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 Bill (the draft Bill), released on 31 March 2023, proposes a new anti-avoidance rule to deny deductions for payments attributed to intangible assets located in low corporate tax jurisdictions. Significantly, the changes do not remove withholding tax from affected payments that are classed as royalties. In some circumstances, payments may therefore be both non-deductible, and subject to Australian withholding tax at rates of up to 30%.

The changes will apply to payments made by significant global entities (SGEs) on or after 1 July 2023. Broadly, SGEs are members of multinational groups with annual consolidated global income of at least AUD 1 billion. The proposed 1 July 2023 start date allows little time to prepare for the impact of the proposed changes.

The draft Bill is one of several measures introduced in the 2022-23 Federal Budget as part of a comprehensive strategy to enhance multinational enterprises’ tax integrity.

Anti-avoidance rule changes

The statutory objective is to discourage SGEs from avoiding income tax by channeling income from the exploitation of intangible assets to low corporate tax jurisdictions. The proposed rule will apply to payments:

• made by SGEs
• in relation to an arrangement where the SGE or an associate acquires or exploits the intangible asset
• where the arrangement results in the recipient (or another associate) generating income in a jurisdiction with low taxes.

A jurisdiction will be classed as a ‘low corporate tax jurisdiction’ if the corporate tax rate is less than 15%.

The rules are also intended to encompass the incurring of a liability or crediting of an amount, without an actual direct royalty payment. This ensures the proposed rules cannot be evaded through indirect payments.

Intangible assets payments

As expected, the proposed law applies to relevant payments made by an SGE directly or indirectly to an associate.

Payments made directly to unrelated third parties are not within the scope of the proposed law unless they are otherwise also indirect payments to an associate.

General definition of intangible assets

In general, the term ‘intangible asset’ is interpreted according to its ordinary meaning. However, the draft Bill proposes an additional definition.

The proposed rules will utilise some of the existing definitions of ‘royalty’ in the current tax legislation, with respect to the use or supply of specific assets. Some examples are:

• intellectual property rights such as trademarks, patents, designs and processes
• knowledge and information pertaining to certain fields such as science, technical and commercial
• in house designed algorithms
• any tapes, visual images or sounds used for broadcasting
• motion picture films.

The proposed definition of intangible asset also encompasses rights or interests in the type of assets mentioned above.  Additionally, further assets may be specified in the regulations.

The proposed rule does not extend to rights related to tangible assets, such as interests in land, or to financial arrangements (as defined in the existing tax legislation). The exclusion from categorisation as intangible assets equally applies to industrial, commercial, or scientific equipment. 

Apportionment

The phrase, ‘to the extent’ in the proposed law contemplates payments of an undissected amount for a bundle of rights or benefits. Apportionment may then be required to allocate part of the payment as relating to the intangible assets. The deduction for that portion of the payment would then be denied.

Several transfer pricing methodologies may be used to apportion payments, however the proposed law is yet to provide guidance on how such apportionment should occur. This appears similar to the potential uncertainty on apportionment of income received in respect of software (albeit relevant to withholding tax).

Low corporate tax jurisdictions

The draft Bill defines a ‘low corporate tax jurisdiction’ as a country in which the lowest corporate income tax rate applicable to an SGE is below 15%. Determining the ‘lowest corporate income tax rate’ of a country may be a complex matter.

Of concern is the fact that jurisdictions which provide tax exemptions for specific types of income may be classed as low tax jurisdictions due to the broad scope of this definition. A country such as New Zealand, which does not generally tax capital gains, may be classed as a low corporate tax jurisdiction.

A Government Minister can also determine that a jurisdiction qualifies as low tax if it has a preferential patent box regime.  This provision is only intended to capture patent box regimes that provide concessional tax treatment without requiring any economic activity to develop the relevant intellectual property in the country providing the patent box treatment.

In making a determination, the Minister may have regard to publications of the Organisation for Economic Co-operation and Development (OECD).

The suggested tax threshold aligns with the global trend towards a domestic minimum tax (DMT) rate of 15% as proposed under the OECD’s Global Anti-Base Erosion (GloBE) Pillar Two initiative. Nonetheless, it exceeds the existing minimum royalty withholding rate of 10% commonly found in Australia’s double taxation agreements. Furthermore, the proposed rate is higher than the 10% rate stipulated in the equivalent legislation of the United Kingdom.

Exploitation of intangible assets

The draft Bill introduces an innovative concept in defining intangible assets to be ‘exploited’. This concept encompasses a wide range of arrangements that go beyond the mere use of the asset. Examples include the use by way of marketing, selling, licensing, distributing, supplying, or engaging in any other activity with the intangible asset. This expanded definition of ‘exploitation’ aims to cover a broad spectrum of arrangements, highlighting the comprehensive scope of activities that may be captured.

The condition will also be deemed as fulfilled if the SGE is granted explicit authorisation to utilise the intangible asset. According to the draft Explanatory Materials, as long as there is a mutual understanding between the parties that allows the SGE to access and utilise the intangible asset, this requirement will be considered met. It should be noted that this condition can still be satisfied even if the permission is not explicitly documented.

