In the lead-up to the end of the financial year for many multinationals, we have summarised the key issues you should have a pulse on.
Our update includes reminders regarding thin capitalisation, withholding tax arrangements and the lodgement of SGE status. Additionally, we address Pillar Two readiness under the Global Anti-Base Erosion Rules (GloBE), significantly impacting the tax functions of affected entities.
Thin capitalisation – Debt deductions over $2 million
Thin capitalisation changes are proposed with new interest limitation rules switching from an assets-based test to an EBITDA model already in place from 1 July 2023. These changes are currently before the Senate which can affect entities with debt deductions over $2 million.
Hybrid mismatch – related party deductions at risk
Hybrid mismatch arrangements exploit differences in the tax treatment of financial instruments or entities across different jurisdictions, resulting in financial instruments or entities being treated differently for tax purposes in different countries. To counter this, many countries have introduced measures like the OECD’s BEPS Action 2, which aims to neutralise the effects of hybrid mismatch arrangements by aligning the tax treatment of financial instruments or entities across different jurisdictions. If you prepare an International Dealings Schedule because you have foreign dealings or loans totalling $2 million or more, you are required to disclose details about hybrid mismatch arrangements. In Australia, there is quite a lot of information you need to obtain to support a deduction which may be impacted by hybrid mismatch such as determining that tax has been paid by the lender, if you don’t have information to support that a mismatch does not exist best practice is to deny that deduction until you do.
Withholding tax obligations – royalties changes
You are required to withhold tax from interest, dividends and royalties you pay to a foreign resident when you make the payment, or deal with the payment on their behalf. Failing to withhold tax from offshore interest payments will also invalidate your tax deduction for that interest payment until the withholding tax is paid. Royalties is one that can be easily overlooked when it forms part of a bundle of rights known as embedded royalties. The ATO have also recently changed their view on what payments for software may be characterised as royalties in respect of licensing and distribution software.
SGE status – penalties up to $782,500 for late lodgement
Don’t overlook reviewing your Significant Global Entity (SGE) status annually as structural changes offshore might place you within a group with turnover exceeding $1 billion AUD, escalating tax compliance in Australia. As an SGE, failure to comply with ATO lodgement deadlines may result in penalties of up to $782,500 per late lodgement. SGEs are also subject to country-by-country reporting, the Diverted Profits Tax and Multinational Anti-Avoidance Law will also be impacted by the upcoming Pillar Two rules.
Pillar Two – new global information return and domestic Pillar Two tax return
The OECD’s two-pillar approach aims to tackle the challenges arising from the digital economy’s growth. Pillar Two introduces a global minimum tax rate for large multinational groups, impacting income in low-tax jurisdictions, and is set to come into effect in 2024-2025.
Global Anti-Base Erosion Rules (GloBE) for Australian multinationals
In Australia, the Global Anti-Base Erosion Rules (GloBE) will be implemented, including the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) from 2024 and 2025, respectively.
These changes will significantly affect tax functions, necessitating extensive compliance obligations and data sourcing for affected entities. Companies need to prepare action plans encompassing legislative updates, modelling the impact on effective tax rates, data readiness, process enhancements, and technology adoption.
Compliance will involve filing the GloBE Information Return (GIR) and domestic Pillar Two tax returns. The implementation timeline and responsibilities differ for outbound and inbound organisations. Outbound entities must assess the impact, potentially calculate tax implications, and prepare for reporting obligations. Inbound entities should identify responsibilities, assess safe harbours, conduct data gap analysis, and align with global parent entity reporting requirements. Both types of entities need to gear up for extensive financial statement disclosures and compliance obligations, necessitating a customised approach based on resources, data requirements, existing systems, and technology.
Increased ATO attention – audits & risk reviews
The ATO’s Tax Avoidance Taskforce scope now includes engaging with Medium Public and Multinational Businesses on income tax risks for the next four years. Areas currently concerning the ATO include:
- Interest Withholding tax
- Inbound distribution arrangements
- Hybrid mismatch rules
- Related party financing arrangements
- Tax governance and actions e.g. keeping on top of your lodgements can significantly impact your risk profile with the ATO, helping to reduce the chance of a review or audit.
Tax governance – reduce tax risk
The ATO expect multinationals operating in Australia will have appropriate tax governance and tax policies and procedures in place, including having documented taxation advice to support their positions adopted. The ATO will request your tax governance framework when reviewing your affairs.
Please contact our tax professionals should you require assistance or wish to learn more.