Glossary The following abbreviations and acronyms are used throughout this explanatory memorandum. Abbreviation Definition APRA Australian Prudential Regulation Authority G20 Group of 20 — comprising Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union. ITAA 1936 Income Tax Assessment Act 1936 ITAA 1997 Income Tax Assessment Act 1997 MYEFO Mid-Year Economic and Fiscal Outlook OECD Organisation for Economic Cooperation and Development OECD Action 2 Report OECD report on Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report OECD Branch Mismatch Arrangements Report OECD report on Neutralising the Effects of Branch Mismatch Arrangements, Action 2: Inclusive Framework on BEPS PE Permanent establishment TOFA Taxation of financial arrangements
Further, to avoid doubt, an entity may be a liable entity in respect of its own, or another entity’s, income of profits in a country even if any of the following situations exist: there are no actual income of profits; there are income of profits, but no part of those income of profits is: for Australia — subject to Australian income tax; or for a foreign country — subject to foreign income tax in that foreign country; or the entity is not actually liable to pay an amount of Australian tax or foreign income tax. [Schedule 1, item 1, subsection 832335(4)] In this regard, in determining whether an entity is a liable entity in such a situation, it must be assumed that income or profits within the tax base of the country exist. [Schedule 1, item 1, subsection 832335(4)] Therefore, for the purposes of determining whether an entity is a liable entity in a particular country in respect of its own or another entity’s income or profits, it is necessary to consider who would pay tax on that income or profits, rather than on the actual circumstances of a particular entity in a particular income year. Consequently, if, for example, a test entity is an entity of a type that is normally subject to tax but has a tax loss for a particular income year (and therefore has no tax liability in that particular income year), the test entity will still be a liable entity. An entity is not a liable entity in respect of the income or profits of another entity (the test entity) merely because all or part of the income or profits of the test entity are: included under the controlled foreign company provisions (section 456 or 457 of the ITAA 1936) in the assessable income of the other entity; or included under a corresponding provision of a law of a foreign country in working out the tax base of that other entity (including a tax base of nil or a negative amount). [Schedule 1, item 1, subsection 832335(5)] Consequences that arise if a payment gives rise to a hybrid payer mismatch The hybrid payer mismatch rules apply to neutralise a hybrid payer mismatch of an entity if:
are members of the Global Co Division 832 control group. Global Co (which is a resident in Country A) is the ultimate parent entity. Country A imposes tax on foreign source interest payments at a rate greater than 10 per cent. Country B does not impose income tax on any foreign income derived by its residents. Regional Hold Co undertakes a holding company function for the Global Co group for the Asia-Pacific region and has conducted this function since its inception. This function includes holding shares and lending to a number of subsidiaries operating in the Asia-Pacific region, including Aus Co. Regional Hold Co was established prior to its acquisition of Aus Co, which was funded primarily via Regional Hold Co’s surplus cash reserves at the time. Regional Hold Co has employees in Country B who undertake substantial economic activities on behalf of the company and its Board can demonstrate that it undertakes the decision making functions expected of a regional holding company. In this regard, the provision of debt financing by Regional Hold Co to its subsidiaries is part of its ordinary functions as a regional holding company. Therefore, this would indicate that it would not be reasonable to conclude that the scheme, involving the establishment of Regional Hold Co and the funding of Aus Co, was designed to produce the outcomes identified in subsection 832-800(5). When the integrity rule will not apply — group financing function Group Finance Co conducts a function of providing finance (long term and short term) to Global Co group members. It has mixed sources of funding to support its onlending function, including: external debt funding; equity provided from Global Co; and interest bearing loans provided by various group members that have surplus funds. Group Finance Co has employees in Country C with the relevant expertise to carry out its borrowing and on lending functions and can demonstrate that funding used to lend to Aus Co was not effectively funded via a capital injection from Global Co. On balance, these facts regarding Group Finance Co’s source of funds and its ordinary business function would indicate that it would not be reasonable to conclude that the scheme was designed to produce the outcomes identified in subsection 832-800(5).