dividend received will be subject to tax at 30% withholding tax and those dividends that are paid to subsidiary are exempted from withholding tax, this exemption will only be effective if these dividends are completely franked. Austech co will be entitled to dividend from En Zed co in which it is going to suffer a 30% withholding tax. Because Austech co has an obligation of paying Rupert Co which is the foreign parent company, tax on dividend paid is not a final tax and thus will be subject to a further taxation. This is because the income derived from dividend is not regarded as foreign source of income. The provision of 230AJ provides that, Where Rupert Co owns 10% or 3 %, Austech co will still be exempt from paying tax on such dividend because they are non-Portfolio dividend which is received from listed or unlisted states. Also the provision of 317 (ITAA36) holds that that dividend which are paid and has a voting right amounting to 10%, will be exempt from tax .this is only advantage to the Australian companies having subsidiaries operating in other states with their parent company controlling more than 10% of their voting right. (Holmes, 2007) Q4). Controlled foreign companies This provision is governed under CFC part XITAA 36. The act came into law because of foreign credit system. The Australian company’s accrue income derived in foreign nations and hence the government imposed tax on income received from the foreign companies in which they are controlled. Those non-resident companies deriving income in the countries and with no linked source in Australia will not be subject to taxation in the country but will be tax in that country in which it has a permanent establishment. But a foreign corporation which is a subsidiary of the local company and derives income in Australia, their income will be subject to tax through the resident companies in which they control the voting right. This rule is only applicable where the foreign entity derived some passive income in the country and the company must be having a permanent establishment in those countries in which Australia is not a trading partner. A corporation is a Controlled foreign company at that exact instance on condition that the business is a resident of listed or unlisted states among those who are Australian trading partners as far as section 317 and 320 and section 340 where it state that a company must be a foreign entity is upheld. these will lead to reduction of tax evasion inform of thin capitalisation by a resident foreign companies and consequently the relationship between Austech company a resident corporation and Vanco company a non resident corporation but has its operation and finance resident company in Australia need to be evidently ascertained to circumvent such consequences of tax evasion. Austech co owns 55% in Van co. And thus a de facto control is depicted in which Van co would be a controlled foreign company under CFC s340. Austech co owns 40% shares of En Zed co and thus this corporation is not a controlled foreign company because another corporation controls the voting right, also the CFC rule will not be relevant since En Zed co is resident of a listed state. (Cch, Australian Income Tax Legislation,, 2012) The capital gain of $ 22 million made by En Zed will be regarded as component proceeds of the Austech Company in which the Austech will aggregate its income altogether and taxed at the corporation tax rate. Where the shareholders are resident, dividends which are paid to them are recognized as income and thus it will not change the controlled foreign status of the company. Where En Zed is a foreign branch of Austech co, then this will stop being a controlled foreign company because the company will be a resident of a listed company. Capital gain made by En Zed Company will still constitute the income of Austech limited though. For a company to be treated as controlled foreign company’s pursuant to Controlled Foreign Company act 340, it must fall under the definition of a foreign company whether in a listed or unlisted country’s, it must have been controlled by another company (Australia, ‎Cch, 2011) Reference Australia, ‎Cch. (2011). In Australian Income Tax Legislation 2011: Income Tax (p. ppg 219). Campbell, E. D. In I. T.-T. TRANSACTIONS, 2008. Cch. (2011). In Australian Master Tax Guide 2011 (p. ppg 1169). Cch. (2012). In Australian Income Tax Legislation, (p. ppg 45). Holmes, K. (2007). In International Tax Policy and Double Tax Treaties: An (p. ppg 149). Preview . In Australian Master Financial Planning Guide (p. ppg 74). Roger Hamilton, ‎. L. (1998). In Understanding Australian International Taxation (p. ppg 159). Sandler, D. (1998). In Tax Treaties and Controlled Foreign Company Le (p. ppg 31). Sandler, D. (1998). In Tax Treaties and Controlled Foreign Company Legislation: (p. ppg 31). Sandler, D. (1998). In Tax Treaties and Controlled Foreign Company Legislation: (p. ppgg 36). White, J. R. (2010). In International Taxation: Study Countries That Exempt .. (p. ppg 36). Read More