Labor government should speed up tax reform in Australia
In this update, we discuss potential reforms related to international taxation and provide an update on recent developments at the ATO.
The Australian Labor government is expected to accelerate various reforms related to international taxation in the coming months ahead of the mid-year budget scheduled for October 25, 2022.
In addition to its strong endorsement and support of the OECD’s two-pillar approach, including the 15% minimum tax on global profits, the new government should prioritize other international tax measures , including limiting debt-related deductions on cross-border debt, i.e. expanded thin capitalization. rules limiting deductions to 30% of profits constituting taxable profit before interest, taxes, depreciation and amortization (EBITDA).
We await further clarification on the impact of these reforms on the arm’s length debt amount test and the safe harbor test as part of the review of Australia’s thin capitalization rules that are supposed to apply from from July 1, 2023.
Other reforms impacting withholding tax concessions on payments to recognized tax havens for the use of intellectual property will be denied where tax evasion is paramount. In addition, an expanded tax transparency regime including mandatory reporting of certain tax haven structures will be introduced in the coming months.
The government has yet to formally approve certain tax reform initiatives of the previous Australian government, most notably the proposed tax regime for the category of patents for the medical, biotechnology, low-emission technologies and agricultural sectors, which would eligible for the concessional effective tax rate of 17%.
These tax reform initiatives are expected to be approved ahead of the mid-year budget scheduled for October 25, 2022, noting that Parliament resumed sittings this week.
Conventional purchase tax alert
The ATO issued Taxpayer Alert TA 2022/2 on July 20, 2022 regarding treaty shopping arrangements designed to secure reduced rates of withholding tax on dividends or royalties through the interposition of entities located in a jurisdiction that has entered into a favorable double tax treaty with Australia.
The tax alert is very brief and explains the ATO concerns from a tax perspective and raises the potential application of anti-avoidance rules under the relevant treaty (including the principal purpose test or the main purpose) as well as the general anti-avoidance provision (Part IVA) and the diverted profits tax.
In addition, the ATO notes that it is currently reviewing certain international transactions of this nature and engaging appropriately with ratepayers and advisers.
The ATO also provides two separate examples of arrangements involving reduced withholding taxes on dividends and royalties. It highlights several relevant features of concern and also refers to the importance of contemporaneous documentation and other objective evidence in support of the business rationale (non-tax matters) for the structure, restructuring or acquisition.
The purpose of issuing the Taxpayer Alert is to raise public awareness of new arrangements or perceived tax risk issues.
Major international tax settlement
On July 20, 2022, a major tax settlement was announced between Rio Tinto, a major global mining company, and the ATO in the amount of approximately A$991 million ($692 million).
The main dispute with the ATO was the use of Rio Tinto’s marketing center in Singapore for its mineral sales (mainly iron ore and aluminium) over several years from 2010 to 2021.
Although the particular regulation implies the use of a marketing center in the minerals sector, the ATO has actively sought centralized supply, service, sales and marketing centers and has issued previous guidance on these tax risks and related matters. The Rio Tinto settlement follows another recent similar settlement/case with BHP.
ATO protocol on professional secrecy
On June 22, 2022, the ATO published a comprehensive legal privilege protocol on its recommended approach to responding to official ATO notices requiring the production of documents under audit/review.
This follows an emerging perception that some taxpayers have improperly asserted or recklessly asserted legal professional privilege over certain documents, among other reasons, to obstruct ATO investigations. The ATO has contested numerous legal professional privilege claims and several have been challenged in court in recent years.
The ATO recommends a three-step approach before claiming privilege, including properly assessing the eligibility of each communication and explaining the reasons for each claim of legal professional privilege – with appropriate detail.