Peter Madden, Liam Delahunty and Fabian Fedele look at legislation to pass the Australian Parliament targeting multi-national tax avoidance.
The Australian Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 ('Anti-Hybrid Measures') was passed in both houses of Parliament on Thursday 16 August and awaits the formality of Royal Assent.
The Anti-Hybrid Measures, summarised in our Tax Insights article of 28 May 2018, apply from income years starting on or after 1 January 2019, with an exception for the indirect and direct imported hybrid mismatch rules, which apply to income years starting on or after 1 January 2020.
These rules reflect part of Australia’s contribution to the Organisation for Economic Cooperation and Development's (OECD) broader project, targeting multi-national tax avoidance through the use of hybrid arrangements. Put simply, hybrid arrangements allow groups to drive down their global tax rate, through the use of arrangements which – although fully complying with existing domestic tax laws – arbitrage differences in the domestic tax laws of different countries.
A classic example is a hybrid loan, which an Australian borrower may see as debt with interest paid generating a deduction, but a foreign lender may see as equity with 'dividends' received being tax-exempt.
Effectively, the Anti-Hybrid Measures will shut down this arbitrage, typically by denying deductions or in some cases by taxing otherwise tax-exempt receipts.
Most Australian entities will be aware if they are party to hybrid loans or if they have hybrid entities as part of their groups. However, there are two less apparent consequences from the rules, which can adversely impact Australian entities, even where they may be 'innocent bystanders' to global tax planning. We are seeing a number of Australian entities being caught by surprise by these consequences.
The 'financing integrity' rule will deny Australian entities a deduction for interest on borrowings, where there is no hybrid arrangement, unless the lender is actually subject to a 'minimum tax' of more than 10 percent on the interest income. The rule also looks through back-to-back arrangements to the ultimate lender.
In this respect, Australia has gone out alone by introducing this rule, which is not part of the OECD measures.
By way of example, this rule will adversely impact a number of Australian borrowers which have been financed by Singaporean group finance entities, which are not taxed on unremitted earnings. Other examples are also common.
In many cases, Australian entities will not have a line-of-sight of any offshore hybrid mismatches in the global value chain, which are within scope of the Anti-Hybrid Measures and can result in deductions for a range of Australian payments being denied. The same goes for how foreign lenders are taxed – which can result in Australian interest deductions being denied.
Many Australian entities and groups are now seeking assistance in how to diagnose the potential risks of the Anti-Hybrid Measures applying. This diagnosis requires a broad knowledge of international tax regimes to identify fact patterns that potentially create risks.