Essay about International Tax

The application of the Income Tax Acts to the transactions in question is determined by the way the parties, involved in each transaction, relate to each other and their tax jurisdiction.
Metro Industries is the head entity and as a foreign resident for tax purposes (the issue of residency status cannot be raised from the information provided), subject to the Australian income tax as determined under s6-10(5). Metro-Traffic is a subsidiary of Metro Industries which makes it a related but separate legal entity, resident of Hong Kong which is a non-treaty country. Metro Industries’ Australian branch is a permanent establishment, as wholesaler has authority to enter negotiations and conclude contracts as well as other functions that fit the definition of term, ITAA 1936 6(1) and Article 5 of the Indian Agreement. It is not considered a separate legal entity but only part or extension of the head entity. The fourth entity is AusMetro, a wholly owned subsidiary, incorporated in Australia and, therefore, a resident entity for tax purposes. AusMetro is a separate legal entity related to Metro Industries
Tax implications for the year ended 30 June 2003
The supply of materials and templates made to the Metro-Traffic does not mention whether there was any consideration paid to Metro Industries, but any issues raised by this transaction would attract any direct application of the Australia Income Tax Acts. The payment of the 10% royalty is, also, out of Australia’s tax jurisdiction, due to the residency status of both parties and sourced from Australian.
The sale of manufactured clothing from Metro-Traffic to the Australian branch may cause the Commissioner’s discretion to be exercised, due to the high mark-up applied on the supply of trading stock to a related entity. A transaction that may have the character of profit shifting, to a jurisdiction with lower tax rate. The Commissioner’s discretion will have to be exercised and a determination of the arm’s length price will be made, which will be taken to be the transaction price for income tax purposes. The application of Div. 13 requires the Commissioner to be satisfied that the supply of property was made under an international agreement, s136AD(1). Although, 136AC(1)(a) provides limitation for permanent establishments of non-resident entities, the transaction qualifies the international agreement requirement, as result of the items were acquired by the Australian branch from MetroTraffic (to which the Australian branch is not a Permanent Establishment). The Commissioner must be satisfied that the parties involved were not dealing at arm’s length with each other, s136AD(1)(b),(2)(b)(3)(b) (with the association of the parties not being a parameter in deciding the character the transaction subject of the agreement or a tax avoidance purpose requirement). Given that all the above conditions have been satisfied the Commissioner may determine the application of Div. 13 and supply the arm’s length prices deemed to apply to the transaction s136AD(1)(d),(2)(d)(3)(d). Further, s136AD(4) allows the Commissioner to determine the amount where it is not possible or practicable for the arm’s length price to be ascertained.
The legislation does not provide any methodology in ascertaining the amount of the arm's length price. However, in chapter 3 of TR1997/20, the Commissioner provides the methods considered appropriate in determining the arm's length price. The Commissioner will have to give priority to Traditional methodologies (CUP, cost plus method or resale price method), and only if those methods cannot produce a reliably comparable arm’s length price, considering the Profit methods (profit comparison, profit split or transactional net margin method). Taking into account that MetroTraffic is not exposed to any market risk, all the manufactured clothing is sold to Metro Industries’ Australian branch, materials and templates were provided and the functions performed are limited to

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