With tax being the Government’s greatest revenue generator, it is not unusual for the ATO to put through reforms as part of its Federal Budget and recently multinationals seem to be in the spotlight.
If you operate a multinational business, here’s what you need to know:
How do we know the ATO is going through with tax reforms for multinational businesses?
In the most recent Federal Budget, the Government announced a further $1b spend over the next four years to the ATO Tax Avoidance Taskforce, which will largely target multinational enterprises and large businesses. With these changes in place, the Government is expecting to make a 3:1 return on its investment.
How will revenue be generated?
The ATO has several mechanisms to target multinational taxpayers, both under existing and proposed law:
Existing mechanisms
1. Hybrid mismatch (“HMM”) rules – the sleeping giant
Over the last few years, the ATO have been concessionary to taxpayers who are in the process of adopting the complicated and often ambiguous HMM rules. However, this honeymoon period seems to be nearing its end. These rules target the mismatch in tax treatment of payments between multiple jurisdictions, primarily focusing on payments that give rise to a tax deduction in two jurisdictions, or a deduction in one jurisdiction (payer) and the non-accessibility in the other jurisdiction (recipient).
Through both recent ATO guidance and dealings with the ATO in their taxpayer reviews, it’s clear their expectations in terms of the taxpayer analysis of these measures (which need to be applied on a global basis), and the associated substantiation of the positions adopted, have significantly increased.
2. Transfer pricing – an oldie but a goodie
The ATO is continuously trying to ensure they are receiving part share of a multinational’s profits, which includes a strong focus on intergroup transaction pricing. It’s critical transfer pricing is not only adhered to but substantiated thoroughly.
3. Tax residency of foreign incorporated companies – the confusing one
The ATO controversially determined a foreign incorporated company may be a tax resident of Australia (providing it with more taxation rights on the company’s income), where its central management and control are based here, even when its underlying operations are based in the foreign jurisdiction of incorporation. For example, think about a company based in Africa, with an African mine, who are owned and strategically managed by an Australian company.
This position was criticised by industry and tax professionals, resulting in the implementation of transition rules allowing the Treasury to update the wording so common sense would prevail. However, the re-drafting of the law has taken longer than expected and the transitional period is soon to expire. Watch this space…
Future mechanisms
1. Federal Budget Announcements
As part of the recent Federal Budget, there was newly proposed legislation that multinational taxpayers need to consider:
• Upturning the thin capitalisation rules, altering the metric of measuring allowable interest deductions from a balance sheet focussed test to a profit and loss (EBITDA) based test;
• The denial of tax deductions for payments made by Significant Global Entities (entities with global revenue of at least $1b) to respective parties in relation to intangibles held in low- or no tax jurisdictions; and
• Increased tax transparency requirements for companies with overseas operations. Greater tax-related information accessibility to the media and public without context should give rise to potentially interesting outcomes.
Fundamental framework changes
In addition, the OECD made recent fundamental global tax recommendations for multinationals. Australia, along with more than 130 countries, has committed to implementing these – either broadly or specifically. These recommendations aim to ensure multinationals pay the appropriate amount of tax in the jurisdictions in which they operate (BEPS Two Pillar framework). It should be noted these measures will initially target large groups only.
The key recommendations are:
- The reallocation of taxing rights to jurisdictions where the goods and services are being consumed, as opposed to where the value of the produced was added; and
- Implementation of a global minimum tax rate of 15 per cent.
These rules are yet to be drafted but are anticipated to be implemented in 2024.
What can multinational businesses do?
It’s of paramount importance that multinational businesses are aware of the complicated and ever-increasing international tax measures as unawareness is not a deference for the ATO.
Further, substantiation of positions taken and the process of getting to that position is as important as ever – maybe even more so now. Therefore, it’s critical that taxpayers, with the assistance of their tax service providers, do this in a diligent manner.
How we can help
Should any of the above concern you, or you wanted to discuss the nuance of a particular matter, please contact your Grant Thornton adviser.
