24 May 2018 Australia introduces bill on hybrid mismatch tax rules into Parliament On 23 May 2018, the Australian Government introduced into Parliament the Australian implementation of the Organisation of Economic Co-operation and Development's Action 2 Neutralising the Effect of Hybrid Mismatch Arrangements, in Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 (the Bill). The Bill contains the measures previously announced in the 2015/16 Budget and included in draft law released in November 2017 and March 2018.1 In comparison to the March 2018 draft law, there have not been substantive changes and by and large, the changes implemented merely fine tune the mechanics of the law. However, there has been a material change to the integrity measure contained within the hybrid mismatch rules. Integrity measures: subdivision 832-J The stated purpose of the integrity measures is to prevent multinational groups from being able to enter into arrangements designed to circumvent the hybrid mismatch rules using interposed conduit type entities that pay effectively no tax to invest into Australia, as an alternative to investing directly into Australia via traditional hybrid instruments or entities. - The integrity measure will apply where Australia makes a deductible interest (or equivalent) payment to an entity in a jurisdiction interposed between Australia and the ultimate parent jurisdiction.
- In the previous draft law, for the rule to apply, the entity in the interposed jurisdiction was required to be subject to a tax rate of 10% or less. Under the Bill, this test has been changed to require that the payment is subject to foreign income tax in one or more foreign countries and the highest rate at which the payment is subject to foreign tax is 10% or less.
- Previously the law had a carve-out where it was not reasonable to conclude that the scheme was designed to produce an Australian deduction and a 10% or less foreign tax rate. Under the Bill, the "design test" has been replaced with a "principal purpose" test. It is now a condition for the integrity rule to apply that the scheme was entered into for a principal purpose or for more than one principal purpose that includes a purpose of obtaining an Australian deduction and enabling foreign tax to be imposed on the payment at a rate of 10% or less.
- In considering the application of the principal purpose test, the Bill specifically requires consideration to be given to the source of funds provided by the interposed foreign entity to Australia and whether the interposed foreign entity engages in substantial commercial activities in carrying on a banking, financial or other similar business.
- The hybrid mismatch rules will apply to income years starting on or after 1 January 2019. Consistent with the March 2018 draft law, there is no grandfathering of existing arrangements.
- However, the imported mismatch provisions, which are aimed at stopping arrangements that seek to avoid the application of the hybrid mismatch rules by interposing one or more entities between the hybrid mismatch and a country that has hybrid mismatch rules, are delayed by one year to apply to assessments for income years starting on or after 1 January 2020. The exception to this is where the imported mismatch payment (that is, the payment giving rise to the Australian deduction) is made under a "structured arrangement" and the Australian entity making the payment is a party to this structured arrangement. An arrangement is a structured arrangement where the hybrid mismatch is priced into its terms or it is reasonable to conclude that the scheme has been designed to produce a hybrid mismatch. Taxpayers will need to review their existing arrangements to determine if the extended application date will apply.
- The measures clarify that the thin capitalization provisions are not impacted by the application of the hybrid mismatch rules. Therefore, an inappropriate thin capitalization outcome will arise where a debt deduction is denied under the hybrid mismatch provisions given the debt remains included in the calculation of "adjusted average debt" for thin capitalization purposes.
- Affected taxpayers should note subtle changes have been made to some of the mechanics dealing with the ability of foreign bank branches to obtain a notional deduction, the treatment of deductions that arise in different periods to when the payment is made and the interaction of the hybrid mismatch rules with various part of the existing taxation law including the Taxation of Financial Arrangements provisions, trading stock provisions, capital gains tax provisions, partnership and trust provisions, controlled foreign company provisions and foreign currency translation rules.
- Unlike the diverted profits tax, there is no carve out for collective investment, sovereign wealth or widely held entities.
- It is expected that the law will be enacted in late June 2018, when there is next a joint sitting of both Houses of the Australian Parliament. The Australian Taxation Office has informally indicated that it will be releasing guidance on the application of Australia's general anti-avoidance rule (Part IVA) in the context of the hybrid mismatch rules around this time.
For additional information with respect to this Alert, please contact the following: Ernst & Young (Australia), Sydney - Sean Monahan
sean.monahan@au.ey.com - Stephen Chubb
stephen.chubb@au.ey.com - Lachlan Cobon
lachlan.cobon@au.ey.com
Ernst & Young (Australia), Melbourne - Brendan Dardis
brendan.dardis@au.ey.com - Peter Janetzki
peter.janetzki@au.ey.com
Ernst & Young (Australia), Perth - Andrew Nelson
andrew.nelson@au.ey.com - David S Browne
david.browne@au.ey.com
Ernst & Young LLP, Australian Tax Desk, New York - David Burns
david.burns1@ey.com
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ATTACHMENT PDF version of this Tax Alert Document ID: 2018-5691 |
