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Tax Tip | TA 2022/2: Treaty Shopping arrangements to obtain reduced withholding tax rates
TA

By Natasha Wilson

Although not commonplace in the SME market, following the recent ATO settlement with Rio Tinto regarding the use of an offshore marketing hub, taxpayers are on notice that the ATO are on the lookout for taxpayers that “treaty shop”.

The withholding tax (WHT) rate on dividend or royalty payments from Australia to foreign residents, is set at 30%, unless, the recipient is resident of a country which has a tax treaty / double tax agreement (DTA) with Australia, and that DTA specifies a lower rate.

The ATO has released a taxpayer alert (TA) advising that they are reviewing arrangements designed to obtain reduced WHT rates under DTA’s in relation to royalty or dividend payments from Australia. This benefit is typically sought by interposing a related entity between an Australian resident and the ultimate recipient of the royalty or dividend. The ATO has advised that they may make further enquiries where the following features exist:

  • The interposed entity is resident of a country which has a DTA with Australia which imposes a favourable WHT rate; and,
  • The ultimate recipient is located in a country that does not have a DTA with Australia, or the DTA provides a higher WHT rate;

and:

  • Structures & restructures involving interposition of existing or new entities between Australia and the ultimate recipient of royalties or dividends; or,
  • The interposed entity has significant operations and employees and the taxpayer contends that commercial benefits flow to the Australian operations or interposed entity (with a lack of objective evidence to support such contentions).

Where clients have legitimate structures in place which may involve any of the above features, it is important that appropriate evidence and documentation is in place to support the reasons for such structures/arrangements.

Further questions? Please reach out to either myself or Kim.

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