On August 6, 2022 we already reported that on August 5, 2022 the Australian Government opened a public consultation on its intention to:

• Introduce the fixed ratio rule to replace the asset-based safe harbour test as currently included in the Australian thin capitalization rules; and to
• Introduce regulations denying MNEs deductions for payments relating to intangibles and royalties paid to low or no tax jurisdictions.

Introduction of the fixed ratio rule

With respect to the introduction of the fixed ratio rule the Australian Government states that it will draw on approaches adopted by comparable international jurisdictions (for instance, the United Kingdom, Canada, France, Germany and the United States) in implementing the fixed ratio rule

Payments relating to intangibles and royalties

MNEs can shift profits to low or no tax jurisdictions using arrangements involving intangibles to avoid paying tax in Australia. The fast growth of the digital economy has exacerbated these practices, with an increasing number of MNEs structuring their ownership of intangibles through low tax jurisdictions, giving rise to integrity risks to Australia’s tax base.

Earlier the Australian Government has announced it will introduce a new rule limiting MNEs’ ability to claim tax deductions for payments relating to intangibles and royalties, that can lead to insufficient tax paid.

What I find intriguing is that the Australian Government asks for views in relation to the following 5 options that are outlined in the consultation document and that contain various factors that could be considered in defining ‘insufficient tax’ or ‘low or no tax jurisdictions’:

1. Hybrid mismatch targeted integrity rule: Payments made to jurisdictions where they are taxed at a rate of 10 per cent or less would be in scope. This is consistent with the hybrid mismatch targeted integrity rule in Subdivision 832-J of the ITAA 19979, which seeks to prevent offshore MNEs from otherwise circumventing the hybrid mismatch rules by routing investment or financing into Australia via an entity located in jurisdictions with a tax rate of 10 per cent or less.
2. Global Anti-Base Erosion Rules (GloBE) minimum tax rate: Payments made to entities in jurisdictions determined under the GloBE rules to have an effective tax rate of less than 15 per cent would be in scope. This is consistent with the GloBE minimum tax rate as part of the GloBE (Pillar Two) Model Rules. Under the GloBE rules, the tax base for the effective tax rate calculation is based on financial accounting statements, rather than tax filings, and the covered taxes are broadly the same as the tax liability recorded in the income tax return.
3. Sufficient foreign tax test: Payments made to jurisdictions with a corporate tax rate of less than 24 per cent would be in scope. This is consistent with the ‘sufficient foreign tax test’ outlined under section 177L of the ITAA 1936. Under this test, the measure would not apply if the increase in foreign tax resulting from the offshore income diversion is at least 80 per cent of the reduced Australian tax liability. Jurisdictions with a corporate tax rate below 24 per cent would not be considered to pass this exception, as the company tax rate for Significant Global Entities (SGEs) is 30 per cent.
4. Intellectual property tax-preferential regime: Payments made to jurisdictions with an intellectual property (IP) tax-preferential regime (commonly referred to as ‘Patent Box Regimes’) would be in scope. However, this option may restrict the proposed measure to IP only rather than the broader application to payments relating to intangibles and royalties.
5. Low or nominal tax jurisdiction lists: Payments made to jurisdictions listed on low or nominal tax jurisdiction lists published by international organisations would be in scope. However, this option is not preferred as there is no global consensus on the status of these lists. Developing Australia’s own bespoke list of low tax jurisdictions for this measure (as opposed to leveraging an existing mechanism) could increase the likelihood of retaliatory responses from listed jurisdictions.

I am intriguied by the number of options as well as the fact that for example option 3 is being considered.

Click here to be forwarded to the consultation document as available on the website of the Australian Government.

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