The Australian Labor Party recently claimed victory in the Australian Federal Election, with Anthony Albanese being sworn in as Australia’s new Prime Minister on May 23, 2022.

The new Labor government’s tax reform program mainly targets multinational tax avoidance. It basically includes:

  • the implementation of certain agreements of the Organization for Economic Co-operation and Development (OECD) recommendations for the reform of the taxation of international companies; and
  • more specific anti-avoidance and reporting measures.

Labor has said it will carry out targeted consultations over the coming months before releasing further details on the precise scope and operation of the proposed measures. It is expected that key details and any new measures will be provided as part of the proposed October re-release of the federal budget. The main elements of the proposed reforms are detailed below.

Implementation of OECD proposals

The implementation of certain OECD proposals will increase the corporate tax base and limit deductions related to the debt of multinational companies in Australia. The measures proposed in this regard are:

  • Overall minimum tax rate of 15%: Labor has pledged to tax multinationals in Australia at rates that ensure an effective rate of tax of at least 15% on global profits, in line with the OECD’s second limb Two-pillar solution to address the tax challenges arising from the digitalization of the economy (2021). Australia already levies corporation tax at a relatively high rate of 30%. The OECD has published technical guidance relevant to the implementation of this measure, designed to promote consistency in the interpretation of the rules. Although practical detail of how the measure will be passed in Australia is not yet available, it is expected to come into force in 2023, in line with the current OECD timetable.
  • Limit multinational debt deductions to 30% of profits: In line with OECD ‘Action 4’ Inclusive Framework on Base Erosion and Profit Shifting (2015), Labor announced that deductions linked to the debt of multinationals will be limited to 30% of the Earnings before interest, taxes, depreciation and amortization(EBITDA) from July 1, 2023. This new limit is expected to replace the existing safe harbor rule under Australia’s thin capitalization rules, which currently limits debt to 60% of adjusted Australian assets (or, expressed differently, a leverage ratio of 1.5:1). competition” and “global debt ratio”. Moving from a debt limit based on 60% of asset value to an interest deduction limit based on 30% of earnings could potentially benefit companies with high profitability and low asset value, and disadvantage businesses with high asset value and low profitability. measures aimed at dissuading companies in the first category from going into debt could be added to the reform proposal. In any case, all multinationals will have to review their method of financing their Australian subsidiaries before July 1, 2023.

Targeted anti-avoidance and reporting measures

Labor also announced the following:

  • Integrity of tax havens with respect to intellectual property assets: Labor is proposing to implement a new measure, under which a deduction would be disallowed for payments for the use of intellectual property (including royalties) in circumstances involving “treaty shopping” and the routing of payments to low-tax jurisdictions in which an intellectual property asset is held, from July 1, 2023. The measure will only apply to “large global multinationals” which may include significant global entities (EMS) with global accounting revenues in excess of A$1 billion (a concept already entrenched in various areas of the Australian tax system). The precise impact of this measure on royalty deductions will depend on whether it is limited in scope to a specific regime of concern through a narrow extension of existing general anti-avoidance rules, or if drafted in broader terms to cover a wide range of intellectual property transactions.
  • Public declaration of tax information country by country: The proposed policy would require large multinationals to publicly disclose how much tax they pay and how many workers they employ, in every jurisdiction in which the company operates. Some Australian companies are already disclosing this information voluntarily and the Labor Party has indicated a willingness to consult with industry. before the implementation of this reform.
  • Establishment of a public register of ultimate beneficial owners: This proposal would see the introduction of a public register showing who owns, controls and receives the profits of a company. This measure is intended to minimize the incidence of avoidance through the use of shell companies and/or the obfuscation of corporate structures.
  • Mandatory declaration of “exposure to tax havens”: This proposal would require companies to disclose to shareholders a “significant tax risk” if the company operates in a jurisdiction where the corporate tax rate is less than 15%.
  • Disclosure of Tax Domicile in Federal Government Tenders: under work Fair Go Sourcing Framework, the bidding process for federal government contracts over AU$200,000 will require bidders to disclose their country of tax residence.