Increased penalties for royalty withholding tax non-compliance
Taxpayers who undervalue or mischaracterise royalty payments to avoid paying royalty withholding tax will be subjected to a new penalty announced in Tuesday’s budget.
The government will introduce a new penalty where royalty payments that would otherwise attract a royalty withholding tax (RWHT) are mischaracterised or undervalued.
From 1 July 2026, taxpayers part of a group with more than $1 billion in annual turnover will be potentially exposed to the new penalty regime whose precise shape has yet to come into view.
Alia Lum, KPMG tax policy partner said the new penalty regime is designed to focus taxpayers on the ATO’s concerns around insufficient royalty withholding taxes, often as a result of payments for royalties being embedded within broader payments, or else undervalued.
“It is something we’ve been looking at a lot with different rulings coming out and also the Pepsico case, which is dealing with a lot of these issues,” Lum told Accounting Times.
Last week, the full Federal Court of Australia heard an appeal from the PepsiCo in relation to its landmark loss to the Tax Commissioner over its treatment of royalty payments.
In the initial case, Justice Mark Moshinsky held that Pepsi’s corporate arrangements between its Australia, Singaporean, and American entities had allowed it to avoid paying royalty withholding taxes to the ATO.
ATO deputy commissioner Rebecca Saint said the decision sent “strong signals” to multinationals with similar royalty arrangements.
Lum said it would be impossible to predict how the appeal case will turn out, but that some witnesses to the case had suggested it could lean towards the ATO.
A successful outcome for the ATO, combined with the new penalty, would “give [the ATO] a lot of confidence in pursuing this in audit activities,” she added.
Also revealed on budget night, the government will drop its original intangibles integrity measure in favour for the OECD’s global 15 per cent minimum tax.
The initial approach was announced as a pre-election promise when the government was in opposition and would have operated to deny deductions on payments for intangibles held in low- or no-tax jurisdictions.
A range of stakeholders submitted that the integrity measure was unnecessary in light of the new global minimum tax which effectively does away with the concept of a low- or no-tax jurisdiction as applied under the original measure.
“There is sort of that overlap there in terms of how the measures operate and because of the way that the rules were interacting, you could also end up with double tax outcomes where you might be denied a deduction in Australia in relation to that payment because it's going to a notionally low tax jurisdiction but then you're also paying top up tax of 15 per cent in that jurisdiction anyway,” explained Lum.
“It was also seen as quite challenging to apply in practice and there were a lot of concerns around the complexity of it versus the amount of tax that was actually likely to collect except for this double tax potential outcome.”
The global minimum tax will apply in Australia for income years beginning on or after 1 January 2024, but the majority of foreign jurisdictions will begin introducing it next year.
“It is a very complicated regime with different nuances in different jurisdictions across the world that are meant to be across a common framework,” said Lum.
“Even in a country like Australia where you do have a high tax rate, it's a significant compliance burden that's coming up for a lot of groups just to prove that you don't have any top-up tax.”
Asked what tax agents should be doing, Lum said the focus should be on clearly identifying where payments could be for royalties even where they are labelled differently.
“It's really just about looking carefully at existing arrangements, any payments offshore… and seeing where there might be a royalty component, even if it's labelled as something else in the contract or it might be a mix of payments that you would traditionally think of royalties, but just really examining those payments to see where there are market risks.”
