Treaty shopping

Anthony Patrk
09/09/2022

What’s happening with treaty shopping?

The Australian Taxation Office (ATO) is currently reviewing treaty shopping arrangements in relation to royalty or unfranked dividend payments made from Australia to a foreign country. Broadly, treaty shopping refers to a contrived arrangement designed to obtain a reduced rate of withholding tax (WHT) under a double-tax agreement.

This typically involves the interposition of one or more related entities, being tax resident(s) of treaty countries, between an Australian resident taxpayer and an ultimate recipient.

The ultimate recipient will either be a tax resident of:

  • a non-treaty country; or

  • a treaty country which provides a less favourable WHT rate than the interposed entity.

Treaty shopping

What does this mean for you?

Where features of treaty shopping arrangements are present, taxpayers under ATO review should expect increased scrutiny from the ATO, with further questions and detailed enquiries likely. Transactions requiring early engagement with the ATO or Foreign Investment Review Board (FIRB) approval are expected to be reviewed by the relevant authorities with regard to treaty shopping arrangements.

Treaty shopping arrangements entered into for the main purpose of obtaining a treaty benefit would attract the operation of the double tax agreement anti-avoidance rules. Where applied, the Australian payer will be denied the reduced WHT rate and instead, the Australian domestic rate will be imposed.

The anti-avoidance rules in the Australian domestic law (e.g. Part IVA) may also be applied where appropriate.

Examples of transactions that would attract the ATO’s attention include:

  • Structures and restructures where an existing or newly incorporated entity was interposed between Australia and the ultimate recipient of royalties or unfranked dividends;

  • Situations where the interposed entity may have significant existing operations and employees and commercial benefits and / or synergies flow to the Australian operations or the interposed entity;

  • Situations where royalty or unfranked dividend payments to the interposed entity would be subject to reduced withholding taxes under the relevant treaty as opposed to:

    • the higher rate of Australian domestic law (for non-treaty countries); or

    • another treaty between Australia and the country of residence of the ultimate recipient.

Arrangements which facilitate genuine investment into Australia which delivers commercial benefits should not trigger the anti-avoidance provisions. However, we note contemporaneous documentation and other objective evidence will be required to substantiate any such claims.

How can Crowe help you?

You can speak to the Crowe Tax Advisory team if you have an arrangement of the type mentioned above, or are contemplating entering into any of the arrangements mentioned above.

Our team can assist you to:

  • Review the arrangement, including whether you have all the contemporaneous evidence required; and

  • Manage ATO engagement.

Contact us today