The broad definition of ‘exploit’ implies that the threshold for meeting this requirement is relatively low, which means that even ordinary commercial arrangements could potentially fall within its scope. Taxpayers will need to carefully assess the application of the other conditions to determine if the provisions are applicable in their specific situation.

SGE penalties

The Government is also requesting stakeholder views regarding the appropriateness of a shortfall penalty provision to be imposed on SGEs which mischaracterise payments in an attempt to avoid income tax, including withholding tax. Given the onerous penalty regime that already applies to SGEs, the introduction of further specific penalties under the intangible payments rules would seem to be excessive.

How SW can help

Our tax experts can assist with

• analysing arrangements referrable to the use of intellectual property and the likelihood of the measures applying to denied deductions
• analysing the substance of payments, including the extent of apportionment required to determine the part attributable to a right to exploit an intangible asset
• assessing the extent of income from exploiting intangible assets that is derived in a low corporate tax jurisdiction.

SW will be monitoring announcements and will keep you updated as more information becomes available.

Please reach out to the Key Contacts here or your SW contact if you would like assistance determining the impact of the measures on your group, and advice on how your group can navigate the complexities.

Contributors

Tony Principe

Wasi Hussain

Rahul Sanghani

The post Australian Treasury denies SGEs deductions for payment relating to intangibles appeared first on SW Accountants & Advisors.

We recommend that all fund managers review their funds’ existing financing arrangements immediately to understand how the proposed rules impact interest deductions. For further details of the of the proposed changes, please see our previous article: New thin capitalisation regime details released.

These rules will broadly apply to property funds that have:

• a foreign investor that has a controlling interest in the fund or where the fund invests in foreign assets, and
• debt deductions over $2 million.

Potential impact on property funds

We have considered the potential impact on several of our property fund clients. Our key findings are:

• The Fixed Ratio Test (FRT) limits interest deductions to 30% of a taxpayers tax EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation). The FRT is likely to deny interest deductions for most taxpayers that fall within the regime based modest gearing and market interest rates. Of note, if borrowings are taken out at the head trust level the interest denial will be significant. Importantly, if debt deductions are denied under the FRT the taxpayer can carry forward the excess for up to 15 years. 
• It may be difficult for some funds to obtain the relevant information to perform the required calculation under the Group Ratio Test (GRT).
• The External Third-Party Debt Test (ETPDT) should provide an appropriate mechanism to allow interest on Australian bank debt to be claimed.  However, the proposed rules only allow this test to be used if:
  • debt is borrowed from a third parties, i.e. related party debt not permitted
  • all 10% associate entities choose to apply it (it will be practically difficult to get agreement on this from all 10% associate entities), and
  • recourse can only be to assets of the borrower. This is practically difficult to achieve and not in accordance with currently lending practices particularly large-scale construction projects where banks typically look for parent support and guarantees
  • debt borrowed is used to only fund Australian investments.
• The 15-year carry forward of excess deductions is only available under the FRT. Therefore, property funds will not be able to switch between methods and recover any interest denied under the FRT.

How can SW help?

The proposed changes are likely to have a significant impact on the property funds management industry, which relies heavily on debt financing. 

SW Accountants & Advisors has already contributed to submissions that have highlighted these issues to Treasury. Even if most of the issues identified for improvement were to be adopted, there is likely to be some level of interest denial in property funds that fall within the regime. 

If you would like to discuss your individual circumstances, please reach out to SW advisor or the team listed here.

Contributors

Luke Fernandes

Ned Galloway

The post Property funds to be impacted by proposed thin cap changes 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.

The ATO’s final interpretation of the law, and their compliance approach to trust arrangements where Section 100A may apply, was released on 8 December in the form of Taxing Ruling TR 2022/4 and Practical Compliance Guideline PCG 2022/2.

Following draft pronouncements released earlier this year (for our initial coverage of these earlier drafts, click here), these final documents take into account extensive submissions to the ATO as well as two Federal Court decisions: Guardian AIT Pty Ltd ATF Australian Investment Trust v FCT [2021] FCA 1619 (Guardian) and BBlood Enterprises Pty Ltd v FCT [2022] FCA 1112 (BBlood).

Both these decisions are on appeal to the Full Federal Court (For our analysis, see Guardian and BBlood).   

Background to section 100A – tax avoidance measure

Section 100A is an integrity measure introduced some 40 years ago to target tax avoidance arrangements involving a trustee making a beneficiary presently entitled to income, yet another person effectively enjoying the economic benefits from the present entitlement.

For the provision to apply, there needs to be a tax reduction purpose identified, and there is an exclusion for arrangements that are ‘ordinary family or commercial dealings.  Whilst originally targeted at aggressive tax avoidance arrangements, the provision is drafted in a manner that can be widely applied and is potentially relevant to some commonplace trust arrangements.

Where section 100A applies, the beneficiary’s entitlement to income is deemed not to have arisen, with the result that the trustee is assessed on the top marginal tax rate of 47%. 

Notably, and unlike many other provisions in tax legislation (including the anti-avoidance rules in Part IVA), section 100A has an unlimited amendment period.  

