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Executive summary

Following the 2022/23 October Federal Budget and previous consultation (See EY Global Tax Alert, Australian Treasury releases Discussion Paper on new thin cap rules, royalty deduction rules and public tax disclosure rules, dated 5 August 2022), the Australian Treasury has released an Exposure Draft (ED) and Explanatory Material for consultation concerning a proposed new anti-avoidance measure that targets significant global entities (SGE with global revenue of at least AU$1 billion) that make certain payments with respect to intangible assets. (Note: Currency references in this Alert are to the AU$.)

The proposed measure is intended to deter SGEs from entering into arrangements that are structured so that an associate of an SGE derives income from exploiting intangible assets in a low corporate tax jurisdiction, while deductions for the related payments the SGE made to the associate are claimed in Australia.

Proposal

Under the proposed measure, no deduction may be claimed for a payment that an SGE makes to its associate that is attributable to a right or permission to exploit an intangible asset if, due to the arrangement or a related arrangement, the associate directly or indirectly derives income from exploiting those or related intangible assets in a low corporate tax jurisdiction.

The ED includes several important defined terms that determine the scope of the proposed measure:

Low corporate tax jurisdiction

A low corporate tax jurisdiction is either:

• A foreign country where the lowest corporate income tax rate under the laws of the foreign country applicable to an SGE is less than 15 per cent (or nil) — based on the headline tax rate
• A foreign country with a tax preferential patent box regime without sufficient economic substance (as declared by the Minister)

To determine the corporate income tax rate:

• Deductions, offsets, tax credits, tax losses, tax treaties, concessions for intra-group dividends and tax rates that only apply to foreign residents are disregarded
• For foreign countries with progressive corporate income tax rates, only the highest rate will be relevant

This definition would therefore capture countries including Ireland and potentially Switzerland.

Tax preferential patent box regime

• The proposed measure does not capture all patent box regimes, only those that provide tax concessions without requiring sufficient economic substance — the Minister must make a legislative instrument to designate the foreign country's income tax laws' status as a "preferential patent box regime."

Intangible assets

• 'Intangible asset' takes its ordinary meaning and includes: intellectual property; copyrights; access to customer databases; algorithms; software licenses; other licenses; trademarks; patents; and leases, licenses or other rights over assets.
• The definition is extended to include certain things referred to in the section 6 (of the Income Tax Assessment Act 1936) definition of a royalty and a right in respect of or an interest in any asset which the provision applies to.
• The Australian Government may also make regulations to prescribe new assets as "intangible assets" for the purposes of the provision.
• There are some specific exclusions, including tangible assets, interests in land and financial arrangements to which the Taxation of Financial Arrangement (TOFA) rules apply.

Exploit an intangible asset

• "Exploit an intangible asset" has a broad meaning that includes:
• Using, marketing, selling, licensing and distributing the intangible asset.
• Supplying, receiving or forbearing of an intangible asset covered by certain section 6 definitions of a royalty.
• Exploiting another intangible asset that is a right in respect of, or an interest in, the intangible asset.
• Doing anything else in respect of the intangible asset.

It is significant that the concept of "exploit an intangible asset" is expressly extended to include "permission" to exploit, in the same way as the right to exploit.

Key dates

The amendments are proposed to apply to payments (or credits an SGE makes to an associate, and liabilities a SGE incurs to an associate), made on or after 1 July 2023.

Comments on the ED legislation are due by 28 April 2023.

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Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor