The Labor Government has followed through on its election commitment of a multinational tax integrity package to target the tax loopholes used by multinational enterprises (MNEs) and to improve tax transparency, with the release of Treasury’s Discussion Paper on 5 August 2022.
Tax integrity has become an increasingly prominent issue due to the implementation of sophisticated tax planning mechanisms used by MNEs, typically by taking advantage of discrepancies between jurisdictions’ tax systems to minimise tax paid. This has prompted the following three targeted proposals for consultation:
- Thin Capitalisation: adapting the existing thin capitalisation rules to align with the OECD’s recommendation under Action 4 of the Base Erosion and Profit Shifting (BEPS) program, by replacing the current safe harbour debt test with a fixed ratio rule limiting net interest deductions to 30% of EBITDA. The policy intent of being based on earnings is to ensure that interest deductions are directly linked to economic activity and taxable income. This is compared to the current assets-based test which has the potential to be utilised in tax planning strategies to shift profits out of Australia. However for now, financial entities and authorised deposit-taking institutions will be able to continue to rely on the existing rules.
- Deductions for intangibles and royalties: introduction of a specific integrity rule limiting intangible and royalty deductions paid to low or no-tax jurisdictions, or those that lead to insufficient tax being paid outside of Australia. The Paper introduces several potential scenarios to identify low or no-tax jurisdictions, including taking concepts from the hybrid mismatch targeted integrity rule, the Global Anti-Base Erosion Rules minimum tax rate, the sufficient foreign tax test, identifying intellectual property tax-preferential regimes, and developing low or nominal tax jurisdiction lists.
- Enhanced Tax Transparency: ensuring enhanced tax transparency through public reporting of certain tax information on a country-by-country basis, mandatory reporting of material tax risks to shareholders, and requiring those tendering for Australian government contracts to disclose their country of tax domicile.
Although a commencement date for each of these proposals was not indicated in the Discussion Paper, this may be as early as 1 July 2023. Affected taxpayers now have the opportunity to consider the practical implications of the proposed measures and provide Treasury with feedback until 2 September 2022. These measures may be formally announced as part of the Government’s October 2022 Federal Budget.
If you wish to discuss this Paper further, please contact us.