The residence of corporate entities has not been an especially contentious part of Australian tax law. If the entity was classified as a non-resident, Australia taxed only its Australian-sourced income; if the entity was classified as a resident, in effect Australia still only taxed the Australian-sourced income either because the foreign income was made exempt, or a tax offset would eliminate most of any residual Australian tax; the imposition of world-wide taxation on residents was often more apparent than real. Moreover, some issues where dual residence might have been problematic (eg, membership of a consolidated group in two countries) were recognised and specifically addressed, and when relief for foreign taxes was extended to non-residents in 2007, there was one less reason to worry about whether the entity was resident or not. That is not to say residence was never important, but it was an area where the boundaries were well-known and rarely controversial, in part because of sensible ATO guidance in TR 2004/15.
But two recent developments have given corporate tax residence new importance. First, in 2016, the High Court delivered its judgment in the Bywater case, treating a foreign-incorporated company as a resident, making its share trading activities liable to Australian tax. While the facts of the case were striking, the ATO has taken an ambitious view of the impact of the decision on innocuous situations. Secondly, in 2017, Australia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Article 4 of the MLI affects covered tax agreements by removing the automatic resolution of dual residence conflicts involving companies, and substituting a rule requiring, 'the competent authorities [to] endeavour to determine' a single place of residence 'by mutual agreement ...' and if they can't agree, denying to the company 'any relief or exemption from tax provided by the Covered Tax Agreement ...'
The ATO responded to these two developments but their actions have not really remedied the problems: the ATO's two new guidance documents on when foreign incorporated companies will be viewed as Australian residents based on carrying on business and having central management and control in Australia (TR 2018/5 and PCG 2018/9) have proved controversial and impractical, particularly in light of modern day corporate board practices where one or more Australian resident directors on the board of a foreign company may participate in board meetings or decision-making from Australia.
The ATO has also announced an 'administrative approach' to avoiding the need to launch competent authority proceedings for companies that are also resident in New Zealand, but surrounded it with conditions that are many and strict.
Given the way Bywater and the MLI have unsettled the corporate 'residence' landscape, it was probably not surprising to learn in the last update from the Board of Taxation that the Treasurer has asked the Board, 'to review the operation of Australia's corporate tax residency rules' and report to the Government on options by the end of the year. The Board has said it will issue a consultation paper shortly.
This is a promising development but the tax community has reason to remain cautious. The Board's 2018 project on reforming the residency rules for individuals was less than successful; it since appears to have disappeared without trace. Hopefully, the Board can deliver more coherent, straightforward and workable proposals this time.
In any case, it remains prudent for companies and corporate groups to review their tax residency position in light of Bywater and other recent developments, and consider in particular whether board meeting and decision-making protocols need to change.