On 25 October 2022, as part of the 2022–23 Budget, the Government announced a multinational tax integrity package to address the tax avoidance practices of multinational enterprises (MNEs) and improve transparency through better public reporting of MNEs’ tax information. The changes will apply from 1 July 2023, and this measure is not yet law.
Tax integrity issues arise due to MNEs adopting increasing tax planning practices. MNEs can take advantage of the differences between jurisdictions’ tax systems to minimise their tax paid, typically by moving the incidence of taxation from a high taxation jurisdiction to a low taxation jurisdiction or by avoiding a taxable presence in high taxation jurisdictions altogether.
The proposed measures in the Consultation Paper are:
- Amend Australia’s existing thin capitalisation rules to limit interest deductions for multinational enterprises in line with the Organisation for Economic Cooperation and Development (OECD)’s recommended approach under Action 4 of the Base Erosion and Profit Shifting (BEPS) program.
- Introduce a new rule limiting MNEs’ ability to claim tax deductions for payments relating to intangibles and royalties.
- Ensure enhanced tax transparency by MNEs, through measures such as public reporting of certain tax information on a country-by-country basis, mandatory reporting of material tax risks to shareholders, and requiring tenderers for Australian government contracts to disclose their country of tax domicile.
Once it comes into legislation, the next step for businesses with international connections is to review these proposed changes and prepare for how they would disclose tax risks to their shareholders under this heightened disclosure test.
