Jock McCormack of DLA Piper summarises tax-related developments from early June 2020, as Australia takes a more stringent approach towards compliance procedures involving foreign investments.
The legislation will broaden the operation of the integrity rule
On Friday, June 5 2020, the Australian Treasurer announced significant changes to Australia’s foreign investment policy/framework mainly driven by concerns regarding emerging national security risks and related developments.
These foreign investment reforms follow upon certain temporary measures announced on March 29 2020 and will be the subject of exposure draft legislation expected to be released for consultation in July with a view to commencement of the new law from January 1 2021.
Briefly, these reforms enable the Treasurer, amongst other things, to impose conditions or block investments by foreign persons on national security grounds and also to strengthen compliance measures, information sharing and enforcement powers, as well as provide certain administrative enhancements.
Most particularly, the Australian Taxation Office (ATO) will increasingly provide a key role in administering, monitoring and implementing the enhanced foreign investment rules/framework, including maintaining a foreign investment register, additional access and information sharing powers with overseas counterpart agencies through various compliance activities – however consistent with Australia’s privacy and confidentiality laws.
Client professional privilege
Given the ATO’s recent well-publicised concerns with and actions on alleged excessive client professional privilege claims (as evidenced by the 2019 case with Glencore International and recent pursuit of certain professional firms), we would expect the continuing rigorous pursuit of taxpayer documentation in the coming months.
Taxpayer alert
The ATO also released on May 25 2020 Taxpayer Alert 2020/2 dealing with the mischaracterisation of certain arrangements connected with foreign investment into Australian entities. The Taxpayer Alert deals with, amongst other things, cross border debt finance and certain arrangements minimising interest or royalty withholding tax in the context of the Australian/US double tax treaty and threatens the use of Australia’s general anti avoidance provision (Part IV A), diverted profits tax and related integrity measures.
Hybrid mismatch rules – amendments
Separately, new legislation was introduced into the Australian parliament on May 13 2020 dealing with certain clarifications to the Australian hybrid mismatch rules, including most particularly the integrity rule. Broadly, the integrity rule will be strengthened to ensure that it can apply to financing arrangements that have been designed to directly circumvent the operation of the hybrid mismatch rules.
The new legislation when enacted will broaden the operation of the integrity rule to ensure that it could still apply in certain circumstances where the following specific hybrid mismatches arise;
The deducting hybrid mismatch (which arises where two jurisdictions permit a deduction in relation to the same payment), and
The hybrid financial instrument (a mismatch which exploits the tax treatment of a financial instrument, e.g. redeemable preference share).
In addition, the new legislation also clarifies that in working out what constitutes ‘foreign income tax’ for the purposes of the integrity rule, any foreign municipal taxes and state taxes will also be taken into account to determine whether a payment has been subject to foreign tax at a rate of 10% or less.
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