Introduced into Parliament on 22 June 2023, the Bill is in line with the Government’s commitment to address tax avoidance practices of multinational enterprises and streamline with (OECD) best practice guidelines. There are some important distinctions from the Exposure Draft legislation, which SW detailed here in March.

From 1 July 2023, the new proposed thin cap provisions will replace the existing rules and limit the amount of interest deductions for certain entities. The Bill has been referred to the Senate Economics Legislation Committee for review, which will complete on 31 August 2023. This means that final legislation may not be released before September 2023.

Who do the new thin cap rules apply to?

The new regime applies to:

• foreign controlled taxpayers and taxpayers with foreign operations. These remain broadly unchanged from the existing rules
• only applies to general investors and, in part, to financial entities
• certain exemptions will continue to apply – including the $2 million (debt deduction) de minimis exemption.

What are the new tests?

The new regime’s safe harbour will be broadly based on the taxpayer’s current year taxable income – instead of the current safe harbour which is based on a taxpayer’s balance sheet.

The new safe harbour will be known as the Fixed Ratio Test (FRT). The FRT will limit interest deductions to 30% of a taxpayers Tax EBITDA. The Tax EBITDA will broadly be calculated as a taxpayer’s taxable income adjusted for interest deductions, tax depreciation and certain distributions received. Any non-deductible interest can be carried forward for 15 years.

Two other tests will be available:

• The Group Ratio Test (broadly replacing the worldwide gearing test)
• The Third Party Debt Test (broadly replacing the arm’s length debt test).

The Group Ratio Test will apply to disallow interest deductions by applying a group ratio to the taxpayer’s tax EBITDA – instead of the 30% FRT. The group ratio is calculated by applying a complex formula broadly equal to the net third party interest expense of the global group divided by the Group EBITDA.

As the name suggests, the Third Party debt test will only apply to debt issued to external third parties – meaning taxpayers may no longer be able to deduct interest issued to related parties even where third parties would have loaned funds on the same terms.   There are exceptions in relation to the use of Australian conduit financing entities.

Notable changes from the Exposure Draft legislation

Some notable changes in the Bill that has been added, or else removed from the Exposure Draft legislation, include:

• Changes to the calculation of tax EBITDA, particularly in relation to:
  • excluding dividends and franking credits
  • excluding trust distributions and partnership distributions from associate entities
  • adding back all amounts under Division 40 and Division 43 except to the extent that the amounts are immediately deductible and
  • removing the add back for prior year tax losses that was in the original Exposure Draft.
• Removal from the proposed legislation of changes to section 25-90 of the ITAA 1997 (about deductions for debt deductions incurred to derive foreign non-assessable non-exempt income from non-portfolio investments) At this stage, no announcement has been made as to the future of this controversial proposed change.
• The choice to apply one of the two new alternative tests is revocable, although a taxpayer will need to apply to the Commissioner to have a choice revoked.
• Removal of limitation to apply the third-party debt test where all associate entities had not made the choice. This has been replaced with a deemed choice for members of an obligor group.
• Addition of new Subdivision 820-EAA to disallow debt deductions to the extent they are created under debt creation schemes without commercial justification.

What is the detail of the rules?

A more detailed analysis of the Bill is contained in our Technical Briefing, linked below.  We encourage you to talk to the SW team to understand these changes further.

Application Date

The new legislation is set to apply to income years beginning on or after 1 July 2023.  

How should taxpayers prepare?

We recommend that taxpayers subject to the thin capitalisation regime review their existing arrangements having regard to the new Bill as a high priority, noting that the proposed date of effect is  1 July 2023. Whilst we hope that common sense will prevail and technical amendments will be made to ensure that the 3^rd party debt test can be used by business, the Bill is predominantly based on the OECD guidance.

How can SW help?

Our SW team can assist with:

• modelling the potential impact of the new rules on your debt deductions
• assessing the feasibility of restructuring any existing financing arrangements for your group
• considering whether one of the alternative tests would be applicable and beneficial to your circumstances.

Reach out to your SW advisor for support from our specialist tax team.

Contributors

Ned Galloway

Ian Kearney

The post Bill for new thin capitalisation regime introduced appeared first on SW Accountants & Advisors.

The Exposure Draft, released on 16 March 2023, is in line with the Government’s commitment to address tax avoidance practices of multinational enterprises and streamline with (OECD) best practice guidelines. To learn more about the previous announcements, see our article about the Proposed changes to Australia’s thin capitalisation rules. 

