A consultation launched by the Australian government on 5 August 2022 sets out measures that would help to address tax avoidance by multinational groups. Comments are invited by 2 September 2022.
The package would implement part of the government’s election commitment platform. The proposals aim to specifically target tax avoidance activities without affecting genuine commercial activity; and to minimise any additional compliance costs resulting from the proposed legislation. In addition to addressing tax avoidance, the provisions also aim to improve transparency by strengthening the public reporting of tax information by multinationals.
Restriction on tax deduction for interest
The paper sets out measures to limit interest deductions for multinationals, generally in line with the OECD recommendations in Action 4 of the project on base erosion and profit shifting (BEPS).
The proposal is for a fixed ratio (earnings-based) rule following the OECD approach which limits net interest deductions to 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA).
The rule would apply to general entities as defined in the current thin capitalisation rules. Financial entities and authorised deposit-taking institutions would at first continue to be subject to the thin capitalisation rules. These institutions can be excluded from the fixed ratio rule because they are net lenders and are subject to regulatory capital rules.
Comments are invited on a number of issues including the additional compliance costs that would be involved; and whether accounting or tax figures should be used as a basis for the fixed ratio rule.
In implementing the rule, the government will consider a potential de minimis monetary threshold based on the net interest expense of the local group. Comments are invited on whether the existing AUD 2 million de minimis threshold would also be an appropriate threshold for the fixed ratio rule.
The government will consider additional flexibility for highly leveraged entities or groups; and will look at the treatment of assets and projects that provide net public benefits or that are considered nationally significant.
Comments are also invited on whether the scope of the provisions should cover payments to both related and unrelated parties.
Limitation on deductions for certain payments
The government proposes to introduce a new rule limiting multinationals’ ability to claim tax deductions for payments relating to intangibles and royalties that lead to insufficient tax paid.
Comments are invited on whether embedded royalties should be covered by the provisions. These are royalty payments that are embedded in the consideration paid for tangible goods or services. Taxpayers sometimes enter transactions involving the supply of goods and services where a royalty element is present, but not explicitly recognised in the supply contract. It may therefore appear that no royalty has been paid and Australian royalty withholding tax obligations would be avoided. Inclusion of embedded royalties in the new measures could rectify the position from the government’s point of view.
Transparency
Proposals to increase tax transparency by multinationals include the introduction of country by country reporting; mandatory reporting of material tax risks to shareholders; and the introduction of a requirement for businesses tendering for Australian government contracts to disclose their country of tax domicile.
Next steps
After receiving comments on the discussion paper, the government will issue draft legislation for further consultation.
The measures will be in line with other ongoing initiatives in relation to the taxation of multinationals, such as the negotiations on the OECD’s two pillar solution on the tax challenges of the digital economy.
