Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023
Second Reading Speech
House of Representatives, 22 June 2023
The Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 gives effect to the government's election commitments. These election commitments were announced in April 2022, with specific details announced in the October 2022 budget.
These policies are grounded in the OECD/G20 inclusive framework on base erosion and profit shifting, which began in 2013. Working together within this inclusive framework, over 135 countries and jurisdictions are collaborating on the implementation of measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
The bill introduces new rules to protect the integrity of the Australian tax system and improve tax transparency. This will help to ensure a fairer and more sustainable tax system. The government will continue to engage with stakeholders on our commitment to introduce a public country-by-country reporting regime.
Schedule 1 to the bill amends the Corporations Act 2001 to require that Australian public companies disclose information about their subsidiaries in their annual financial reports, by way of a 'consolidated entity disclosure statement'. This new requirement is a statement that includes disclosures about entities within the consolidated group. This statement will be provided at the end of the financial year, and include information such as:
- the names of each entity;
- whether the entity was a body corporate, partnership or trust;
- if the entity is a body corporate, the public company's percentage of ownership; and
- the tax residency of each of the entities.
The reported information will ensure companies are upfront with how they structure their subsidiaries, including for tax purposes. Public companies for this purpose include listed and unlisted companies and is defined to mean a company other than proprietary company or a corporate collective investment vehicle, in line with section 9 of the Corporations Act. While some ASX listed companies may already disclose this information in some form, this change will ensure all public companies will now have equal requirements for reporting basic information on their corporate structures.
These amendments will hold companies, particularly large corporate groups, to account on their corporate structures and whether they are operating with opaque or atypical tax arrangements. Given the global momentum towards ensuring that firms pay their fair share of tax, it is in the public interest that shareholders and the community have more information of this kind. The amendments in schedule 1 will apply to annual financial reports prepared for financial years commencing on or after 1 July 2023.
The Legislative and Governance Forum on Corporations was consulted in relation to schedule 1 to the bill and has approved it as required under the Corporations Agreement 2002.
Schedule 2 to the bill amends Australia's thin capitalisation rules to limit the amount of debt that entities can deduct for tax purposes. These amendments introduce earnings-based interest limitation rules for general class investors to replace the existing asset-based rules. Specifically, the current safe harbour rule lets an entity deduct debt up to a threshold of 60 percent of assets. Under the new rules, that threshold will become 30 percent of profits.
This will ensure that an entity's debt deductions are directly linked to its economic activity—its earnings—which is a more robust approach to addressing the use of debt as a base erosion and profit shifting risk. This amendment is consistent with the Organisation for Economic Co-operation and Development's best-practice framework rules.
The amendments in schedule 2 also introduce a third-party debt test to replace the existing arms-length debt test. While this test excludes related party debt—a high base erosion and profit shifting risk activity—from being deductible for tax purposes, it is expected to be used by the property and infrastructure sectors to ensure genuine commercial arrangements can deduct third-party arms-length debt without an earnings limitation. Treasury will continue to engage with industry to ensure the changes operate as intended.
The amendments to strengthen Australia's thin capitalisation rules will ensure multinationals pay an appropriate amount of tax in Australia, while balancing tax settings to support continued investment in Australia. The amendments in schedule 2 apply from 1 July 2023. As with the other measures in this bill, this measure forms part of the government's election commitments, and as such has been foreshadowed for over a year.
Tightening Australia's anti-avoidance legislation will deter multinationals from avoiding income tax, ensuring that they pay their fair share of tax right here in Australia.
The tax integrity measures in schedule 2 to the bill are estimated to result in a gain to receipts of $720 million over the four years from 2022-23.
Full details of the measures are contained in the explanatory memorandum.