From 1 July 2023, the new proposed thin cap provisions will replace the existing rules and limit the amount of interest deductions for certain entities. With 3 months before its intended commencement, the Government has finally released a draft of the new rules. The Exposure Draft legislation is open for consultation until 13 April 2023 with submissions to the Australian Treasury.  

Who do the new thin cap rules apply to? 

The new regime applies to: 

• foreign controlled taxpayers and taxpayers with foreign operations. These remain broadly unchanged from the existing rules 
• only applies to general investors and, in part, to financial entities 
• certain exemptions will continue to apply – including the $2 million (debt deduction) de minimis exemption. 

What are the new tests? 

The new regime’s safe harbour will be broadly based on the taxpayer’s current year taxable income – instead of the current safe harbour which is based on a taxpayer’s balance sheet. 

The new safe harbour will be known as the Fixed Ratio Test (FRT). The FRT will limit interest deductions to 30% of a taxpayers Tax EBITDA. The Tax EBITDA will broadly be calculated as a taxpayer’s taxable income adjusted for interest deductions, losses and tax depreciation. Any non-deductible interest can be carried forward for 15 years. 

Two other tests will be available: 

• The Group Ratio Test (broadly replacing the worldwide gearing test) 
• The External Third Party Debt Test (broadly replacing the arms length debt test). 

The Group Ratio Test will apply to disallow interest deductions by applying a group ratio to the taxpayer’s tax EBITDA – instead of the 30% FRT. The group ratio is calculated by applying a complex formula broadly equal to the third party interest expense of the global group divided by the Group EBITDA. 

As the name suggests, the External Third Party debt test will only apply to debt issued to external parties – meaning taxpayers may no longer be able to deduct interest issued to related parties even where third parties would have loaned funds on the same terms.    

Other changes 

The Government also proposes to repeal current provisions that allow interest and debt deductions referrable to foreign investments. Under the exposure draft, interest would not be deductible where it was referable to the derivation of non-assessable non-exempt dividend income.  

What are the details of the rules? 

A more detailed analysis of the exposure draft proposals is contained in our Technical Briefing in the Download below.  We encourage you to talk to the SW team to understand these changes further. 

Application Date 

The new legislation is set to apply to income years commencing on or after 1 July 2023. Disappointingly, there is still uncertainty on the application date for entities that are early balancers (for example, the entity has a 31 December year-end). 

How should taxpayers prepare? 

We recommend that taxpayers start planning for the draft legislation to be implemented on 1 July 2023. Whilst we expect there to be minor technical amendments, the draft legislation is predominantly based on the OECD guidance. 

Therefore, restructuring debt arrangements may be necessary, and transaction documentation needs revisiting prior to 30 June 2023.  

Taxpayers should consider whether restructuring debt arrangements are necessary and the impact of doing so. 

How can SW help? 

Our experts can assist with: 

• modelling the potential impact of the new rules on your debt deductions 
• assessing the feasibility of restructuring the financing structure of the group 
• considering whether one of the alternative tests would be applicable and beneficial to your circumstances. 

Reach out to your SW advisor for support from our specialist tax team. Please also download the document below for a deeper dive into the technical details.

Contributors

Ned Galloway

The post New thin capitalisation regime details released appeared first on SW Accountants & Advisors.

财政部遵循政府对解决跨国企业避税行为的承诺，在其发布的咨询文件中提出了这些修改内容。资本弱化测试将更改为收益剥离法。根据拟议方法，净利息抵税的最高金额将根据既定的利润计算方法而定（见下文）。这对纳税人的影响，视乎其盈利状况而有所不同；而纳税人按照当前的安全港资产负债率水平衡量是否负债过度，则不在考虑之列。

哪些人受影响？

受影响的群体将包括：

• 受海外控制的澳大利亚实体与分支实体
• 拥有海外子实体和分支实体的澳大利亚实体
• 上述实体的某些关联企业。

资本弱化规则的背景

资本弱化规则设法限制受影响实体的利息抵税。历史上，这些规则旨在防范籍支付利息给关联方或支付关联方担保贷款利息而将利润转移到境外。然而，后来这些规则被扩大适用于对所有贷款人的利息支付，包括第三方融资机构，无论是否由母实体或另一个集团实体提供担保。 

目前的资本弱化条款规定了安全港债务金额。泛言之，这是根据实体的资产负债率水平计算出的最高债务额。一旦超过该金额，实体的利息支出将按比例被拒予抵税¹。值得注意的是，债资六比四的安全港债务金额是跨国集团使用最广泛的做法。

