The latest edition of ‘Going Global’ magazine by Kreston Global, focusing on the mid-market in the Asia-Pacific region, highlights the major tax reforms currently transforming Australia’s financial landscape.
Australia’s tax landscape is undergoing considerable reform, focusing on ensuring that multinationals contribute their fair share of income. This overhaul addresses criticisms that the current tax system is inadequate for managing multinational trade, global investment competition, and the digital economy. One of the major areas of reform is the taxation of multinationals.
On March 27, 2024, the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 was passed by Federal Parliament. This Bill is set to become law upon Royal Assent, introducing a new thin capitalisation regime for income years commencing on or following July 1, 2023.
The Bill envisions limiting Australia’s strict capitalisation rules to reduce excessive debt deductions that undermine the domestic tax base. It will limit the debt used to fund Australian operations or investments and limit deductions for debt exceeding certain thresholds. This regulation is applicable to most multinational businesses operating in Australia with at least AUD 2 million in debt deductions.
Impact and Compliance
The new tax regime has been enacted shortly before the beginning of the income year, leaving companies with limited time to adjust their debt structures. Organisations with a 30 June year-end period have less than eight weeks to restructure their debts, a challenging task for many.
Companies must now trace and document the use of all related-party loans to ensure they are not used for ineligible purposes. It is advisable to reassess debt structures and consult with auditors to confirm that interest expenses do not lead to permanent tax differences. As the 2024 tax return forms will require disclosure of the chosen thin capitalisation method, businesses must seek tax advice and establish a new compliance model.
Applying these rules will be complex, necessitating consultations with accounting and banking experts. Some businesses might face challenges where genuine commercial arrangements lead to denied debt deductions. Immediate action will be necessary for any uncertainties in tax positions requiring disclosure in financial accounts.
The Bill requires a review of the thin capitalisation amendments by February 1, 2023, to assess their impact and the impact on Australia’s attractiveness for foreign investment.
Foreign Investment in Australia
Australia remains a top choice for foreign direct investment (FDI), ranking high on the FDI confidence index in 2024. By the end of 2023, foreign investments in Australia had a total of 6.97 trillion AUD.
While the mining and energy sectors continue to generate investment, the technology sector is experiencing a rapid growth. Treasurer Jim Chalmers has expresses a desire for tech companies to contribute fairly to the tax system. Recent tax developments, such as key ruling on royalties, will have significant implications.
Case Study: PepsiCo
On November 30, 2023, the Federal Court of Australia ruled in favour of the Australian Taxation Office (ATO) in a case involving PepsiCo. The court upheld the ATO’s position that certain payments related to bottling agreements were royalties, subject to royalty withholding tax, and affirmed the application of diverted profits tax.
This ruling marks the first judicial consideration of Australia’s diverted profits tax since its 2017 introduction. Multinationals will now face heightened scrutiny regarding royalties from intellectual property use, potentially leading to changes in tax treaty interpretations.
Both local and foreign multinationals will need to ensure rigorous and transparent reporting to comply with the new tax regime. For companies dealing with these challenges, it is crucial to maintain clarity and accuracy in their tax reporting.
If you are considering expanding your business and need guidance in navigating these new tax regulations, we encourage you to please reach out and contact us. For more information on the mid-market landscape of Asia Pacific, get a copy of the Going Global magazine here.
Author: Darren O’Malley
*Correct as of 30 August 2024
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
