Australia: Treatment of U.S. GILTI under hybrid mismatch rules

The Australian Taxation Office (ATO) finalized its Tax Determination (TD 2022/9) relating to the treatment of the U.S. global intangible low-taxed income (GILTI) provisions in the context of the Australian hybrid mismatch rules.

The Tax Determination sets out the ATO’s view, unchanged from the 2019 draft, that GILTI is not a regime that “corresponds” to the Australian controlled foreign company (CFC) rules (specifically, section 456 or 457 of the Income Tax Assessment Act 1936).

In contrast to the 2019 draft, the ATO’s underlying reasoning focusses on the general operation and “purpose” of the GILTI provisions, in comparison to the Australian CFC regime, rather than specific aspects of the GILTI legislation (such as jurisdictional blending and the limitation of GILTI taxation to deemed non-tangible returns).

The Tax Determination focusses narrowly on statements made during the U.S. legislative process regarding the purpose of the GILTI regime (when it was introduced) which the ATO considers was to impose a minimum tax on certain returns, and contrasts this with the purpose of the Australian CFC rules as an anti-deferral regime.

The implications of the Tax Determination are wide-reaching and may require some multinationals to revisit positions taken in prior periods with respect to the classification of certain structures as giving rise to “hybrid mismatches.” In some structures, where GILTI taxation is not recognized for purposes of assessing if income or profits are “subject to foreign income tax” under the U.S. federal income tax system, this has the impact of leaving significant profits exposed to economic double taxation.

A secondary (but important) implication of the Tax Determination is that the ATO’s approach to interpreting when a particular foreign law “corresponds” to a particular Australian law, is relevant to other aspects of the Australian hybrid mismatch rules. Specifically, “corresponding” foreign hybrid mismatch rules in other countries can effectively stop the application of the Australian imported hybrid mismatch rule, and is thus a critical issue for many taxpayers as they assess and manage compliance obligations relating to the imported hybrid mismatch rules. The “gist” concept, while broad, does not necessarily reduce uncertainty on this point. Indeed, the factors which a taxpayer considers suggest correspondence between Australia’s hybrid mismatch laws and foreign provisions may not be those which the ATO would consider relevant.

The next guidance due to be published by the ATO is further guidance on the meaning of the term “subject to foreign income tax,” with particular focus on the treatment of intra-group payments between members of the same U.S. consolidated group (date “to be advised”).