拟议规则将在什么时候适用？

这些规则最早可能从2023年7月1日起适用。然而，该咨询文件不是法律，也没有明确预定生效日期。

讨论拟议变更

政府最近发布了一份关于拟议跨国税务诚信方案的咨询文件。建议措施包括修订澳大利亚现有的资本弱化规则，以限制受影响实体的利息抵税，这是为了符合经合组织的建议做法。

经合组织建议的做法将净利息抵税额限制在税息折旧及摊销前利润（EBITDA）的30%。使用会计上的EBITDA可能存在问题，因为该指标没有考虑到重估和减值等项目。

政府已经强调要使用税务EBITDA。这意味着纳税人首先要计算/模拟其应税收入，以确定安全港债务金额。请注意，使用税务EBITDA可能意味着不评税非豁免海外收入，例如海外非投资组合股息、海外分支机构利润和参与豁免资本利得可能必须排除在外。根据“税务EBITDA”的定义，可能需要进行调整。

无论如何，希望$200万的豁免额将继续适用或增加。举范例而言，德国、法国、希腊和其他部分欧盟国家的资本弱化豁免利息水平是€300万。

政府还表示会保留独立交易债务措施。这是积极一面，因为特定行业（如房地产基金）可能会受到相关变化的负面影响。

审视国际上具可比性的司法管辖区的资本弱化规则

文件中强调，可以借鉴具可比性的国际司法管辖区（如英国、加拿大、法国、德国和美国）采取的做法。在英国，净利息支出抵税限于以下两项之较大者：

• 英国应税税息折旧及摊销前利润（EBITDA）的30%（固定比率规则）
• 按比例分摊全球集团的净利息支出，等于英国应税EBITDA乘以全球净利息支出与全球EBITDA的比率（集团比率规则）。

与德国类似，该咨询文件也考虑了集团比率规则。这将让高杠杆集团更具灵活性，按文件中的定义这些集团为第三方净利息/EBITDA比率超过30%基准固定比率的集团。

此外，在德国，任何未使用的潜在EBITDA均可结转一定年限，以支付未来的超额利息成本。

同时，在加拿大，这些变化是分阶段进行的，即从40%的比例开始，然后降低至30%。在某一年被拒予抵税的任何净利息支出，可以亏损补报和结转一定年限。纳入亏损补报和结转规则将让纳税人得到更公平的结果，并可容纳经济状况和其他干扰因素引起的利润波动。

在法国，纳税人将需要评估是否存在资本弱化（即关联方债资比超过1:5）。若如此，那么根据债务来自关联方还是外部方，将采用不同的比率。

示例

示例1

在20XX年，澳大利亚公司的EBITDA为$1亿。假设澳大利亚公司没有利息、折旧或摊销。  EBITDA包含$5,000万不可抵税的减值亏损。因此，税务EBITDA为$1.5亿。  若采用30%的固定比率，基于EBITDA和税务EBITDA的净利息支出容许上限（即所有借款和利息支出减去利息收入）分别为$3,000万（30% x $1亿）和$4,500万（30% x $1.5亿）。

示例2

在20XX年，澳大利亚公司的税前利润（PBT）为$1亿。EBITDA计算结果包含：

• $5,000万的会计折旧
• 利息支出$2,000万
• 税收折旧$8,000万。

根据税务EBITA的最终定义，我们计算EBITDA和税务EBITDA项下的净利息容许上限，具体如下：

纳税人应如何准备？

虽然法规尚未发布，但我们建议纳税人模拟使用收益剥离法对其利息抵税的影响。

信永中和澳大利亚使用40名纳税人的税务EBITDA来模拟收益剥离法。虽然我们不得不在法规未出台的情况下做出某些假设，但结果表明，25%的建模实体将受到相关变化的负面影响。结果显示对其中一名纳税人受到正面的影响。

持有投资型资产（如股票或房产）的纳税人受到的影响尤其大，因为这些资产的年度回报率/收益率低（但在未来最终处置时可能产生资本利得）。因此，像加拿大那种结转规则将有助于避免澳大利亚的基金管理发展受阻。受影响的还有尚未创收的实体，例如正在研究或将新产品/创新商业化的企业或处于勘探阶段的采矿企业。

请注意，咨询过程会邀请企业参与，以确保立法公平性（即对超额利息抵税主张结转和亏损补报规则以及主张类似于英国的全球集团比率）。此处让您了解如何回应。

信永中和澳大利亚能如何帮助您？

本事务所能协助以下事项：

• 在对利息抵税使用收益剥离法的情况下，就相关影响建立模型。
• 评估集团融资架构重组的可行性
• 考量能否换一种测试方法（即独立交易债务测试）。

请联系信永中和澳大利亚的顾问，获得专业的税务协助。

¹ 债务超过安全港债务金额的实体也可以考虑其他债务措施，即独立交易债务金额和全球资产负债率债务金额。 

The post 澳大利亚资本弱化规则的拟议变更 appeared first on SW Accountants & Advisors.

