Latest news from international tax and transfer pricing 

New multinational laws now enacted 

Australia’s hybrid mismatch rules have now been enacted (the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018). With the new law having effect for income years commencing on or after 1 January 2019, we recommend that all Australian taxpayers with crossborder transactions consider the potential impact of the hybrid mismatch rules sooner rather than later. Refer to our TaxTalk Insights for further information about the new rules.

In addition, Australia has given the force of law to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting following the enactment of Treasury Laws Amendment (OECD Multilateral Instrument) Act 2018. This now clears the way for the Multilateral Instrument to take effect in Australia from as early as 1 January 2019 (for example, in relation to withholding taxes under the New Zealand and United Kingdom), subject to its ratification by Australia’s treaty partners that have also chosen to adopt the Multilateral Instrument. 

Draft law on thin capitalisation Budget measures 

Treasury has released for comment draft legislation that proposes to implement several changes to Australia’s thin capitalisation rules that were announced by the Government in the 2018-19 Australian Federal Budget. The changes: 

  • require entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements, and 
  • ensure that foreign controlled Australian consolidated entities and multiple entry consolidated groups that have foreign operations are treated as both outward and inward investing entities. 

These changes are proposed to apply from income years commencing on or after 1 July 2019. 

Comments were due on the draft legislation by 17 August 2018. See also the Government’s media release. 

ATO draft determinations addressing application of thin capitalisation rules 

The Australian Taxation Office (ATO) has issued the following draft tax determinations which address certain aspects of the application of the thin capitalisation rules: 

  • Draft taxation determination TD 2018/D4 sets out how an entity must value its ‘debt capital’ for the purposes of Division 820 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). According to the draft determination, an entity’s debt capital must be valued in its entirety in the manner required by the accounting standards. 
  • Draft taxation determination TD 2018/D5 identifies the type of costs which are debt deduct raising finance through debt capital, incurred directly in relation to the debt capital, and all deductible costs directly incurred in maintaining the financial benefit received in association with the debt capital, are debt deductions.

Refer to this TaxTalk Alert dated 1 August 2018 for further detail about these draft determinations. Comments on both draft tax determinations were due on 31 August 2018. 

Update to cross-border financing PCG to deal with derivatives 

The ATO has updated Practical Compliance Guideline PCG 2017/4 which outlines its compliance approach to tax issues associated with cross-border related party financing arrangements and related transactions. The updated PCG now includes draft Schedule 2 which sets out specific risk indicators for  related party derivative arrangements that are used to hedge or manage the economic exposure of a company or group of companies. Comments were due on 31 August 2018. Refer to this TaxTalk Alert dated 1 August 2018 for further detail. 

Updated PCG on simplified transfer pricing record keeping options 

The ATO has published an update to Practical Compliance Guideline PCG 2017/2 which sets out simplified transfer pricing record keeping options that reflect the types of transactions or activities the ATO believe are low-risk in the context of international related party dealings. This update provides that the minimum interest rate for the 2019 income year that is applicable in working out eligibility for the transfer pricing record keeping options for a small related party outbound loan (ie combined cross-border loan balance of AUD50 million or less for the Australian economic group) is 3.7 per cent. 

US tax reform developments 

To keep up to date with the latest developments, news and implications of tax reform in the United States (US), visit PwC’s dedicated website. Updated regularly, to provide response to developments as they occur, it brings together insights from business specialists across the globe for US inbound and outbound organisations navigating change. Some recent updates to note include: 

  • Tax reform readiness – Implications for US tax treaties 
  • Tax reform offers accounting method planning opportunities 
  • Tax reform readiness – BEAT mechanics and selected issues 
  • Tax reform readiness – State and local tax compliance considerations 
  • IRS issues lengthy proposed rules on ‘toll tax’ under amended Section 965 
  • House Ways and Means Chairman Brady releases Tax Reform 2.0 outline 
  • Tax reform readiness – Using partnerships in deal structures after tax reform 
  • Preliminary highlights of the proposed ‘toll tax’ regulations under amended Section 965 

OECD and BEPS developments 

In the communique from the G20 Finance Ministers and Central Bank Governors Meeting held on 21-22 July 2018 in Buenos Aires, Argentina, G20 Finance Ministers reaffirmed the importance of the worldwide implementation of the base erosion and profit shifting (BEPS) package and committed to working together to seek a consensus-based solution to address the impacts of the digitalisation of the economy on the international tax system by 2020, with an update in 2019. The Ministers also called on all jurisdictions to sign and ratify the multilateral Convention on Mutual Administrative Assistance in Tax Matters.  The Organisation for Economic Cooperation and Development (OECD) is seeking input for the Stage 1 peer reviews of Argentina, Chile, Colombia, Croatia, India, Latvia,  Lithuania and South Africa on specific issues relating to access to the Mutual Agreement Procedure (MAP), clarity and availability of MAP guidance and the timely implementation of MAP agreements for each of these jurisdictions. Comments were due on 24 August 2018. 

In other developments:

  • Antigua and Barbuda have signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
  • Ukraine has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. 

Hong Kong enacts new BEPS and transfer pricing law 

Hong Kong has commenced to deliver on the OECD BEPS initiatives with the enactment of a new BEPS and transfer pricing Ordinance which introduces a transfer pricing regulatory regime and documentation requirement into Hong Kong tax law. The Ordinance implements certain minimum standards (Actions 5, 13, and 14) under the OECD’s BEPS Action Plan. For further information, refer to PwC’s Global Tax Insights. 

Germany extends non-resident capital gains tax to shares in foreign real estate-rich corporations 

Recently published German draft legislation seeks to extend the German non-resident taxation rules on capital gains from the disposal of shares in a German corporation to gains from the disposal of shares in a foreign corporation that is deemed to be ‘real estate-rich. For further information, refer to PwC’s Global Tax Insights.