Further, to avoid doubt, an entity may be a liable entity in respect of its own, or another income of profits in a country even entity’s, if any of the following situations exist: there are no actual income of profits; there are income of profits, but no part of those income of profits is: for Australia subject to Australian income tax; or — for a foreign country subject to foreign income tax in — that foreign country; or the entity is not actually liable to pay an amount of Australian tax or foreign income tax. [Schedule 1, item 1, subsection 832335(4)] In this regard, in determining whether an entity is a liable entity in such a situation, it must be assumed that income or profits within the tax base of the country exist. [Schedule 1, item 1, subsection 832335(4)] Therefore, for the purposes of determining whether an entity is a liable entity in a particular country in respect of its own or another entity’s income or profits, it is necessary to consider who would pay tax on that income or profits, rather than on the actual circumstances of a particular entity in a particular income year. Consequently, if, for example, a test entity is an entity of a type that is normally subject to tax but has a tax loss for a particular income year (and therefore has no tax liability in that particular income year), the test entity will still be a liable entity. An entity is not a liable entity in respect of the income or profits of another entity (the test entity) merely because all or part of the income or profits of the test entity are: included under the controlled foreign company provisions (section 456 or 457 of the ITAA 1936) in the assessable income of the other entity; or included under a corresponding provision of a law of a foreign country in working out the tax base of that other entity (including a tax base of nil or a negative amount). [Schedule 1, item 1, subsection 832335(5)] Consequences that arise if a payment gives rise to a hybrid payer mismatch The hybrid payer mismatch rules apply to neutralise a hybrid payer mismatch of an entity if:
Further, to avoid doubt, an entity may be a liable entity in respect of its own, or another entity’s, income of profits in a country even if any of the following situations exist: there are no actual income of profits; there are income of profits, but no part of those income of profits is: for Australia — subject to Australian income tax; or for a foreign country — subject to foreign income tax in that foreign country; or the entity is not actually liable to pay an amount of Australian tax or foreign income tax. [Schedule 1, item 1, subsection 832335(4)] In this regard, in determining whether an entity is a liable entity in such a situation, it must be assumed that income or profits within the tax base of the country exist. [Schedule 1, item 1, subsection 832335(4)] Therefore, for the purposes of determining whether an entity is a liable entity in a particular country in respect of its own or another entity’s income or profits, it is necessary to consider who would pay tax on that income or profits, rather than on the actual circumstances of a particular entity in a particular income year. Consequently, if, for example, a test entity is an entity of a type that is normally subject to tax but has a tax loss for a particular income year (and therefore has no tax liability in that particular income year), the test entity will still be a liable entity. An entity is not a liable entity in respect of the income or profits of another entity (the test entity) merely because all or part of the income or profits of the test entity are: included under the controlled foreign company provisions (section 456 or 457 of the ITAA 1936) in the assessable income of the other entity; or included under a corresponding provision of a law of a foreign country in working out the tax base of that other entity (including a tax base of nil or a negative amount). [Schedule 1, item 1, subsection 832335(5)] Consequences that arise if a payment gives rise to a hybrid payer mismatch The hybrid payer mismatch rules apply to neutralise a hybrid payer mismatch of an entity if:
Explanatory-material-c2018-t268551.docx