This year's Budget has not brought in any major structural tax changes for business. The ambitions for tax reform of a couple of years ago have now faded. Unsurprisingly, given the positive media attention given on measures to combat multinational tax avoidance, several integrity measures have been announced in this area. The Budget also sets out an extended schedule to reduce the corporate tax rate and reform measures have been announced for collective investment vehicles.
Multinational tax avoidance
Diverted profits tax
Getting multinational companies to pay their "fair share" of tax has been a constant political theme in the last few years.
The 2016/17 Federal Budget announces a diverted profits tax (DPT). In last year's budget, the previous Treasurer adopted the first limb of the UK's recently introduced diverted profits tax ‒ the so-called Multinational Anti Avoidance Law (MAAL). The new Treasurer has this year adopted the second limb.
The new measure looks to tax large multinationals (annual global turnover exceeding $1 billion) that have a taxable presence in Australia (either a branch or subsidiary) where the tax they pay is seen as having been reduced by a transaction with a foreign related party.
There are two main gateway tests.
The first, known as the "effective tax mismatch" test, is that the transaction shifts the tax liability to a related party in a jurisdiction which taxes that related party at a lower effective tax rate. The rules cast a broad net as they can apply to situations where the foreign related party is taxed at an effective rate of 24% ‒ which in contemporary terms is hardly tax haven level. Ironically, the UK (who developed the rules) has a corporate rate of 20% ‒ so a related party transaction with a UK based affiliate would certainly pass the first gateway test into the rules.
Given the low threshold for the effective tax mismatch test, the second gateway into the rules ‒ whether it is reasonable to conclude that the arrangement was designed to secure a tax advantage ‒ will be a critical aspect of the rules. Foreign investors will want a high level of certainty as to the behaviours that the ATO will regard as being "reasonable".
Where the rules apply (then broadly) Australia will impose tax on the diverted profits at the rate of 40%.
At this stage the detail is limited to a Treasury consultation paper (also released this evening) and an expectation that the measure will not come into force before 1 July 2017. The key issues will be to ensure that foreign investors invest with sufficient certainty about tax outcomes ‒ and how the measure will work in conjunction with Australia's very strong existing transfer pricing regime and general anti-avoidance law.
Notwithstanding the high profile given to the measure, it is forecast to raise only $100m in 2018/19 and a further $100m in 2019/20.
It raises the question of whether the price for making Australia appear a complex and potentially hostile tax jurisdiction is justified by the meagre revenue forecast.
By adopting a DPT approach along with the UK, Australia seeks to go further than the OECD's Base Erosion and Profit Shifting (BEPS) recommendations, putting Australia out of step with other jurisdictions. This raises the prospect that foreign investors here may suffer unrelieved double taxation ‒ which could be a serious disincentive for foreign investment.
Tax treatment of financial instruments ‒ anti "hybrid" measures
The Government also proposes to introduce measures to address "hybrid mismatch" (part of the OECD BEPS recommendations). "Hybrid mismatch" refers to differences in the tax treatment of entities and instruments across different countries. Such differences are considered to create unfair tax advantages in that multinationals are capable of exploiting the differences in a way that a domestic corporation could not. By way of example, a "hybrid" instrument may give rise to interest deductions in the borrower's jurisdiction but give rise to a tax exempt dividend in the lender's jurisdiction. The measures will be aimed at neutralising such perceived advantages and are proposed to take effect from on or around 1 January 2018.
Australian transfer pricing rules will be amended in line with OECD Transfer Pricing guidance, aimed at making clear how intellectual property and other intangibles should be priced amongst businesses operating in different jurisdictions. Pricing will be determined by reference to the substance of the transaction rather than contractual form.
Other key measures
A new Tax Avoidance Taskforce
The Australian Taxation Office's (ATO) enforcement capabilities will be enhanced. This will include a new Tax Avoidance Taskforce targeting tax avoidance by multinationals and high wealth individuals, together with the proposed introduction of whistle blower protections to encourage people to report "tax misconduct" and the introduction of a Transparency Code aimed at encouraging large business to disclose greater amounts of information. The key theme appears to be transparency and disclosure, but the Budget forecasts show the government is confident that these measures can produce results, estimating the Tax Avoidance Taskforce alone as producing approximately $3.06 billion of additional revenue over four years.
Collective investment vehicle reform
Changes will be made to Australian tax and regulatory rules to create two new forms of collective investment vehicles (CIVs):
- from 1 July 2017, a corporate collective investment vehicle; and
- from 1 July 2018, a limited partnership collective investment vehicle.
These CIVs are already recognised internationally and are intended to make managed funds based in Australia a more attractive place for foreigners to invest.
The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely held and engaging in primarily passive investment. Investors in these new CIVs will generally be taxed as if they had invested directly.
Long-term plan to reduce the company tax rate
The Government has announced a "Ten Year Enterprise Tax Plan" to reduce the company tax rate for all companies to 25% over the next 10 years.
This will start with the Government reducing the tax rate for small businesses. The tax rate for businesses with an annual aggregated turnover of less than $10 million will be 27.5% from the 2016/17 income year. The threshold will then be progressively increased so that ultimately, all companies will be subject to a tax rate of 27.5% in the 2023-24 income year.
In the 2024-25 income year, the company tax rate for all companies will be reduced to 27%, and will then be reduced progressively by 1% per year, until it reaches 25% in the 2026-27 income year.
It is questionable whether any investment decisions will be significantly influenced by such a long term plan.