In this update we discuss potential reforms related to international tax and provides an update on recent ATO developments.
The Australian Labor government is expected to expedite various reforms related to international tax in the coming months leading up to the mid-year budget planned for October 25 2022.
In addition to its strong endorsement and support of the OECD two pillar approach, including the 15% minimum tax on global profits, the new government is expected to prioritise further international tax measures including limiting debt related deductions on cross border debt, i.e. expanded thin capitalisation rules limiting deductions to 30% of profits being taxable earnings before interest, taxes, depreciation and amortisation (EBITDA).
We are expecting further clarification regarding how these reforms will impact on the arm’s-length debt amount test and the safe harbour test as part of the revision of Australia’s thin capitalisation rules intended to apply from July 1 2023.
Further reforms impacting treaty withholding tax concessions on payments to recognised tax havens for the use of intellectual property will be denied where tax avoidance is primary. In addition, an expanded tax transparency regime including mandatory reporting of certain tax haven structures will be introduced in the coming months.
The government has not, as yet, formally endorsed certain tax reform initiatives of the previous Australian government, most particularly the proposed patent box tax regime for medical, biotechnology, low emissions technology and the agricultural sector, which would be eligible for the concessional effective tax rate of 17%.
It is expected that these tax reform initiatives will be endorsed in the lead up to the mid-year budget planned for October 25 2022 noting that Parliament has recommenced sittings this week.
Treaty shopping tax alert
The ATO released Taxpayer Alert TA 2022/2 on July 20 2022 dealing with treaty shopping arrangements designed to secure reduced dividend or royalty withholding tax rates by the interposition of entities located in a jurisdiction which has a favourable double tax treaty with Australia.
The Tax Alert is very brief and explains the ATO concerns from a taxation perspective and raises the potential application of anti-avoidance rules under the relevant Treaty (including the principal purpose test or the main purpose test) as well as the general anti avoidance provision (Part IVA) and diverted profits tax.
Further, the ATO notes that it is currently reviewing certain international transactions of this nature and engaging with taxpayers and advisors appropriately.
The ATO also provides two separate examples of arrangements involving reduced dividend and royalty withholding taxes. It highlights several relevant characteristics of concern and also refers to the importance of contemporaneous documentation and other objective evidence supporting the commercial rationale (non-tax issues) for the structure, restructure or acquisition.
The purpose of releasing the Taxpayer Alert is to raise the awareness of perceived emerging tax risk arrangements or issues.
Large international tax settlement
On July 20 2022 a large tax settlement was announced between Rio Tinto, major global mining company, and the ATO amounting to approximately A$ 991 million ($692 million).
The major issue of dispute with the ATO was the use of Rio Tinto’s Singapore Marketing Hub for its mineral sales (mainly iron ore and aluminium) over several years from 2010 to 2021.
Although the particular settlement involves the use of a marketing hub in the minerals sector, the ATO has been actively pursuing centralised procurement, services, sales and marketing hubs and has issued earlier guidance on these tax risks and related issues. The Rio Tinto settlement follows another recent similar settlement/case with BHP.
ATO protocol on legal professional privilege
On June 22 2022 the ATO released a comprehensive legal professional privilege protocol on its recommended approach to responding to formal ATO notices requiring the production of documents under audit/reviews.
This follows an emerging perception that certain taxpayers have been inappropriately asserting or recklessly claiming legal professional privilege over certain documents, among other reasons, to hinder ATO investigations. The ATO has challenged many legal professional privilege claims and several have been contested in the courts in recent years.
The ATO recommends a three-step approach in advance of claiming privilege including properly assessing the eligibility of each communication and explaining the reasons for each legal professional privilege claim – with appropriate details.