Following the new Australian Government’s international tax policy commitments announced prior to the May 2022 Election, Australian Treasury released on Friday, 5 August a Consultation Paper on its proposed Multinational Tax Integrity and Transparency measures.
These proposed measures are extensive and will likely have a significant impact on many multinational groups and entities (MNEs), impacting both inbound and outbound investment and a broad range of industry sectors.
Broadly, the consultation paper seeks public consultation on the three core tax measures proposed below:
- Strengthening the Interest Limitation Rules to limit debt deductions for multinationals in line with the OECD’s recommended approach under Action 4 of the Base Erosion and Profit Shifting (BEPS) program.
- Introducing a new rule limiting the deductibility of payments relating to intangibles and royalties resulting in insufficient tax being paid.
- Enhancing disclosure of tax related information including broader public disclosure of multinationals’ tax arrangements.
This paper does not cover the implementation of the OECD’s Pillar One and Two solutions, which will be the subject of another consultation paper. Proposed tax measures 1. Interest limitation rules
Broadly, the Government is proposing to amend the thin capitalisation rules and thus replace the current safe harbour amount (currently set at 60% of the average value of the entity’s Australian assets), with a proposed new debt related deduction limitation based on 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA). This approach is aligned with the OECD’s recommended approach to utilise a fixed ratio rule based on earnings. The policy intent of such a rule is to align an entity’s interest deductions to its economic activity and taxable income, which is meant to safeguard against certain tax planning practices.
The Consultation Paper also considers the possibility of entities increasingly turning to the Arm’s-length Debt Amount Test to justify a higher quantum of debt, as a result of the introduction of the new EBITDA test. To avoid the undermining of the policy intent behind these proposed measures, the Government is considering whether broader modifications to the Arm’s-length Debt Amount Test are also needed. ‘Financial entities’ and ‘authorised deposit-taking institutions’ will continue to apply the current thin capitalisation rules, at least in the short-term.
2. Limiting deductions for payments relating to intangibles and royalties paid to low or no tax jurisdictions
The Government is increasingly wary of MNEs which seek to secure certain tax advantages by entering into arrangements involving intangibles to shift profits from higher tax jurisdictions (such as Australia) to low or no tax jurisdictions. The Government’s concern is that through these arrangements, taxpayers may seek to reduce Australian tax by reducing/avoiding royalty withholding taxes, claiming increased tax deductions, and/or reducing income recognised in Australia.
Whilst the ATO has several weapons in its arsenal to target these arrangements (eg. transfer pricing, diverted profits tax and general anti-avoidance rules amongst others), the Government intends to introduce a specific integrity measure which would limit the quantum of deductions for payments relating to intangibles and royalties that lead to “insufficient tax” being paid. The Consultation Paper explores the concept of “insufficient tax” in some detail.
This proposal is potentially far broader than as previously foreshadowed and could for example, impact on ‘embedded royalties’ in the consideration paid for tangible goods or services; for example, management fees. The new rule could also potentially impact on broader issues including royalty withholding taxes.
The concept of “low or no tax jurisdiction” is one that Treasury has asked for comment on, pointing out that Patent Box regimes are potentially “within scope”.
3. Multinational tax transparency
The Consultation Paper seeks consultation on various measures aimed at enhancing tax transparency by MNEs, such as:
- Public reporting of certain tax information on a country-by-country (CbC) basis; - Mandatory reporting of material tax risks to shareholders; and - Requiring tenderers for Australian government contracts to disclose their country of tax domicile.
In relation to CbC reporting, disclosures made under the current regime are subject to strict confidentiality. However, the EU has recently moved to mandate public CbC reporting, and it remains to be seen how the Government intends to address the tensions between confidentiality requirements and the desire to publicise this information. Further, the Government announced that it will require companies to disclose to shareholders, and to the share market, certain ‘material tax risks’. These tax risks may include references to the proposed global minimum tax rate of 15% being progressed through the OECD Pillar Two solution and self-assessment by the entity as a “high-risk” taxpayer in line with certain ATO practical compliance guidelines. We note that the paper does not consider the broader impact of these disclosure requirements from a corporate governance/reporting perspective, and thus it is currently unclear what approach would be adopted or preferred by corporate regulators such as ASIC. Implications and Next Steps
While these proposed international tax measures are focused on multinational tax integrity and transparency, they will likely have a broader (non-tax) impact on multinationals and the Government/Treasury is seeking comments and submissions on tax policy and implementation aspects of the proposed measures by 2 September, 2022.
Importantly, the proposed multinational tax measures are based on committed tax policy prior to and following the election. Further, the principles outlined in the Consultation Paper only provide a guide as to how these tax principles and broader tax policy may operate. Accordingly, there is an opportunity currently to influence the debate on the proposed multinational tax measures.
Many of these tax measures are consistent with or emanate from similar initiatives on tax policy reforms across the OECD, EU, UK and the US. The important and immediate opportunity is to respond to the consultation paper by 2 September 2022, which we expect interested parties to use. It is likely that certain representations might focus on whether the proposals are inconsistent with the multilateral policy intent of the OECD model agreement and commentary, and the Pillar One and Two initiatives already under development. They may also address the purported “similarity” of the foreign measures referred to by Treasury.
In deciding whether to make representations it is useful to consider whether (at a high level) any of the proposed measures will impact a taxpayer’s group or operations. For instance, disallowance of payments relating to intangibles may have the effect of increasing the effective tax rate on profits in Australia, with consequential challenges in accessing foreign tax credits at a parent level. This can be modelled, and might be compared with a conscious decision to charge a royalty instead going forward, which must also be considered against the risk of adjustment of past years by the ATO and consequential issues in other countries. It will also be necessary to fully assess an entity’s “risk profile” against ATO guidance (such as PCG 2021/D4 on “intangibles”) in order to understand the likely public disclosures which may be required.