The Australian Taxation Office (ATO) released guidance on 20 July 2022 (Taxpayer Alert TA 2022/2) that cautions taxpayers about using treaty shopping arrangements to obtain reduced withholding tax rates on dividends and royalties paid out of Australia and indicates that such arrangements will be subject to heightened scrutiny.
Treaty shopping usually involves the interposition of one or more related entities between an Australian resident and the ultimate recipient of the dividends or royalties. The interposed entity usually is a resident of a jurisdiction that has concluded a tax treaty with Australia but the ultimate recipient is generally located in a jurisdiction that either does not have a treaty with Australia or if it does, the treaty provides for less favourable treaty benefits.
The ATO tax alert contains two examples and the ATO notes the need for contemporaneous documentation and other objective evidence that support a taxpayer’s arrangements. Failure to produce such evidence could lead to an assumption that accessing reduced withholding tax rates under a treaty that the taxpayer was not otherwise entitled to was one of the principal or main reasons for structuring a transaction. Finally, ATO mentions tools at its disposal to counteract treaty shopping arrangements, i.e., the domestic general anti-avoidance rule and diverted profits tax, as well as the principal purpose and main purposes tests under Australia’s tax treaties.