The government’s election promises are implemented via the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023. Specifics about these electoral commitments were revealed in the budget for October 2022, which was released in April 2022.
The OECD inclusive framework on base erosion as well as profit shifting, which was established in 2013, serves as the foundation for these initiatives. Over 135 nations and jurisdictions are cooperating on implementing measures to combat tax avoidance, enhance the coherence of international tax rules, and provide a more transparent tax environment by working together within this open framework.
The bill adds additional regulations to enhance tax transparency and safeguard the integrity of the Australian tax system. This will contribute to a more equitable and long-lasting tax system. The administration will keep in touch with interested parties about its intention to enact a public country-by-country reporting regime.
The Corporations Act of 2001 would be amended by Schedule 1 of the bill to compel Australian public businesses to provide a “consolidated entity disclosure statement” in their annual financial reports that include information about their subsidiaries. This new requirement calls for a statement that discloses information about organizations that are part of the consolidated group. This statement, which will be delivered at the conclusion of the fiscal year, will include details like:
The disclosed data will guarantee that businesses are honest about organizing their subsidiaries, including tax considerations. Section 9 of the Corporations Act defines public corporations as any company other than a proprietary company or a corporate collective investment vehicle. This includes listed and unlisted companies. Even though certain ASX-listed firms may disclose this information in some manner, this change will guarantee that the reporting requirements for all public companies are now uniform.
With these changes, businesses, huge corporate groups, will be held accountable for their company structures and any unusual or opaque tax arrangements. It is in the public interest for shareholders and the community to have wider access to this kind of information, given the global movement to ensure that pay their fair share of tax. All annual financial reports created for fiscal years starting on or after July 1 2023, must comply with the changes in Schedule 1.
Per the Corporations Agreement of 2002, the Legislative and Governance Forum on Corporations was consulted over schedule 1 to the bill and approved.
The bill’s Schedule 2 modifies Australia’s thin capitalization standards to cap the amount of debt that corporations can write off as a tax deduction. To replace the current asset-based rules, these changes provide earnings-based interest limitation rules for general class investors. In particular, the existing safe harbour law permits a debt deduction for a business up to a limit of 60 per cent of assets. That threshold will be 30 per cent of profits under the new regulations.
This will make sure that a company’s debt deductions are closely related to its revenue, which is a more effective way to combat the risk of base erosion and profit shifting caused by using debt. The best-practice framework rules of the Organization for Economic Co-operation and Development are adhered to by this revision.
A third-party debt test, which takes the place of the current arms-length debt test, is also included in the Schedule 2 modifications. The property and infrastructure sectors are anticipated to use this test, which prevents related party debt—high base erosion and profit-shifting risk activity—from being deductible for tax purposes—in order to ensure that legitimate commercial arrangements can deduct third-party arms-length debt without an earnings cap. To make sure the measures work as planned, Treasury will keep working with business.
The changes to reinforce Australia’s thin capitalization requirements would guarantee that multinational corporations pay the proper amount of tax there while balancing the tax system to encourage further investment in Australia. Schedule 2 Amendments are effective as of July 1, 2023. This measure, like the others in this law, is an election commitment made by the administration and has therefore been anticipated for more than a year.
Over the course of the four years from 2022 to 2023, it is predicted that the tax integrity provisions in schedule 2 of the bill will increase collections by $720 million.
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