RSM Australia

International

Enhancements to Multinational Anti Avoidance Law

The Multinational Anti Avoidance Law enacted in 2015 has been further strengthened to negate the use of foreign trusts and partnerships in corporate structures including:

  • corporate structures that involve the interposition of partnerships that have any foreign resident partners;

  • trusts that have any foreign resident trustees; and

  • foreign trusts that temporarily have their central management and control in Australia.

The amendment will apply retrospectively from 1 January 2016.


Enhancements to Multinational Anti Avoidance Law

The Multinational Anti Avoidance Law (“MAAL”) enacted in 2015 has been further strengthened to negate the use of foreign trusts and partnerships in corporate structures.  MAAL only applies to significant global entities with:

  • an annual global income exceeding A$1 billion; or
  • a member of an accounting consolidated group where the global parent entity has an annual global income of more than A$1 billion.

The key changes proposed include:

  • corporate structures that involve the interposition of partnerships that have any foreign resident partners;
  • trusts that have any foreign resident trustees; and
  • foreign trusts that temporarily have their central management and control in Australia.

The amendment will apply retrospectively from 1 January 2016.


Hybrid Mismatch Rules

Further to intentions raised in Budget 2016-17, the Government has confirmed the OECD hybrid mismatch arrangement rules will be applied to regulatory capital.

Financial institutions that utilise hybrid entities in aggressive tax minimisation structures to exploit the different tax treatments of their regulatory capital across international borders will be targeted. 

Without these measures, advances from a head company to its foreign subsidiary may be treated as equity in  the head company’s jurisdiction and debt in  the foreign subsidiary jurisdiction.  This may allow the foreign subsidiary to claim a tax deduction for interest payments made to its parent without the parent company being liable for tax on those payments in its home country.

This measure implements one of the key action items from the OECD Base Erosion and Profit Shifting package.


Specifically, the measures will be:

  • preventing returns on Additional Tier 1 (“AT1”) capital from carrying franking credits where such returns are tax deductible in a foreign jurisdiction; and
  • where the AT1 capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were to be franked.

The measure will apply (subject to transitional arrangements) to returns on AT1 instruments paid from the later of 1 January 2018 or six months after Royal Assent.

Transitional arrangements will apply to AT1 instruments issued before 7.30 pm (AEST) on 9 May 2017 such that the measure will not apply to returns paid before the next call date of the instrument occurring after 7.30 pm (AEST) on 9 May 2017.


Case Study
An advance of $10M is made by Granny Smith Limited to its foreign subsidiary, Pink Lady Pty Ltd at 5% p/a interest.  The advance is treated as equity in Granny Smith Limited’s tax jurisdiction but as debt in Pink Lady Pty Ltd’s tax jurisdiction. 
This scenario allows Pink Lady Pty Ltd to claim a tax deduction for $500,000 in interest payments it makes to Granny Smith Limited without Granny Smith Limited being liable for tax on receipt of that $500,000 in its own tax jurisdiction.
The proposed changes to the hybrid mismatch rules will ensure alignment of the tax treatment in both jurisdictions. 


Learn more about Budget 2017-18:

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Authors

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Con Paoliello

Director, Tax Services

E: [email protected]

T: +61 8 9261 9100


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Corey Beat

Principal, Tax Services

E: [email protected]

T: +61 8 9261 9507


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Joanne Wynne

Principal, Tax Services

E: [email protected]

T: +61 8 9261 9453


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Ross Watson

Principal, Tax Services

E: [email protected]

T: +61 8 9261 9100


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