Announcement date
22 June 2023
Link to announcement
https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7057
Problem being addressed
Multinational entities (MNEs) can take advantage of the differences in tax laws between countries to minimise the amount of tax they pay, typically through structures designed to avoid profits, or limit their taxable presence, in a high(er) tax jurisdiction. This includes through adjusting debt amounts within a group and the use of intragroup (related party) borrowings to claim tax relief for interest expenses in certain jurisdictions to maximise their tax benefits – debt is deductible for tax purposes – while depleting tax receipts.
In addition, Australia’s relatively high corporate tax rate and the increasing prevalence of highly mobile intangible assets (e.g., intellectual property) provide MNEs with incentives, and the opportunity, to structure arrangements to lower their tax in Australia, and shift profits to low- or no-tax jurisdictions to achieve overall lower tax outcomes.
Proposal
The Government is seeking to raise revenue by implementing targeted changes to Australia’s thin capitalisation rules. These changes will limit an entity’s interest expenses in line with their taxable earnings before interest, tax, depreciation and amortisation (EBITDA) – in line with OECD/G20 Base erosion and Profit Shifting Project Action 4, 2016 update. Additionally, the Government seeks to stop related party borrowings from being deductible for tax purposes under an Australian specific third-party debt test.
The Government is also seeking to protect revenue from arrangements that involve intangibles that avoid Australian tax and seek to achieve overall low tax outcomes by denying tax deductions for payments that relate to intangible assets connected with low- or no-tax jurisdictions.
Assessed Impact Analysis outcome
Adequate
Assessment comments
The IA addresses the seven IA questions and follows an appropriate policy development process commensurate with the significance of the problem and magnitude of the proposed intervention.
To be considered ‘good practice’ as per the Australian Government Guide to Policy Impact Analysis, the IA would need additional substantiated evidence in determining the magnitude of the problem and analysis of flow-on and hard-to-quantify indirect costs the policy change might trigger.
Regulatory burden
The Department of the Treasury estimates, across the two measures, an increase in regulatory costs of $14.0 million per year, averaged over ten years.