Submissions on multinational tax reform close today - could one proposed reform have unintended consequences?

Ahead of submissions closing today (2 September) on the Australian Government’s multinational tax reform package, The Australian Government’s multinational tax reform package.a company tax specialist has raised concerns with one of the proposed reforms on intangibles and royalties.

The government released a discussion paper, Multinational Tax Integrity and Tax Transparency, on 5 August seeking industry feedback on a suite of reforms targeting the tax practices of multinational enterprises (MNEs).

RSM Australia National Tax Technical Director Liam Telford said the proposal to ‘’introduce a new rule limiting MNEs’ ability to claim tax deductions for payments relating to intangibles and royalties that lead to insufficient tax paid’’ was materially different to the ALP 2022 Election Platform, and also failed to include a ‘motive’ or ‘purpose’ test.

Mr Telford says in its current form the proposed rule on intangible assets, such as patented inventions, trade secrets and algorithms, could unwittingly capture a wide range of company payments for intangible assets to any country where the prevailing tax rate was deemed unacceptable, irrespective of motivation or purpose.

“For example, companies may have good reason to locate their intellectual property in countries such as India where their technology talent is located,’’ he said.

A punitive tax on royalties to particular jurisdictions, as is currently framed, appears misguided particularly given the novelty of the measure, and multilateral efforts already underway,’’ he said.

“I would hope to see greater detail and further consultation around this measure and its potential impacts. For example, the possibility of applying the measure to payments made to any jurisdiction with an effective tax rate of less than 15% seems potentially incongruous with Pillar Two of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to which Australia is a signatory. The indiscriminate focus on any jurisdiction with a patent box regime seems equally problematic.’’

Mr Telford questioned the government’s front-footed approach, particularly when Australia was one of more than 135 countries and jurisdictions collaborating on global measures to tackle tax avoidance through the OECD’s BEPS two-pillar reform plan.

‘’It may have been more appropriate to wait for the introduction of the OECD BEPS initiatives – potentially due in 2023,’’ he said.

“However, the current process of consultation is welcome and critical to ensure such fundamental changes to Australia’s taxation system, worth billions of dollars, do not have unintended consequences for some of the country’s most significant taxpayers.’’

Mr Telford said the public reporting proposal outlined in the consultation paper was consistent with a European Union directive requiring certain multinational enterprises meeting revenue thresholds to disclose publicly the income tax they pay.

Mr Telford has co-authored a paper on the proposed reforms. It can be found here.

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Liam Telford
National Tax Technical Director - Perth