New ATO Guidance on ‘Direct Connection Test’ Under MAAL

New ATO Guidance on ‘Direct Connection Test’ Under MAAL

The Australian Taxation Office (ATO) on July 4 issued Tax Determination (TD) TD 2018/12, which provides guidance on the application of “direct connection test” under the Multinational Anti-Avoidance Law (MAAL).

TD 2018/12 explains the ATO’s view on the meaning of the expression “directly in connection with” in subparagraph 177DA(1)(a)(ii) of the Income Tax Assessment Act, 1936

The purpose of section 177DA is to ensure that foreign multinational enterprises (MNEs) cannot avoid the attribution of business profits to Australia, by avoiding a taxable presence in Australia. Under this section, a scheme that limits a taxable presence in Australia requires, among others, that activities are undertaken in Australia “directly in connection with” the supply.

The guidance notes that the phrase “directly in connection with the supply” is not to be read down as meaning “directly in connection with the supply contract,” or “directly causing the supply to be made.” There can be a direct connection between activities undertaken for an ongoing supply notwithstanding the contract has already been concluded,” it notes.

“Where the activities are part of an end-to-end process ultimately resulting in the foreign entity making that supply to an Australian customer, the activities will be directly connected with that supply,” the guidance adds.

TD 2018/12 includes practical examples to assist taxpayers to self-assess whether their activities satisfy the direct connection test under the MAAL.

TD 2018/12 will apply from January 1, 2016 – the commencement date for the MAAL.