On 31 March 2023, The Australian Treasury released for comment exposure draft law and draft explanatory materials (the “proposed new law”) to implement the Federal Government’s proposal, as announced in the October 2022 Federal Budget, to deny an income tax deduction for payments relating to intangible assets connected with low corporate tax jurisdictions (primarily with reference to a 15 per cent tax rate). The proposed new rules will apply to in-scope payments made or credited, or liabilities incurred on or after 1 July 2023.
Broadly, under the proposed new law, the Australian deduction denial will apply to a payment, made by a significant global entity (SGE) directly or indirectly to an associate, in relation to exploiting intangible assets which results in the recipient (or another associate) deriving income in a low corporate tax jurisdiction.
The proposed new law will not be contained within the existing suite of general anti-avoidance provisions, and it does not require an anti-avoidance “purpose” to be satisfied for the measures to apply. There are also no substance based carve-outs contemplated.
The proposed new law appears to clarify the use of a country’s headline (as opposed to effective) tax rate in determining the corporate tax rate, however, the determination of a low corporate tax regime is still not straightforward in all circumstances.
The potential breadth for this undertaxed profits measure appears very wide, including the scope to:
- assert the mischaracterisation of payments or arrangements (applying a substance over legal form approach),
- broadly define an arrangement noting that legally documented agreements may not be determinative and undocumented undertakings may be relevant (including express or implied permission to use, or a common understanding of the use of an intangible asset that is not covered by legally documented arrangements),
- cover intangible assets that are broader than the existing domestic (and Australian tax treaty) definition of royalties,
- look-through to group arrangements without a strict tracing requirement from the payment itself, or connection between the payment and the intangible asset,
- consider apportionment (“to the extent” a payment is attributable to the right to exploit an intangible asset), and
- apply without a payment, provided a liability has been incurred or amounts credited.
These proposed new rules are subject to a consultation period with submissions due by 28 April 2023.