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Australia: Do U.S. GILTI rules correspond to the Australian CFC regime?

Australia: Do U.S. GILTI rules correspond to CFC regime

The preliminary view of the Australian Taxation Office (ATO)—as presented in draft Taxation Determination (TD) 2019/D12—is that the U.S. global intangible low-taxed income (GILTI) regime does not correspond to the Australian controlled foreign company (CFC) regime.

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Background

Since 1 January 2019, Australia’s anti-hybrid mismatch rules have operated in certain circumstances to deny a deduction for a payment made by an Australian taxpayer to a non-resident, when the payment is not included in the recipient’s taxable income in the foreign jurisdiction.  One exception is when the foreign recipient’s income is included in the assessable income of its third-country parent, under a rule that “corresponds” to Australia’s CFC regime.

In late 2017, the United States enacted a tax law that added GILTI measures to the U.S. subpart F regime.  Broadly, GILTI is an anti-base erosion measure that taxes a U.S. parent company on a portion of the profits of its overseas subsidiaries, when these profits have not been subject to a specified minimum level of tax in the overseas jurisdictions.  

Australia’s proposal in draft TD 2019/D12

The question is: Does GILTI correspond to the Australian CFC regime? 

The draft TD 2019/D12 provides the ATO’s preliminary view is that GILTI does not correspond to the Australian CFC rules.  The ATO contrasted GILTI’s activation when the “globally blended” tax rate on subsidiaries’ income is below a certain minimum level against the Australian CFC regime’s application on a discrete subsidiary-by-subsidiary basis.  The ATO also contrasted GILTI’s application only to that part of a foreign subsidiary’s profits that exceeds a deemed normal return on tangible assets, with the Australian CFC rules’ application to the actual income of the CFC, regardless of what return it represents.

An alternative point of view could be that the GILTI and CFC rules both operate as an integrity measure to prevent corporations shifting profits on highly mobile assets to low-tax jurisdictions and thus operate to tax certain income of foreign subsidiaries, when the profits of those foreign subsidiaries have not been subject to an adequate level of taxation in the foreign country.  There are differences in the detail of how each regime goes about achieving the objective, but the fundamental principle (i.e., the prevention of tax avoidance via the use of foreign low-tax subsidiary) is the same.

TD 2019/D2 remains open for public consultation until 17 January 2020.

KPMG observation

Tax professionals believe that given the relevant provisions in the anti-hybrid rules only require the foreign provisions to “correspond” to the Australian CFC rules, rather than match the CFC rules in detail, it is disappointing the ATO did not adopt a more pragmatic approach to the GILTI provisions given the intention of the provisions. The implications of the ATO’s position would be that Australia could deny a deduction for a payment that an Australian taxpayer entity makes under a hybrid arrangement, at the same time as the payment was being reported as income in the United States under the GILTI regime.  Subject to the multinational group’s overall global tax position, double taxation could consequently arise.

The ATO may be concerned about the fact that GILTI applies only when the U.S. multinational’s blended rate of foreign tax across all its subsidiaries is below a certain level, and that after allowing a (restricted) offset for foreign tax, the effective rate of GILTI tax on a particular payment might be quite low.  However Australia’s anti-hybrid rules (other than the targeted integrity rule) do not specify a minimum rate of tax that is to apply, but instead are limited to consideration of whether an amount has been included in taxable income in the recipient’s jurisdiction.

 

For more information, contact a tax professional with the KPMG member firm in Australia:

Peter Madden | +61 2 9335 7500 | petermadden@kpmg.com.au

Denis Larkin | +61 2 9335 7171 | dlarkin@kpmg.com.au

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