‘Sub-optimal’ thin cap rules to damage economy, warns CPA
Limiting the debt deductions that companies can claim will drive investment away from Australia and hurt the economy, the accounting body cautions.
The implementation of the government’s multinational tax integrity and transparency bill will negatively impact investment, the economy and jobs in Australia, CPA Australia has warned the government in a recent submission.
The bill, which is currently before the Senate, amends the thin capitalisation rules to limit the amount of debt deductions that multinational entities can claim in an income year.
CPA Australia noted that while all European Union member states have adopted the 30 per cent tax EBITDA cap since 2019, the adoption of interest limitation rules was still not prevalent around the world.
“The latest edition of OECD’s Corporate Tax Statistics published in November 2023 shows that of the 134 Inclusive Framework jurisdictions, 67 (or 50 per cent) had interest limitation rules in place in 2023, and this is unchanged from what was published in July 2020,” the submission said.
“Out of the 67, only 23 of them have a 30 per cent tax EBITDA interest cap in place. This means jurisdictions such as Canada and China with asset-based limits and who are competing with Australia for investment will have a more favourable and simpler thin capitalisation regime.”
CPA Australia said it estimates that the proposed thin capitalisation rules in the bill will significantly reduce deductible debt from 60 per cent to 30 per cent in Australia. This is based on Treasury’s costing slide comparing deductible debt under the existing rules with the proposed 30 per cent tax EBITDA interest cap.
“Capital is mobile and investors have choices. They seek opportunities with the best return on investment and this bill will impact that return,” it said.
“Jurisdictions with thin capitalisation rules that are more favourable and less complicated, will look more attractive to investors than Australia.”
The submission also stated that while the amendments made to the original bill propose to narrow the scope of the debt deduction creation rules, the lack of a tax purpose test means genuine commercial transactions could still be caught by these anti-avoidance rules.
“For example, there is still no exemption for purchases of trading stock, meaning that debt deductions will likely be denied where an entity uses related party debt to fund the acquisition of trading stock from an associate,” the submission said.
“This is likely to capture situations where intercompany payables on stock purchases are left outstanding and begin to accrue interest.”
CPA Australia noted that the amendment in the Exposure Draft allows trust distributions to form an entity’s tax EBITDA for entities holding less than 10 per cent and eligible unit trusts that hold more than 50 per cent to benefit from the excess tax EBITDA amendment.
“However, entities that hold between ten and just below fifty per cent, such as joint ventures and consortium investments, are excluded from benefitting from the amendment,” it said in the submission.
“The change to allow eligible unit trusts to transfer their excess tax EBITDA amounts to other eligible unit trusts is welcome, however it is still very narrow in scope as most non-consolidated entities and trusts will not be able to benefit.”
CPA Australia is also calling for the start date for the thin capitalisation rules to be postponed, given that eight months have already passed since the proposed 1 July 2023 start date.
“The new thin capitalisation rules should not have a retrospective application in any circumstance. Our premise is that the new thin capitalisation rules should only commence when they are ready and we submit the current amended Bill is still flawed and significant issues remain.”
“If the Parliament legislates these sub-optimal thin capitalisation rules in haste, they will seriously hurt investment into Australia, and therefore the economy and jobs.
“We submit that we should continue with the existing thin capitalisation rules until we have a properly designed replacement thin capitalisation legislation.”
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