By Graeme Cooper and Ryan Leslie
The Government has wasted no time starting the process of enacting their election commitments to amend several of Australia’s international tax rules. Earlier today, Treasury released a Discussion Paper seeking submissions on several areas for reform.
The Paper addresses the key tax policies proposed by the ALP during the election campaign:
- changing the ‘safe harbour’ in Australia’s thin capitalisation rules from a test based on the ratio of debt to the group’s assets to a test which caps interest deductions at a fixed percentage (30%) of the group’s earnings before interest, tax, depreciation and amortisation (EBITDA). This change would align Australia’s thin capitalisation regime more closely with the 2015 OECD recommendation in Action 4 of the BEPS Action Plan;
- introducing a new rule to deny a deduction to a multinational enterprise (MNE), or perhaps, only those MNEs that are significant global entities (i.e. part of groups with more than A$1 billion in annual turnover) for payments relating to intangibles and potentially ‘embedded royalties’, paid to related parties (and perhaps also unrelated parties) offshore, where the recipient is not subject to ‘sufficient’ foreign tax;
- increasing the quantity and level of detail of information about tax matters to be made available to the public;
- requiring directors to report ‘material tax risks’ to their shareholders – the situations discussed in the Paper suggest directors might have to report as problematic the fact that the company operates in certain countries, or has a particular financing structure in place; and
- requiring tenderers for contracts valued at $200,000 to be awarded by the Commonwealth government to disclose their country of tax residence in the tender.
The import of the paper is to seek submissions on matters of detail and implementation for each topic. All of the 51 questions posed in the Paper go to matters of scope, detail and administration; the core policy commitments are not up for discussion. But as always, some policy development has been occurring as the policies are fleshed out. For example, while the election proposal about changes to thin capitalisation said the Government would change only the safe harbour rule and retain the arm’s length test, the Paper ponders whether the change to the safe harbour will simply drive more taxpayers to use the arm’s length test, and whether that might not be worse than the current state of affairs. Similarly, there are a number of possible definitions that might be used for determining what constitutes ‘insufficient tax’ or a ‘low tax or no tax jurisdiction’.
The Paper makes clear these changes will supplement several other international tax measures to which the Government is also committed: Australia will continue to be involved in the OECD’s ‘two-pillar’ project including the 15% minimum tax on the profits of large MNEs, and the Government will revive the proposal for a public registry of the beneficial ownership of companies, which stalled in 2017 after the release of a Treasury Discussion Paper.
We will release a more detailed examination of the Paper shortly. Submissions on the Paper are due by 2 September 2022. Please contact us if you would like to discuss.