How will multinationals “pay their fair share” under the new Government?
The Australian Labor Party (ALP) steered clear of controversial tax debate during the Federal Election campaign this year. However, with the ALP forming Government, many people are wondering what to expect in terms of tax reform.
Whilst the important details of the framework have yet to be released (and remain the subject of an intended consultation process), the Albanese Government’s intention is to “to ensure multinationals pay their fair share of tax“.
The Government plans to do this via 4 major areas of reform or expansion:
- implementation of BEPS 2.0
- modification of thin capitalisation rules
- restricting Intellectual Property deductions, and
- expanding Tax Transparency measures, including requiring:
- public release of Country-by-Country (“CbC”) information
- a public registry of ultimate beneficial ownership of entities
- mandatory reporting of “tax haven exposure”, and
- transparency requirements for Australian government tenderers.
Adoption of BEPS 2.0
The ALP has confirmed its commitment to the timely implementation of the Base Erosion and Profit Shifting framework (BEPS 2.0) to follow through on Australia’s agreement to the global arrangement reached in October 2021 and membership of the OECD’s Inclusive Framework.
This will include the domestic implementation of what is known as a 2-Pillar solution, which includes:
- a global minimum effective minimum corporate tax rate set at 15% for multi-nationals, and
- a fairer distribution of profits by multinationals.
The new Government is clearly hoping that the introduction of these measures will increase Australia’s proportion of the tax take on many multinationals.
Thin capitalisation reform
The ALP is proposing to further limit interest deductions to bring Australia in line with the OECD recommended approach. In particular, the Government is proposing to limit interest deductions to 30% of EBITDA from 1 July 2023, while retaining the arm’s length and worldwide gearing debt tests.
The proposed reform is simple in statement but difficult in execution, and will likely have significant impact on a range of sectors that are traditionally highly leveraged and increase the compliance burden for many multinationals.
Thankfully, the ALP has stated that these reforms will only proceed after industry consultation, and we hope that due consideration is given to the broader implications of such a change.
Intellectual Property restrictions
The Government has seemingly sought to ‘borrow’ certain integrity measures from other tax systems such as the UK and US in seeking to deny tax deductions for the use of intellectual property when those payments are paid to a tax haven jurisdiction.
These measures are intended to only apply to Significant Global Entities (SGEs) and are intended to stop “treaty shopping”. The Government intends to introduce provisions that would deny such a payment unless it could be substantiated that the royalty payment was not for the dominant purpose of avoiding Australian tax.
There are many complexities evident with this proposal, not the least the interaction of these proposed rules with existing tax provisions such as Part IVA and Diverted Profits Tax.
Tax Transparency expansion
The remainder of the ALP’s reform agenda is focused on expanding requirements for multinationals to be transparent in their dealings.
These expansions focus on 4 areas:
Public reporting of CbC information
It is currently only mandatory to provide CbC Reporting information to the ATO. The ATO then shares that information with certain other global revenue authorities.
The ALP intends to require “large multinational firms” (presumably SGEs) to publicly disclose the CbC information.
Ultimate beneficial ownership information
The Government intends to create and maintain a public registry of ultimate beneficial ownership. Ultimate beneficial ownership is essentially the identity of who ultimately owns, controls, or receives profits from a company or other type of entity.
Implementation of a public register of such information will bring Australia in line with other G20 nations such as Canada, UK, and the US.
We expect that such a register would be limited in scope to large multinationals given the broader context of the reform agenda. However, limited information has been provided at this stage.
Mandatory reporting of “tax haven exposure”
Presumably tied to the implementation of BEPS 2.0, these changes will require multinationals operating in jurisdictions below the proposed global minimum 15% tax rate to disclosure a “material tax risk” to shareholders.
Tax transparency requirements for Australian Government tenderers
Lastly the ALP plan to implement a “Fair Go Procurement Framework” requiring companies tendering for Government contracts worth more than $200,000 to disclose their country of domicile for tax purposes.
ALP plan needs broad consultation
The ALP’s proposals clearly represent a significant pivot from policies in previous elections and have generally focused on ways of addressing tax avoidance by multinational corporations. Whilst they may provide some headaches and uncertainties for taxpayers, they are unlikely to unsettle Australian voters or mums and dads.
Nonetheless, the potential application of the reforms are significant and may impact many small and medium sized enterprises – as well as the SGEs. We welcome the opportunity for broad consultation to ensure that the plan achieves its objectives in an appropriate and measured way.