Australian multinationals warned on top tax issues ahead of EOFY

With the end of the financial year drawing closer, multinationals should consider reviewing the thin capitalisation changes, their withholding tax obligations and their significant global entity (SGE) status, says HLB Mann Judd director of tax consulting, Donna Emsies.

The thin capitalisation changes, which are currently before the Senate, impose new interest limitation rules for entities with debt deductions over $2 million.

The thin capitalisation changes replace the asset-based test with an EBITDA model which applies from 1 July 2023 onwards, Ms Emsies said in a recent article.

Some multinationals may also need to disclose information about hybrid mismatch arrangements as the end of the financial year gets closer, she said.

“Hybrid mismatch arrangements exploit differences in the tax treatment of financial instruments or entities across different jurisdictions, resulting in financial instruments or entities being treated differently for tax purposes in different countries,” she explained.

“To counter this, many countries have introduced measures like the OECD’s BEPS Action 2, which aims to neutralise the effects of hybrid mismatch arrangements by aligning the tax treatment of financial instruments or entities across different jurisdictions.”

Multinationals that prepare an International Dealings Schedule because they have foreign dealings or loans totalling $2 million or more are required to disclose details about hybrid mismatch arrangements, said Ms Emsies.

“In Australia, there is quite a lot of information you need to obtain to support a deduction which may be impacted by hybrid mismatch such as determining that tax has been paid by the lender, if you don’t have information to support that a mismatch does not exist best practice is to deny that deduction until you do,” she said.

The tax consultant also reminded multinationals that they are required to withhold tax from interest, dividends and royalties that they pay to a foreign resident where they make a payment, or deal with the payment on their behalf.

“Failing to withhold tax from offshore interest payments will also invalidate your tax deduction for that interest payment until the withholding tax is paid,” she said.

“Royalties is one area that can be easily overlooked when it forms part of a bundle of rights known as embedded royalties. The ATO have also recently changed their view on what payments for software may be characterised as royalties in respect of licensing and distribution software.”

She also reminded multinationals to review their Global Entity (SGE) status annually as structural changes offshore may place them within a group with turnover exceeding $1 billion, escalating their tax compliance in Australia.

“As an SGE, failure to comply with ATO lodgement deadlines may result in penalties of up to $782,500 per late lodgement,” she said.

“SGEs are also subject to country-by-country reporting, the Diverted Profits Tax and Multinational Anti-Avoidance Law will also be impacted by the upcoming Pillar Two rules.”

Pillar two introduces a global minimum tax rate for large multinational groups and is set to come into effect in 2024–2025.

Multinationals should also prepare for the Global Anti-Base Erosion Rules (GloBE), including the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR), which will be introduced in 2024 and 2025 respectively.

“These changes will significantly affect tax functions, necessitating extensive compliance obligations and data sourcing for affected entities. Companies need to prepare action plans encompassing legislative updates, modelling the impact on effective tax rates, data readiness, process enhancements, and technology adoption,” she said.

“Compliance will involve filing the GloBE Information Return (GIR) and domestic Pillar Two tax returns.”

The implementation timeline and responsibilities will differ for outbound and inbound organisations.

“Outbound entities must assess the impact, potentially calculate tax implications, and prepare for reporting obligations. Inbound entities should identify responsibilities, assess safe harbours, conduct data gap analysis, and align with global parent entity reporting requirements,” she said.

“Both types of entities need to gear up for extensive financial statement disclosures and compliance obligations, necessitating a customised approach based on resources, data requirements, existing systems, and technology.”

Ms Emsies also warned that the ATO’s Tax Avoidance Taskforce scope now includes engaging with medium public and multinational businesses on income tax risks for the next four years.

“Areas currently concerning the ATO include interest withholding tax, inbound distribution arrangements, hybrid mismatch rules, related party financing arrangements and tax governance and actions,” she said.

“The ATO expect multinationals operating in Australia will have appropriate tax governance and tax policies and procedures in place, including having documented taxation advice to support their positions adopted. The ATO will request your tax governance framework when reviewing your affairs.”