Australia: KPMG comments on draft legislation denying deductions for low-taxed related-party intangibles payments

The government released draft legislation which would deny large multinational taxpayers (with annual global income of AU$1 billion or more) deductions for payments relating to intangibles to related entities in low-corporate-tax jurisdictions (with a corporate income tax rate of less than 15%). Read TaxNewsFlash

The proposal was announced as part of the government’s multinational tax integrity package in the 2022-23 October Budget and is proposed to become effective 1 July 2023.

The KPMG member firm in Australia submitted comments [PDF 263 KB] in response to the draft legislation, noting concerns with the breadth of the measures as currently drafted. The comments specifically point out that in its current form, the intangibles measure would create double taxation outcomes and departs from internationally agreed principles, and the measure could be narrowed to focus on genuinely low-taxed payments with a tax avoidance purpose.

In particular, the comments include the following key themes:

• The measure operates outside and without regard to the Pillar Two global minimum tax internationally agreed framework, which can result in the denial of deductions for payments that are already subject to Pillar Two top-up taxes to 15%. It is therefore necessary for the measure to recognize and give priority to the application of Pillar Two and address double tax outcomes. Multinational enterprises or jurisdictions that are subject to Pillar Two or a domestic minimum tax could be carved out. Alternatively, Pillar Two and domestic minimum top-up taxes must be accounted for in the determination of a low-corporate-tax jurisdiction.
• Given the intent to target multinational groups that avoid income tax through the structuring of their arrangements, it would be advisable that the rules include a principal purpose test or economic substance exception. If not, the rules would unfairly affect groups in situations when there are bona fide arrangements with no BEPS motives. If a principal purpose test or economic substance exception is not included in the measure, the measure must include a specific carve-out when the intangible is located in the parent company jurisdiction.
• The drafting of the low-corporate-tax jurisdiction test must be reconsidered as it does not achieve its intention as a “headline” tax rate test and its operation is unclear. To provide certainty, a list of foreign jurisdictions in the scope of these rules must be published and maintained.
• The exploiting intangible assets test must be restricted so that routine activities not connected with a global group’s core set of intangibles do not fall within the scope of this measure.
• A number of these concerns could be rectified by adopting the legislative design of the existing hybrid mismatch financing rule, supplemented by an explicit carve-out for multinational enterprises subject to Pillar Two.