The Australian Labor Party recently claimed victory in the Australian Federal Election, with Anthony Albanese sworn in as the new Australian Prime Minister on 23 May 2022.
The incoming Labor Government’s tax reform agenda principally targets multinational tax avoidance. It broadly comprises:
- the implementation of certain Organisation for Economic Co-operation and Development (OECD) recommendations for reform of the international business tax system; and
- more specific anti-avoidance and reporting measures.
Labor has indicated that it will be conducting targeted consultations over the coming months before releasing further details on the precise scope and operation of the proposed measures. It is expected that critical detail, and any new measures, will be provided as part of the proposed October re-release of the Federal Budget. Key elements of the proposed reforms are detailed below.
Implementation of OECD proposals
Implementation of certain OECD proposals will increase the corporate tax base and limit debt-related deductions by multinationals in Australia. The measures proposed in this regard are:
- Global minimum tax rate of 15%: Labor has committed to taxing multinationals in Australia at rates that ensure an effective tax rate of at least 15% on global profits is levied, in line with the second limb of the OECD’s Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (2021). Australia already levies corporate income tax at a comparably high rate of 30%.
The OECD has released technical guidance relevant to the implementation of this measure, designed to promote consistency in the interpretation of the rules. Although the practical detail of how the measure will be adopted in Australia is not yet available, it is expected to come into effect in 2023, in line with the OECD’s current timetable.
- Limiting debt-related deductions by multinationals to 30% of profits: In line with ‘Action 4’ of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (2015), Labor has announced that debt-related deductions of multinationals will be limited to 30% of Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) from 1 July 2023. This new limit is expected to replace the existing safe harbour under Australia’s thin capitalisation rules, which currently limits debt to 60% of adjusted Australian assets (or expressed differently, a 1.5:1 debt-to-assets ratio).
Labor has flagged that deductibility in excess of this new 30% threshold will still be available, provided that the relevant deductions can be substantiated under existing ‘arm’s length’ and ‘worldwide gearing ratio’ tests. The change from a safe harbour debt limit based on 60% of asset value to an interest deduction limit based on 30% of profit could potentially benefit companies with high profitability and low asset values, and disadvantage companies with high asset values and low profitability.
Supplementary measures to discourage companies in the former category from increasing debt may be added to the reform proposal. In any event, all multinationals will need to review how they finance their Australian subsidiaries before 1 July 2023.
Targeted anti-avoidance and reporting measures
Labor also announced the following:
- Tax-haven integrity in relation to intellectual property assets: Labor proposes to implement a new measure, under which a deduction would be denied for payments for the use of intellectual property (including royalties) in circumstances involving ‘treaty shopping’ and funnelling of payments to low tax jurisdictions in which an intellectual property asset is held, from 1 July 2023. The measure will only apply to ‘large global multinationals’ expected to include significant global entities (SGEs) with global accounting revenue in excess of A$1 billion (a concept already entrenched in various areas of the Australian tax system). The precise impact of this measure on royalty deductions will depend on whether it is confined in scope to a specific scheme of concern by way of narrow extension of existing general anti‑avoidance rules, or is drafted in more expansive terms to capture a broad range of transactions involving intellectual property.
- Public reporting of tax information on a country-by-country basis: The proposed policy would require large multinationals to publicly disclose how much tax they pay, and how many workers they employ, in each jurisdiction that the enterprise operates in. Some Australian companies already voluntarily disclose this information and Labor has indicated a willingness to consult with industry prior to implementing this reform.
- Establishment of a public registry of ultimate beneficial ownership: This proposal would see the introduction of a public register showing who ultimately owns, controls and receives profits from a company. This measure is intended to minimise the incidence of evasion through the utilisation of shell corporations and/or through obfuscating corporate structures.
- Mandatory reporting of ‘tax haven exposure’: This proposal would require companies to disclose to shareholders a ‘material tax risk’ if the company engages in business in a jurisdiction with a headline corporate tax rate below 15%.
- Disclosure of tax domicile in Federal Government tenders: Under Labor’s Fair Go Procurement Framework, the tender process for Federal Government contracts worth more than A$200,000 will require tenderers to disclose their country of tax domicile.
This article was originally co-authored by Cameron Rider.
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