Australia: Hybrid mismatch targeted integrity rule, final guidance

Australia: Hybrid mismatch targeted integrity rule

The Australian Tax Office (ATO) released a “law companion ruling” that finalises guidance on particular aspects of the targeted integrity rule as contained within the hybrid mismatch rules. The amendments are effective retroactively from 1 January 2019.

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The final ruling (LCR 2021/1) generally adopts the proposed ruling and maintains the ATO’s views contained in the draft ruling, and includes clarification of the rule following the amendments passed in 2020.

Subject to foreign income tax at a rate of 10% or less

The final ruling contains an expansion of the ATO’s view on the application of the “subject to foreign income tax at a rate of 10% or less” requirement which is integral to the operation of the targeted integrity rule. The targeted integrity rule will only apply to an interest or derivative payment that is not subject to foreign income tax, or when the highest rate of foreign income tax applied to the payment is 10% or less.

In LCR 2021/1, the ATO clarified its view that specific facts surrounding the foreign tax payable must be considered in determining if a foreign tax rate is 10% or less. This will include when a deduction is provided by a country in working out the applicable income tax payable on the profits of the recipient.

This type of deduction and any other concessions that have a consequence of reducing the rate of tax applicable on the actual interest or derivative payment or the profits of the recipient entity need to be considered when calculating the rate of tax paid on an interest or derivative payment.

KPMG observation

The update regarding the “subject to foreign income tax at a rate of 10% or less” requirement once again demonstrates that detailed information regarding foreign taxation outcomes of the payment recipient is required to get clarity on whether the targeted integrity rule may apply. To clarify, the jurisdictional tax rate applicable to, or the effective tax rate of the recipient, is not determinative of whether a payment is subject to tax at a rate of 10% or less. Rather, additional detail about the tax paid on the actual payment, and the tax outcomes of the recipient, are required to determine the rate of tax paid when assessing the targeted integrity rule.

ATO compliance and the hybrid mismatch rules

The ATO maintained the overall broad interpretation of the targeted integrity rule without any meaningful change to the draft ruling. Uncertainty still remains regarding how, in practice, the ATO will seek to apply the “principal purpose test” in situations when there is less than 10% foreign tax paid on an interest or derivative payment, but there are commercial drivers supporting the financing arrangement in its particular form.

KPMG observation

Tax professionals continue to assert that when a group has a financing arrangement within scope of the targeted integrity rule, taxpayers need to consider how the “principal purpose test” may apply to the particular facts and circumstances present. It is anticipated that the ATO will make enquiries on inbound financing arrangements for Australian entities in multinational groups to assess the application of the targeted integrity rule as part of its 2021 compliance program.   

 

For more information, contact a KPMG tax professional in Australia:

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

Fabian Fedele | +61 3 8663 8067 | ffedele@kpmg.com.au

Bevis Field | +61 2 9295 3920 | bfield2@kpmg.com.au

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