Income tax: foreign income tax offset: Brazilian tax paid on employment income by Vale S.A. employees

This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates.

The relevant provision dealt with in this Ruling is section 770-10 of the Income Tax Assessment Act 1997 (ITAA 1997). All subsequent legislative references in this Ruling are to the ITAA 1997 unless otherwise stated.

The class of entities to which this Ruling applies are persons employed by Vale S.A. in Brazil who are subsequently sent to Australia on assignment and continue to receive income from Vale S.A. on which Brazilian tax is paid.

The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling.

The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 8 to 11 of this Ruling.

If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: • this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and • this Ruling may be withdrawn or modified.

This Ruling applies from 1 July 2011. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

The following description of the scheme is based on a number of documents provided to the Commissioner. These documents or relevant parts of them, as the case may be, form part of and are to be read with this description. The documents include: • the application for class ruling dated 12 April 2013; and • communications with representatives of the applicant dated 21 May 2013, 22 July 2013, 21 August 2013 and 16 October 2013. Note : certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation.

Vale S.A. is a large Brazilian company which has operations in Australia carried on by its Australian subsidiary.

At times persons employed by Vale S.A. in Brazil are seconded to Australia on assignment. These situations fall into two categories: • Short term assignments of less than six months where the employees remain on the payroll of Vale S.A. for the purposes of administrative expediency, that is, Vale S.A. continue to pay the salary and wages of these employees. • Longer term assignments (generally up to two years) where the employees are transferred onto the payroll of Vale S.A.'s Australian subsidiary. These employees are paid their ordinary salary and wages by the Australian subsidiary but are also paid residual benefits by Vale S.A. under long term incentive plans.

Income tax is withheld in Brazil on the income paid by Vale S.A. to its employees on assignment in Australia. Brazilian income tax is not imposed on income paid by Vale S.A.'s Australian subsidiary.

Persons employed by Vale S.A. in Brazil who are subsequently sent to Australia on assignment will be entitled to a tax offset for the income year under subsection 770-10(1) for Brazilian tax paid on income they receive from Vale S.A. which is included in their assessable income in Australia for that income year.

Under Brazilian tax law, income paid from an entity located in Brazil is considered Brazilian sourced income and is subject to tax levied at the source. [1] This is the case irrespective of where the recipient resides or in the case of employment income, where the employment is carried out.

Vale S.A. is required under Brazilian tax law to withhold income tax in Brazil from income that it pays to employees on assignment in Australia.

Under Australian tax law, the source of income earned from employment will usually be considered to be where the employment is carried out. [2] Therefore, income from employment in Australia is generally considered to be sourced in Australia. Australian sourced employment income is included in the assessable income of an employee irrespective of whether they are a resident or non-resident of Australia for tax purposes. [3]

Income paid by Vale S.A. to employees in relation to their employment in Australia must be included in the assessable income of the employees.

In order to be entitled to a tax offset for foreign income tax under subsection 770-10(1), the employee must have paid an amount of foreign income tax in respect of an amount included in their assessable income.

Under subsection 770-10(1), it is not a requirement for entitlement to a foreign income tax offset that the income have a foreign source, only that foreign income tax is paid on it and that it is included in the taxpayer's assessable income in Australia. This is confirmed in paragraph 1.39 of the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 4) Bill 2007.

Subsection 770-15(1) defines 'foreign income tax' and includes tax that is imposed by a law other than an Australian law and is a tax on income.

The Brazilian income tax withheld by Vale S.A. on income it pays to employees on assignment in Australia is levied by a law other than an Australian law and is a tax on income. Accordingly, this tax is 'foreign income tax' as defined.

Where the foreign jurisdiction has a tax treaty with Australia, the foreign income tax includes only the tax that has been correctly imposed in accordance with that tax treaty. [4] As Australia has not entered into a tax treaty with Brazil, this limitation is not applicable.

Therefore, the conditions in subsection 770-15(1) have been satisfied.

Under section 770-130, in certain circumstances a person is considered to have paid foreign income tax when it has been paid by someone else, for example, if the foreign income tax has been withheld from the income at its source.

Therefore, the Brazilian tax withheld by Vale S.A. from income paid to an employee in relation to their employment in Australia is considered to be foreign income tax that the employee has paid.

Subsection 770-10(3) provides that foreign income tax does not count toward the tax offset for the year if that tax is paid: (a) to a foreign country because the taxpayer is a resident of that country for tax purposes; and (b) in respect of amounts sourced outside that country.

As discussed in paragraphs 15 and 16 of this Ruling, from an Australian tax law perspective, the income paid by Vale S.A. to an employee in relation to their employment in Australia is considered to be sourced in Australia. Therefore, the paragraph 770-10(3)(b) requirement for the exception is met as from an Australian tax law perspective, the Brazilian tax on this income is paid in respect of amounts sourced outside of Brazil.

However, the Brazilian tax is payable regardless of whether the employee is a resident of Brazil for tax purposes or not. Therefore, the tax is paid not because the employee is a resident of Brazil. Accordingly, the paragraph 770-10(3)(a) requirement for the exception is not met.

As only one of the two requirements for the exception provided by subsection 770-10(3) is met, the exception does not apply in this case.

Accordingly, the tax paid in Brazil on the income received from Vale S.A. which is included in the assessable income of the employee in Australia for the income year will count towards the foreign income tax offset for the purposes of subsection 770-10(1).

The amount of the foreign income tax that counts towards the foreign income tax offset is subject to the foreign income tax offset limit. [5]

Where the employee is claiming a foreign income tax offset of more than $1,000, he or she must calculate their foreign income tax offset limit. [6] If the amount of the foreign income tax offset exceeds the limit, then the tax offset must be reduced by the amount of the excess to the amount of the limit. [7] Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to the employee.

If an employee becomes entitled at any time to a refund of any amount of the tax paid in Brazil, the amount of any such refund is taken under section 770-140 not to be an amount of foreign income tax paid. Accordingly, the amount of any foreign income tax offset to which an employee is entitled is reduced. In such instances, the participant should request an amendment to ensure their assessment reflects the correct amount of foreign income tax offset.

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Relevant provision(s) 2 Class of entities 3 Qualifications 4 Date of effect 7 Scheme 8 Ruling 12 Appendix 1 - Explanation 13 Taxing of income paid by Vale S.A. 13 Entitlement to foreign income tax offset 17 Exception for certain residence based income taxes 25 Foreign income tax offset limit 30 Refund of tax paid in Brazil 32 Appendix 2 - Detailed contents list 33