Unveiling the Australian Government’s Revised Intangibles Integrity Measure: Impact on Significant Global Entities

July 6, 20230

The Australian Government recently unveiled its revised exposure draft legislation, the Treasury Laws Amendment (Measures for Future Bills) Bill 2023, to address the issue of deductions for payments associated with intangible assets linked to low corporate tax jurisdictions. This article examines the key features of the proposed intangibles integrity measure and its potential impact on significant global entities. 

 

Overview of the Intangibles Integrity Measure  

 

The revised exposure draft bill builds upon the previous version released in March 2023 and aims to prevent significant global entities (SGEs) with annual consolidated global revenue of at least AU$1 billion from avoiding income tax through structuring arrangements that exploit intangible assets in low corporate tax jurisdictions. The measure denies deductions for payments made by Australian payers to associates for intangible assets-related transactions. 

Key Changes in the Revised Exposure Draft: 

 

  • Definition of Low Corporate Tax Jurisdiction: The updated bill clarifies that the relevant corporate income tax rate should be the national headline rate applicable to income derived in the ordinary course of business, disregarding exemptions, concessions, and rates that only apply to foreign residents. Based on this definition, countries like Ireland and Switzerland continue to be considered low corporate tax jurisdictions. 
  • Disregarding Taxed Income: Concessions have been introduced to identify income derived in low corporate tax jurisdictions that is nonetheless subject to a tax rate of at least 15%. Under certain circumstances, income assessed as attributable income under Australia’s controlled foreign company regime or subject to foreign income tax at a 15% rate or more may not be denied a deduction. 
  • Royalty Withholding Tax: In cases where a deduction would otherwise be disallowed, the amount of the deduction denied will be reduced proportionately by the remitted withholding tax. If the full non-treaty withholding rate of 30% applies, no deduction will be denied. 
  • New Penalty Provisions for SGEs: The revised exposure draft introduces a new penalty for SGEs, adding to the existing penalties in the Taxation Administration Act 1953. This quadrupled penalty applies when a deduction is denied under the proposed measure, resulting in increased consequences for non-compliance. 
  • Global and Domestic Minimum Taxes: The exposure draft does not specifically address the interaction between the intangibles legislation and proposed Pillar Two global and domestic minimum taxes. However, the Government acknowledges the need to consider these interactions during the implementation of minimum tax measures. 
  • Substantive Requirements: The revised legislation includes changes in wording and provides additional commentary and examples. Notably, there is a focus on genuine distribution arrangements and distinguishing between payments for goods and payments for intangible assets. 
  • Implications and Action Required: With the proposed rules set to come into effect on 1 July 2023, affected businesses should analyze the impact of the new legislation and consider necessary adjustments to their payment practices. It is crucial for SGEs to review their arrangements involving intangible assets and assess the connection to low corporate tax jurisdictions. 

The Australian Government’s revised exposure draft legislation on intangibles integrity aims to prevent SGEs from exploiting low corporate tax jurisdictions for tax avoidance purposes. By disallowing deductions for payments related to intangible assets, the government seeks to protect the Australian tax base. Businesses affected by these measures should stay informed and take necessary steps to ensure compliance with evolving tax regulations. 

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