The Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 amends Australia’s thin capitalisation rules to limit the amount of interest expenses that entities can deduct for tax purposes from 1 July 2023.
The government estimated the measure would result in a gain to receipts of $720 million over the four years from 2022–23.
The bill would also see asset-based rules for general class investors replaced with earnings-based interest limitation rules and a new third-party debt test. It would also change the safe harbour test to a default fixed ratio test.
In a statement, Assistant Minister for Competition, Charities and Treasury, Dr Andrew Leigh, said: “This reflects the government’s immediate priorities to strengthen the thin capitalisation rules to stop excessive debt deductions and ensure that deductions are linked to genuine economic activity. The bill reflects several technical changes proposed by industry to provide a better balance with commercial arrangements, including for trust structures.
“The bill also introduces new reporting requirements for Australian public companies, both listed and unlisted, to disclose information on their subsidiaries in their annual financial reports, to apply from 1 July 2023. The reported information will ensure companies are upfront with how they structure their subsidiaries, including for tax purposes.”
The changes will come into effect from 1 July 2023, however, there are no more parliamentary sittings in this financial year, so the bill can’t be passed ahead of this date and the new provisions will apply retroactively. The Senate economics legislation committee is also due to deliver a report on the bill by 31 August 2023.
“The measures in the bill reflect several rounds of public consultation to balance the integrity of our tax system while continuing to support genuine commercial activity and being mindful of compliance costs. Treasury will continue to work with industry stakeholders to ensure the new rules operate as intended,” Dr Leigh said.
“The government will also continue to engage with stakeholders on our commitment to introduce a public country by country reporting regime. Over the coming months, we will further engage on the appropriate level of disaggregated reporting. This will build on refinements we have already made to align more closely with the European Union’s public country by country regime.”
Among the changes to the bill as introduced to Parliament and the exposure draft released in March is that the bill would no longer repeal section 25-90 of the Income Tax Assessment Act 1997.
In its submission to the consultation on the measures in April, the Financial Services Council (FSC) argued strongly against the repeal of section 25-90, which permits tax deductions for borrowings relating to the earning of offshore non-assessable non-exempt (NANE) income.
“The repeal of section 25-90 had not been previously mentioned in the government announcements nor in any of the previous consultations on the proposed changes to the thin capitalisation provisions,” the FSC submission said.
“The FSC considers that the repeal of section 25-90 is a separate and unrelated policy decision to the amendment of the thin capitalisation provisions to move to an earnings-based test.”
FSC also argued that the decision to repeal section 25-90 would represent a significant policy shift from Australia’s current income tax regime, which seeks to encourage Australia as a regional holding company jurisdiction.
“Repealing section 25-90 will increase the average cost of capital and make Australia less competitive in the global market,” the submission said.
“The repeal would mean that Australian based multinationals will be forced to raise equity finance, which is more expensive than debt, or else borrow in foreign jurisdictions — where debt margins may well be higher for foreign owned borrowers (and the benefit to the Australian economy from the use of Australian finance will be lost).”
The bill’s explanatory memorandum stated that “stakeholder concerns regarding section 25-90 were considered by government, with the proposed amendment deferred, reflected in its removal from the final legislation, to be considered via a separate process to this interest limitation measure”.