Treasury recently released a multinational tax integrity and enhanced tax transparency consultation paper to follow through on Labor’s pre-election manifesto to target Multinational’s.  There are three main proposals in the consultation paper:

Thin capitalisation

The proposal is to change the existing safe harbour rules for non-financial entities (currently based on asset and debt levels) with an earnings based (“fixed ratio rule“) safe harbour test in line with the OECD best practice.  The proposal is to limit the interest deduction to a “fixed ratio” of 30% of Earnings Before Interest, Taxes, Depreciation, and Amortisation (“EBITDA”).

The policy intent behind the change is to ensure that an entity’s interest deductions are directly linked to its economic activity and the entity’s taxable income.  There is currently no guidance on the potential impact in a loss year or for businesses in a start-up phase (eg where capital investment is required upfront) or group holding company structures.

The proposal seeks feedback on a potential de minimis monetary threshold based on net interest expense of the local group with the current level of $2m being flagged.  For highly profitable entities, if the 30% fixed ratio rule is implemented it may provide for an increase in the maximum allowable debt amount.

Multinationals with interest expenses will need to review existing arrangements as the change could significantly impact currently qualifying debt positions.

Payments relating to intangibles and royalties

The proposal for intangibles and royalties is to introduce a new rule to deny deductions to multinationals for payments relating to intangibles and royalties paid to a “low or no tax jurisdiction” or arrangements that lead to “insufficient tax being paid on the royalty”.  There is no proposed definition of “low or no tax jurisdiction”, however, the existing anti hybrid rules utilises a 10% threshold with other proposed thresholds flagged at 15% – 24% including Patent Box regimes.

The paper goes further by seeking feedback on whether the rules should apply to:

• Significant Global Entities only or other taxpayers;
• All payments or only payments to related parties (ie a payment to a third party that is in a low tax jurisdiction could result in a non-deductible cost); and
• Whether the measures should cover both royalties and embedded royalties (which are seen to be on the increase)

As to how Australian entities would be able to identify and address embedded royalties where they sit higher up the supply chain in unclear and at best would appear to raise the prospect of increased compliance costs and uncertainty.

Multinational tax transparency

The proposal in this regard contains measures designed to strengthen multinational tax transparency.  In other words, making entities own up to their tax information and risks through public disclosures through a variety of potential avenues including:

• the public reporting of tax information on a country-by-country basis;
• mandatory reporting of material tax risk to shareholders;
• requiring tenderers for Australian government contracts to disclose their country of tax domicile; and
• potential adoption of the (voluntary) Tax Transparency Code (a set of principles and minimum standards for disclosure of tax information developed by the Board of Taxation).

The Federal Government has indicated its commitment to move on a number of the proposals through its pre-election manifesto and therefore, unlike a number of recent proposals, these are more likely to get traction and be implemented in some form or another.  Given the initially announced start date of 1 July 2023, we expect to see regular updates.

We will keep our clients informed as to the progress of any changes as and when more information becomes available, however, should you have any queries in relation to the above please don’t hesitate to contact your ESV Engagement Partner.