So, what has changed from the draft ruling and Practical Compliance Guideline (PCG)?

In short, not that much.

The Commissioner has fleshed out his analysis (with additional references to the Guardian and BBlood decisions) and provided more examples, which are helpful in better understanding the Commissioner’s position and the risk profile of various scenarios. 

However, those hoping for a softer landing with the final releases may be disappointed. In particular, the Commissioner has maintained his narrow view of the all-important ‘ordinary family or commercial dealing’ exception to section 100A.  

Changes to section 100A in the final ruling

• Numerous additional comments are made concerning the important condition that a tax reduction purpose must exist for the application of section 100A, many of which are driven by the BBlood judgement (decided in the Commissioner’s favour), including the following:
  • it is not necessary to identify a specific amount of additional tax that would be payable by a particular person (in the absence of the arrangement) for a tax benefit purpose to be identified
  • a deferral of tax liability to a later income year is sufficient to demonstrate a tax reduction, and
  • a tax reduction purpose may exist even in circumstances where tax savings did not eventuate.
• Where the objective of a dealing is the maximisation of group wealth by the payment of less tax instead of a family or other commercial objective, the ATO’s view is that this cannot be an ordinary dealing.
• Contextual facts, circumstances and (in a familial sense) cultural practices are relevant in demonstrating the commercial or family objectives of an agreement.
• Repetitive gifting or making of non-commercial loans by beneficiaries increase the risk that the arrangement would not be regarded by the Commissioner as an ordinary family or commercial dealing.
• A situation where an adult child beneficiary is aware of a distribution but chooses not to call on the trustee for payment until the funds are required, may be considered as an ordinary family dealing so long as the funds are not dealt with by the trustee in a manner inconsistent with this expectation. For example, loans to another person interest-free would increase the risk.

New content in the final PCG

Various additional examples have been included in the finalised PCG. While these are helpful in a communicative sense, in many cases these illustrations more exemplify than modify or soften the Commissioner’s previously stated views.      

New examples have been added to the ‘green zone’ (which covers arrangements that the ATO will not dedicate compliance resources to review, provided the taxpayer can demonstrate that the arrangement falls within the zone). Some notable new green zone examples include:

• an arrangement where a beneficiary receives and retains its entitlement within two years of becoming presently entitled.  As one would hope, the PCG confirms that leaving the entitlement unpaid beyond that period does not necessarily transpire to a high-risk arrangement which the ATO will review/challenge
• further illustrations of distributions to beneficiaries with losses, indicating he will likely accept such arrangement as green zone arrangements in circumstances where:
  • the entitlement is cashed out and the proceeds used to repay debt of the loss entity
  • the entitlement is not paid out but the entitlement is loaned back on complying Division 7A terms
• The finalised PCG removes the medium-risk arrangements (blue zone) and have essentially replaced this with a long list of exclusions from the green zone. These exclusions significantly narrow down the breadth of the green zone and include:
  • gifting, forgiving or releasing the trustee from its obligation to satisfy his/her trust entitlements (note that gifting of entitlements, say, between family members, may be an ordinary family dealing, but such arrangements would not fall with the safe harbour green zone)
  • deliberate actions (such as the trustee exercising a discretionary power) to create a mismatch between trust distributable income and taxable income
  • circular flows of funds involving discharge of a beneficiary’s entitlement through payments sourced from the same beneficiary (e.g. dividends)
  • a lossmaking beneficiary company or trust using its entitlement to fund a subsequent distribution that compromises its ability to repay existing or future liabilities
  • trustees not notifying the beneficiary of their entitlements to trust income
• One significant addition to the final PCG is the Commissioner’s emphasis on the maintaining of contemporaneous documentation in relation to trust distributions. The PCG makes reference to the need to maintain records to evidence how beneficiaries were notified of their entitlements, how entitlements were satisfied, details of how trusts applied any funds retained from undrawn entitlements (to satisfy the retention of funds conditions necessary for green zone status) and commercial/family objectives of arrangements. 

Significantly, one thing that was not changed in the PCG is that the Commissioner has not budged on the question of timing. The ATO has resisted the many requests that its views, as outlined in the earlier drafts, be applied only prospectively. However, some welcome additional guidance has been provided on the circumstances in which the ATO will review arrangements retrospectively.

How SW can help

Despite the guidance providing a better understanding of the Commissioner’s view, a number of concerns raised during the consultation process remain.

SW will continue to monitor this space and provide ongoing commentaries, with the impending full Federal Court decision for the Guardian appeal likely to be the next development (with BBlood following thereafter).  We will be looking to keep clients informed of any developments as soon as they occur.

If you would like advice regarding the application of section 100A, please reach out to our highly experienced SW team.

Contributors

Antony Cheung

Ned Galloway

The post ATO position on section 100A for trusts finalised 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.

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:

1. implementation of BEPS 2.0
2. modification of thin capitalisation rules
3. restricting Intellectual Property deductions, and
4. 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.

Contributors

Jae Debrincat

The post How will multinationals “pay their fair share” under the new Government? appeared first on SW Accountants & Advisors.