Explanatory Memorandum
(Circulated by authority of the Assistant Minister for Competition, Charities and Treasury, the Hon Dr Andrew Leigh MP)Chapter 3: Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023
Schedule 1 - Multinational tax transparency—disclosure of subsidiaries
Overview
3.1 Schedule 1 to the Bill does not engage with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
3.2 Schedule 1 to the Bill introduces new rules on the disclosure of information about subsidiaries. The amendments require additional disclosures by public companies and do not apply to natural persons.
3.3 Australian public companies (listed and unlisted) will be required to disclose information on their subsidiaries. This measure will place an onus on companies to be more transparent about their corporate structures. Disclosures would be made publicly available within the company's annual financial report published on their website to minimise compliance burden.
3.4 The intent is that increased public disclosures will lead to enhanced scrutiny on companies' arrangements, including how they structure their subsidiaries and operate in different jurisdictions, including for tax purposes.
3.5 Under the amendments, for each financial year commencing on or after 1 July 2023, Australian public companies must, as part of their annual financial reporting obligations under Chapter 2M, provide a 'consolidated entity disclosure statement':
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- If the accounting standards require the public company to prepare financial statements in relation to a consolidated entity – the 'consolidated entity disclosure statement' is a statement that includes disclosures about entities within the consolidated entity at the end of the financial year.
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- If the above does not apply – the 'consolidated entity disclosure statement' is a statement to that effect.
Human rights implications
3.6 Schedule 1 to the Bill does not engage any of the applicable rights or freedoms.
Conclusion
3.7 Schedule 1 to the Bill is compatible with human rights as it does not raise any human rights issues.
Schedule 2 - Thin capitalisation
Overview
3.8 Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
3.9 The amendments address risks to Australia's domestic tax base arising from the excessive use of interest expenses or debt deductions, which amount to base erosion or profit shifting arrangements. The amendments introduce new thin capitalisation earnings-based rules for certain entity types, replacing the existing asset-based rules, and establishing a new arm's length debt test in the form of a third party debt test. Schedule 2 also amends the existing thin capitalisation rules as appropriate to ensure they continue to be fit for purpose.
3.10 These amendments align with the OECD's best practice guidance, which recommends limiting an entity's deductions for net interest, and payments economically equivalent to interest, to a percentage of the entity's EBITDA. This reflects the view that aligning debt deductions with taxable economic activity is a more robust approach to address base erosion and profit shifting from excessive interest expenses.
Human rights implications
3.11 Schedule 2 to the Bill does not engage any of the applicable rights or freedoms.
3.12 Interest expenses are deductible when borrowed funds are used to produce assessable income or in carrying on a business for that purpose. The amendments are intended to limit the deductions for interest expenses for entities that are part of a multinational enterprise. Therefore, Schedule 2 does not engage any applicable human rights.
Conclusion
3.13 Schedule 2 to the Bill is compatible with human rights as it does not raise any human rights issues.