With international tax there is always something happening and multinational companies need to keep abreast of the latest changes.

The main focus in 2024 is governments seeking to ensure multinationals pay their fair share of tax.

Key changes include:

Thin capitalisation rules

The Australian Federal Government has proposed changes to the thin capitalisation rules, which will impact the amount of interest deductions multinationals can claim and may potentially impact the way Australian multinationals are funded in future.

The changes are part of the 2022-23 Budget and were announced to address risks to Australia’s domestic tax base stemming from the use of excessive debt deductions. The proposed changes would strengthen Australia’s thin capitalisation rules in line with the Organisation for Economic Cooperation and Development (OECD)’s best practice guidance.

The proposed amendments are currently under consideration in the Senate. The Government proposes that most changes would be backdated to start from 1 July 2023 with the debt creation rules to apply one year later.

Withholding taxes

The ATO has advised that interest withholding tax is on its radar in 2024. When making a payment for interest or royalties to a foreign resident, companies are required to withhold tax at the applicable rate. If they fail to withhold from these offshore payments, they will be denied an income tax deduction for that expense until the withholding tax is paid.

The ATO is targeting arrangements where royalty withholding tax may not have been paid because payments have been inaccurately described, particularly payments for the use of intangible assets such as trademarks. The Federal Court ruled in favour of the ATO in a recent case against Pepsico which was liable for royalty withholding tax in relation to a portion of payments made under service agreements because royalties were embedded in these payments.

The ATO’s focus on embedded royalties is likely to continue in 2024. A draft guidance TR 2024/D1 was released in January and discusses when cross-border payments made under a software arrangement will be treated as royalties and therefore subject to royalty withholding tax.

Multinationals with IP-intensive industries such as life sciences, technology, and retail, will need to review their arrangements to determine if an embedded royalty arises from IP use in Australia before the ATO do.

Hybrid mismatch

Another area of focus for the ATO this year is ‘hybrid mismatches’. The ATO has designed and implemented hybrid mismatch rules to prevent multinational companies from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements.

Hybrid mismatches are where the Australian entity cannot demonstrate that tax has been paid by the ultimate recipient of the payment.

The ATO expects multinational companies operating in Australia will have appropriate tax governance and tax policies and procedures in place to minimise hybrid mismatches. A company’s related party deductions may be at risk if it has a hybrid mismatch.

When preparing an International Dealings Schedule, companies are required to disclose details about hybrid mismatch arrangements.