The Australian Treasury has released Exposure Draft legislation aimed at strengthening Australia’s thin capitalisation (thin cap) rules on 16 March 2023. Click here to read the article about this latest update.

These amendments are part of a consultation paper released by the Treasury in line with the Government’s commitment to address tax avoidance practices of multinational enterprises. The thin capitalisation test will be changed to an earnings stripping approach. Under the proposed approach, net interest deductions will be limited based on a defined measure of profit (see below). This will impact taxpayers differently based on their profit profile, regardless of whether or not they are currently excessively geared based on the current safe harbour gearing level.

Who is impacted?

Affected groups will include:

• foreign controlled Australian entities and branches
• Australian entities with foreign subsidiary entities and branches
• certain associates of the above.

Background of thin capitalisation rules

The thin capitalisation rules seek to restrict interest deductions of affected entities. Historically, the rules were intended to prevent the shifting of profits offshore via interest payments to related parties or on loans guaranteed by related parties. However, the rules have since been expanded to apply to interest payments to all lenders including third party financiers whether or not guaranteed by the parent entity or another group entity. 

The current thin capitalisation provisions provide for a safe harbour debt amount. This is broadly the maximum debt amount calculated based on the entity’s gearing level. Once exceeded, an entity interest expense is proportionately denied¹. It is noteworthy that the 60/40 debt to equity safe harbour debt amount is the measure most widely used by multinational groups.

When will the proposed rules apply?

The rules may apply from as early as 1 July 2023. However, the consultation paper is not law and does not specify an intended commencement date.

Discussion on proposed change

The Government recently released a consultation paper regarding the proposed multinational tax integrity package. One of the proposed measures is the amendment of Australia’s existing thin capitalisation rules to limit interest deductions of affected entities in line with OECD’s recommended approach.

The OECD’s recommended approach limits net interest deductions to 30% of Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA). The use of accounting EBITDA can be problematic as the measure does not account for items such as such as revaluations and impairments.

The Government has flagged the use of tax EBITDA. This means that the taxpayer will firstly need to calculate/model its taxable income to determine the safe harbour debt amount. Note that the use of tax EBITDA may mean that non-assessable non-exempt foreign income e.g. foreign non-portfolio dividends, foreign branch profits and participation exemption capital gains may have to be excluded. Adjustments could be required depending on the definition of “tax EBITDA”.

Regardless, it is hoped that the $2m de minimis exemption continues to apply or increased. As examples and broadly speaking, the “de minimis” interest level in Germany, France, Greece and some other EU countries is €3 million.

The Government has also indicated that the arm’s length debt measure will be retained. This is positive as particular industries (e.g. property funds) may be negatively impacted by the change.

Looking at thin capitalisation rules in comparable international jurisdictions

In the paper it was highlighted that approaches adopted by comparable international jurisdictions (for instance, the UK, Canada, France, Germany and the US) may be drawn upon. The deduction for net interest expense in the UK is restricted to the greater of:

• 30% of taxable earnings before interest, taxes, depreciation and amortization (EBITDA) in the UK (the Fixed Ratio Rule)
• a proportionate share of the worldwide group’s net interest expense, equal to UK taxable EBITDA multiplied by the ratio of worldwide net interest expense to worldwide EBITDA (the Group Ratio Rule).

Similar to Germany, the consultation paper also considers the Group ratio rule. This will provide greater flexibility of highly leveraged groups, which is defined in the Paper as those with a net third party interest/ EBITDA ratio above the 30% benchmark fixed ratio.

Additionally in Germany, any unused EBITDA potential may be carried forward for a certain number of years to cover future excess interest cost.

Meanwhile in Canada, the changes are phased in i.e. starting with a 40% ratio before reducing to 30%. Any net interest expense for a particular year that is denied in that year, could be carried backwards and forwards for a certain number of years. The incorporation of carry forward and carry back rules will provide a fairer outcome for taxpayers and allows for profit fluctuations arising from economic conditions and other disruptions.

In France, taxpayers will need to assess whether they are thinly capitalised (where related party debt-to-equity ratio exceeds 1:5). If so, then different ratios are applied depending on whether the debt is from a related or external party.

