Ahead of the Australian General Election on May 21 2022, the Labor opposition has announced a four-pronged international tax policy which is described as ‘a responsible and measured multinational tax integrity package’.
In a joint media release by the Shadow Treasurer, the Honourable Jim Chalmers MP and the Shadow Assistant Treasurer and Shadow Assistant Minister for Treasury, Labor has highlighted its four key initiatives to tackle multinational tax avoidance as follows:
1. Fully supporting the OECD’s two pillar solution including a 15% minimum tax on global profits. Labor recognises the need to address the digitalisation of our economies and with a greater emphasis on taxing related profits where the products or services are sold.
2. Limiting debt – related deductions of multinationals at 30% of profits, while preserving the arm’s-length test and the worldwide gearing ratio. While there is limited detail provided in the media release, the interaction with Australia’s thin capitalisation rules requires further clarification particularly as to the practical application of the arm’s-length debt amount test and the safe harbour test. The reforms are intended to apply from July 1 2023.
3. Limiting the ability to access concessional treaty withholding taxes on payments made to recognised tax havens (for example Cayman Islands, Bermuda) for the use of intellectual property held in those tax havens. Deductions for these payments will be denied unless taxpayers can substantiate that the royalty payments are not for the dominant purpose of tax avoidance. While Labor will consult on these proposed rules, it is anticipated that these rules will be applicable from July 1 2023.
4. Further initiatives enhancing transparency on international tax structures including a public registry of ultimate beneficial ownership, mandatory reporting of tax haven exposure to shareholders and related initiatives in relation to being eligible to participate in government tenders will be introduced by Labor.
Labor is forecasting additional revenues from these international tax measures to raise approximately AU$1.89 billion over the next four years which will assist in repairing the budget, preventing profit shifting and evening the playing field for Australian businesses. If enacted, this combination of measures will materially increase the ATO’s armoury to address multinational tax avoidance.
Uber Technologies Inc case and legal professional privilege: In-house counsel
Although not a tax specific case and following on from our previous article, in-house lawyers are reminded of the heavier onus of proof to confirm that its internal communications are privileged, as opposed to proving privilege in communications involving external counsel.
While noting that in-house counsel need to have the appropriate degree of independence, the role and structure of the particular in-house legal team will have a guiding impact on whether privilege should apply to their advice – noting amongst other things that in-house lawyers may have a broader strategic or commercial role in particular companies.
Australia–India economic co-operation trade agreement
As part of the broad Australia-India economic co-operation trade agreement, Australia has agreed in principle to amend its domestic taxation law to remove the taxation of offshore income of Indian businesses providing essentially technical services to Australian businesses.
The practical application of the Australia–India double tax treaty pursuant to the royalties article (Article 12) has been a major concern for Indian services providers particularly since the Satyam Computer Services Limited v. FCT (2018) 108 ATR 822 Case, and it appears in principle that Australia has agreed to a unilateral solution.
The Australian and Indian governments exchanged letters dealing with these proposed amendments to Australian domestic law in April 2022 and we expect this reform to be implemented in the coming months.
Jock McCormack
Partner, DLA Piper Australia
E: jock.mccormack@dlapiper.com
