Multinationals in the crosshairs of new Labor government tax policy

The Australian Labor Party’s (ALP) tax policy flew somewhat under the radar in the lead up to the 2022 Australian federal election, owing primarily to the party’s espousal of a more populist tax agenda.

Multinational tax avoidance is now within the ALP’s crosshairs, rather than the refundability of franking credits or halving of the capital gains tax discount, which is consistent with the coordinated efforts currently underway on a global basis to address tax avoidance by multinational corporations.

The ALP’s ‘Plan to Ensure Multinationals Pay Their Fair Share of Tax’ broadly consists of the following seven strategies: 

1. Adoption of BEPS 2.0;
2. Reforming Australia’s thin capitalisation rules;
3. Denying income tax deductions to multinationals for cross-border payments in respect of the use of IP; 
4. Public reporting of Country-by-Country (CbC) information;
5. Establishment of a public registry of ultimate beneficial ownership information;
6. Mandatory reporting of ‘tax haven exposure’; and

7. Tax transparency requirements for Australian government tenderers.

Set out below is a high-level analysis with respect to each strategy, and the potential implications for multinational corporations with a connection to Australia. 

1. Adoption of BEPS 2.0

Although the extent to which it can be characterised as an ALP strategy may be questionable, given Australia’s membership of the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework and agreement to the historical global tax deal reached last October, the ALP has confirmed its commitment to the timely implementation of BEPS 2.0.  This commitment is welcome and provides with Australian taxpayers with certainty. 

2. Reforming Australia’s thin capitalisation rules

The ALP is proposing to limit income tax deductions to net interest expenses at or below 30% of EBITDA from 1 July 2023, while retaining the arm’s length and worldwide gearing debt tests. This strategy will ensure Australia’s thin capitalisation rules are reflective of the OECD’s BEPS Action 4 recommendations and bring them in line with the rules applied by other G20 nations such as Japan, the UK and US, all while retaining the flexibility of the arm’s length and worldwide gearing debt tests.

Despite the simplicity of the proposal, its implementation is unlikely to be without challenge or imposition. Specifically:

• Highly leveraged sectors such as infrastructure, private equity, and real estate, some of which are still reeling from the recent changes to asset valuation rules for thin capitalisation purposes, are likely to be adversely affected. Even if they can preserve income tax deductions through the arm’s length debt or worldwide gearing tests, a material compliance burden may result; and
• A substantial re-write of Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) will be required. It will be interesting to see whether carve-outs such as the Public Benefit Project Exclusion in the UK will be included, and how practical issues such as volatility in earnings will be dealt with.

Overall, despite the ostensible simplicity of the reforms, it is likely that they will result in an additional compliance burden for taxpayers, at least in the near-term. It is also foreseeable that more disputes will arise in this area, as certain taxpayers are required to rely on less objective debt tests. Fortunately, the ALP have stated that the implementation of any reforms will be preceded by industry consultation.

3. Denying income tax deductions to multinationals for cross-border payments in respect of the use of IP

This strategy involves denying taxpayers income tax deductions for payments for the use of IP, where the payment is to a jurisdiction “where they don’t pay enough tax”.

The ALP has stated that this strategy is “related to” measures put in place in the UK and US. However, it is important to recognise that the measures in place in the UK and US (viz. the intangibles regime in the UK and Global Intangible Low-Taxed Income (GILTI) in the US) reflect idiosyncrasies of their respective income tax systems and differ materially from what the ALP are proposing, and neither specifically deny deductions for payments to low-tax jurisdictions for the use of intangibles.

For example, the relevant rule of the UK’s intangibles regime is a targeted integrity measure designed to prevent abuse of favourable measures that were implemented by the Finance Act 2020, whereas GILTI is arguably a product of the US’ lack of sophisticated controlled foreign company (CFC) regime.

Australia has in place a robust CFC regime, which specifically deals with the payment of royalties to related parties in low-tax jurisdictions. Accordingly, what this proposal seeks to redress, or how it would do so, is presently unclear. 

4. Public reporting of CbC information

Presently, CbC information is only required to be disclosed to the ATO, although the ATO automatically exchanges this information with signatories to the CBC reporting Multilateral Competent Authority Agreement, and certain forerunners such as certain large corporations in the resources sector already publicly disclose this information. The ALP’s strategy is to mandate such public disclosure.

The ALP’s strategy will supplement the ATO’s legislative duty to produce its annual ‘Report of entity tax information’, as well as any disclosures by taxpayers under the Board of Taxation’s Voluntary Tax Transparency Code.

The ALP have indicated that this requirement will apply only to ‘large multinational firms’, which presumably refers to Significant Global Entities (SGE). Accordingly, the additional compliance burden would seem justified, given the resources of such organisations. This proposal mirrors the EU Commission’s ongoing efforts to mandate the public disclosure of CbC information, and requirements already in place in the EU for participants in the extractive and logging industries.

5. Establishment of a public registry of ultimate beneficial ownership information

The ALP proposes to implement a public registry of beneficial ownership, which will show who ultimately owns, controls, or receives profits from a company or legal vehicle. While likely of limited application to the multinationals that are within the crosshairs of the ALP’s policy, this is a nonetheless welcome proposal following years of inertia by the incumbent government (i.e., the absence of any substantive developments since Treasury’s consultation in early 2017).

Implementation of this strategy will bring Australia in line with other G20 nations such as Canada, the UK, and US.

6. Mandatory reporting of ‘tax haven exposure’

The sixth strategy of the ALP’s plan is to require disclosure to shareholders as a ‘material tax risk’ where an organisation is operating in a jurisdiction with a tax rate below the global minimum of 15%. 

It will be useful to attain clarity on how this strategy interacts with the ALP’s commitment to a global minimum tax rate of 15% under Pillar Two.  For example, if any ‘underpayment’ of tax is being addressed through the various rules underpinning Pillar Two, the purpose of reporting operations in a particular jurisdiction (which may have significant commercial substance) may not be clear. Characterisation as a ‘material tax risk’ is, in any case, potential alarmist, and prejudicial to economies that have consciously decided to impose a rate of income tax of less than 15%. It will be useful to see the ALP’s consultation paper on this strategy.

7. Tax transparency requirements for Australian Government tenderers

The final strategy of the ALP’s plan is to implement a ‘Fair Go Procurement Framework’ that requires all firms tendering for Australian Government contracts worth more than $200,000 to state their country of domicile for tax purposes.