House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Minister for Competition, Charities and Treasury, the Hon Dr Andrew Leigh MP)

General outline and financial impact

Schedule 1 - Multinational tax transparency—disclosure of subsidiaries

Outline

Schedule 1 to the Bill introduces new rules on the disclosure of information about subsidiaries. For financial years commencing on or after 1 July 2023, Australian public companies (listed and unlisted) must disclose information about subsidiaries in their annual financial reports.

Date of effect

Schedule 1 to the Bill will commence the day after Royal Assent. The amendments apply to annual financial reports prepared for financial years commencing on or after 1 July 2023.

Proposal announced

Schedule 1 to the Bill partially implements the Government election commitment on multinational tax integrity, as well as the 'Multinational Tax Integrity Package – improved tax transparency' measure from the October 2022-23 Budget.

Financial impact

This measure is estimated to have an unquantifiable impact on receipts.

Human rights implications

Schedule 1 to the Bill does not raise human rights issues. See Statement of Compatibility with Human Rights — Chapter 3.

Impact Analysis

The Impact Analysis relating to the amendments in Schedule 1 to the Bill is at Attachment 1. This Impact Analysis also considers the Government's country-by-country reporting 2022-23 Budget measure.

Compliance cost impact

The measure is estimated to have a minor impact on compliance costs.

Schedule 2 – Thin capitalisation

Outline

Schedule 2 to the Bill limits the amount of debt deductions multinational entities can claim in an income year. The new thin capitalisation rules seek to align with the OECD's earnings-based best practice model which allows an entity to deduct net interest expense up to a benchmark earnings ratio.

Date of effect

Schedule 2 to the Bill will commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent. The amendments apply to income years beginning on or after 1 July 2023.

Proposal announced

Schedule 2 to the Bill implements the MNE interest limitation rules from the Government election commitment on multinational tax integrity, as well as the 'Multinational Tax Integrity Package – amending Australia's interest limitation (thin capitalisation) rules' measure from the October 2022-23 Budget.

Financial impact

Schedule 2 has the following estimated revenue implications:

All figures in this table represent amounts in $m.

- denotes nil

Human rights implications

Schedule 2 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 3.

Impact analysis

The Impact Analysis relating to the amendments in Schedule 2 to the Bill is at Attachment 2. This Impact Analysis also considers the Government's 2022-23 Budget measure to deny deductions relating to intangibles connected with low- or no-tax jurisdictions.

Main points

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International profit shifting by multinationals erodes the domestic and corporate tax base and limits Government revenue.

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Strengthening Australia's thin capitalisation rules will combat multinational profit shifting and tax avoidance by ensuring that debt (interest) deductions are linked to an entity's economic activity and taxable income in Australia.

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The amended thin capitalisation rules will limit an entity's debt deductions to 30 per cent of its tax EBITDA. Two alternative thin capitalisation tests are available for entities which are more highly leveraged for non-tax reasons.

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This is expected to raise revenue and to limit the ability of multinationals to use debt and associated interest deductions as a BEPS technique.

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The thin capitalisation rules are intended to target multinational enterprises and large businesses. There are approximately 2,500 taxpayers with sufficient levels of debt deductions to fall within scope of the new law and who are likely to seek legal and tax advice on the impacts of the new law.

Compliance cost impact

This measure has an estimated compliance cost impact of $70.1 million for the initial year of effect, followed by nil ongoing costs.