- $1 billion of tax is to be raised from multinational companies through thin capitalisation changes.
- Complex rules to restrict deductions for intangibles and royalties are to be introduced.
- Multinationals will face greater transparency requirements.
The October Budget unveiled further information about the Labor Party’s election commitments regarding the taxation of multinationals. This follows high-level consultations by Treasury with stakeholders including CA ANZ.
The Government has announced limited details about the following measures, all of which have a 1 July 2023 start date:
- Changes to thin capitalisation rules which will limit debt-related deductions to 30% of profits (EBITDA).
- Restricting deductions for intangibles and royalties.
- Transparency measures including reporting of certain information on a country-by-country (CbC) basis, tax haven exposure and in relation to Government tenders
No updates were provided about the OECD's Two-Pillar Solution.
Implementation timeframe is tight with little guidance
A start date of 1 July 2023 is concerning as key policy components of these measures are unknown and the exposure draft legislation has not been released. Understanding the thin capitalisation changes will take time, let alone analysing their impact on a business and adjusting financial arrangements.
A 12-month delay to these measures is needed but with $1 billion of revenue expected from these measures and a $36.9 billion budget deficit, calls for a delay are unlikely to succeed.
From 1 July 2023, net interest deductions will be limited to 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA). The policy intent of this change is to ensure that an entity’s interest deductions are directly linked to its economic activity and the entity’s taxable income so that tax planning practices are discouraged.
It is unclear whether the EBITDA rule will apply to accounting or tax profit. CA ANZ supports the use of tax EBITDA as using accounting EBITDA may add complexity since not all financial statements are audited, accounting policies vary, and accounting figures include timing differences such as unrealised gains/losses.
The 30% of EBITDA rule will replace the current thin capitalisation safe harbour amount.
Replacing the safe harbour test with an EBITDA rule means that volatile earnings will affect the amount that can be deducted for interest. Most OECD countries with similar measures deal with this issue by incorporating carry forward/back features to reduce the risk or permanent disallowance of interest expense.
The Government has announced the ability for denied deductions to be carry forward up to 15 years. CA ANZ welcomes this development as the absence of carry forward/back features would have resulted in Australia having one of the most restrictive interest limitation regimes in the world.
The alternative thin capitalisation calculation methods, namely the arm’s length debt test and the worldwide gearing debt test are also modified. The worldwide gearing amount will be replaced by a test which looks at the level of the worldwide group’s net interest expense as a share of earnings. The arm’s length test will apply but only in relation to third party debt.
Limiting deductions for intangibles and royalties
Significant global entities (SGEs), entities with annual global income of more than $A1 billion, will need to scrutinise their payments for royalties and intangibles even more closely to ensure that they are deductible.
Payments for intangibles that are made directly or indirectly to related parties in low or no tax jurisdictions will be non-deductible. A low or no tax jurisdiction is a jurisdiction with:
- A tax rate less than 15% or
- A tax preferential patent box regime without sufficient economic connection.
Large organisations already must navigate a number of rules when it comes to deductions for intangibles and royalties – section 26-25 ITAA 1997, transfer pricing, multinational anti-avoidance law, Part IVA, CFC provisions and the diverted profits tax, just to name a few.
The Treasury consultation paper on this issue canvassed the possibility of legislating against embedded royalties. This is not mentioned in the Budget update.
Multinationals taxation practices are also coming under increased scrutiny. Greater transparency is seen as a way to both change behaviour and inform the debate about the level of tax that multinationals should pay. The multitude of different reporting requirements both in Australia and internationally is likely to cause even greater compliance headaches for large multinationals.
The Budget contains proposals to:
- Publicly report some of the tax information on a CbC basis. This requires Australian public companies to disclose information on the number of subsidiaries and their country of tax domicile.
- Require the disclosure of tax domicile by tenders for Australian Government contracts over $200K including GST.
The proposal to require mandatory reporting of material tax risk to shareholders is not mentioned. CA ANZ had advocated against this measure.
Multinational taxation consultation
CA ANZ’s submission to the Treasury’s consultation about thin capitalisation, royalty deductions and transparency.
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