Examples

Example 1

In year 20XX, Ausco has EBITDA of $100m. Assume that AusCo has no interest, depreciation or amortisation.  Included in EBITDA is a non-deductible impairment loss of $50m. Therefore tax EBITDA is $150m.  Applying a fixed ratio of 30%, the maximum net interest expense (i.e. all borrowing & interest expenses minus interest income) allowed based on EBITDA and Tax EBITDA are $30m (30% x $100m) and 45 (30% x $150m) respectively.

Example 2

In year 20XX, AusCo derived a profit before tax (PBT) of $100m. Included in the EBITDA calculation are:

• accounting depreciation of $50m
• interest expense of 20m
• tax depreciation is $80m.

Subject to how tax EBITA is eventually defined, we calculate the maximum allowable net interest under EBITDA and tax EBITDA as follows:

How should taxpayers prepare?

Whilst legislation is yet to be released, taxpayers are advised to model the impact of the use of the earning stripping approach on their interest deductions.

SW modelled the earnings stripping approach using the Tax EBITDA of 40 taxpayers. While we had to make certain assumptions in the absence of legislation, the results show that 25% of the entities modelled will be negatively impacted by the change. The results show a positive impact for 1 of the taxpayers modelled.

Taxpayers holding investment type assets (e.g. equity or property) which generate a low annual return/yield on the investments (but may derive future capital gains on their eventual disposal) are particularly impacted. A carry forward rule such as that in Canada would therefore be helpful so as to not discourage the growth of funds management in Australia. Also impacted are entities which are not yet generating income for example companies in the process or research or commercialising a new product/innovation or mining companies in the exploration stage.

Note that businesses are invited to be a part of the consultation process to ensure that the legislation is fair (i.e. advocating for: carry forward and carry back rules for excess interest deductions and for a world-wide group ratio similar to the UK). Information about how to respond can be found here.

How can SW help?

Our SW team can assist with:

• Modelling the impact of the use of the earing stripping approach on your interest deductions
• assessing the feasibility of restructuring the financing structure of the group
• consider whether one of the alternative tests would be applicable (i.e. arm’s length debt test).

Reach out to your SW advisor for support from our specialist tax team.

¹ Entities with debts exceeding the safe harbour debt amount can also consider alternative debt measures being the arm’s-length debt amount and the worldwide gearing debt amount. 

The post Proposed changes to Australia’s thin capitalisation rules appeared first on SW Accountants & Advisors.

Using CTS REAL our Tax experts will perform a health check on your overseas related loans to:

• assess the transfer pricing risks
• understand the expected ATO approach
• identify ways to mitigate risk where required.

Want to find out more? 

To learn more about how CTS can benefit your business, simply click here to email our CTS team and a team member will be in touch with you within the next business day.

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The Government announced in the 2020/21 Federal Budget that it will be amending the current corporate tax residency test in response to the Board of Taxation’s recommendations. The proposed change will amend the law so that a foreign incorporated company will only be an Australian resident company if it has a ‘significant economic connection’ to Australia.

The new residency test will be satisfied for a foreign incorporated company if both its:

• core commercial activities are undertaken in Australia and
• central management and control is in Australia.

The key changes

The prevailing interpretation of the current residency treats a foreign incorporated company as a resident if the company’s ‘central management and control’ is in Australia. This interpretation is relatively new and arose as a result of the High Court decision in the Bywater Case and the consequent withdrawal of the ATO’s previous view on corporate residency in Taxation Ruling TR 2004/15.

The existing interpretation ignores the location of the actual operations of the company as well as the day to day management, but rather focuses on the location of the controlling mind(s). This may result in a company becoming an Australian resident by virtue of a single person undertaking board level management activities in Australia – regardless of the location the company physically carries out its business.

This change is particularly welcomed during the COVID-19 pandemic where directors of foreign companies may be stranded in Australia as a result of travel restrictions.

Next steps

Review corporate tax residency positions and wait for the passing of legislation before amending guidelines for what activities may be undertaken by management in Australia.

Who will this impact?

Multinational groups and certain private client groups with international business operations.

Important dates

Announced on the 6 October 2020 Federal Budget.

The legislation will have effect from the first income year after the date that the enabling legislation receives Royal Assent.

However, taxpayers will have the option of applying the new law retrospectively from 15 March 2017 (the date on which the ATO withdrew its ruling TR 2004/15).

How SW can assist?

When the changes are legislated, SW can provide updated guidance on the Australian tax residency status of foreign companies that may have some form of management and control in Australia.

Contacts

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