Australia: Changes to Thin Capitalization Rules Finally Pass Both Houses of Parliament

After a period of deliberation and debate, a significant legislative milestone has been reached in Australia. On the 27th of March 2024, both the Australian Senate and House of Representatives jointly passed the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023. This crucial bill, aimed at enhancing tax integrity and transparency within multinational corporations, now awaits royal assent to become law.

The bill encompasses two pivotal measures, delineated as follows:

Schedule 1 - Multinational Tax Transparency: Disclosure of Subsidiaries This schedule focuses on enhancing transparency in multinational tax affairs, particularly concerning the disclosure of subsidiaries.

Schedule 2 - Thin Capitalization: Under this schedule, significant changes are introduced to the thin capitalization rules, primarily revolving around the implementation of the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)-based testing and the third-party debt test.

It is important to highlight the following key points:

• The amendments to Schedule 2, initially proposed by the government in November 2023, have been passed in their original form, with minor adjustments regarding the tax calculation of tax EBITDA concerning native forests.
• A post-implementation review, pursuant to an amendment proposed by Senator David Pocock, is scheduled to take place, ensuring the efficacy and appropriateness of the implemented measures.
• The commencement dates for these provisions remain unchanged, with adjustments only for Australian plantation forestry entities:
  • Generally, the provisions apply to financial years commencing on or after 1st July 2023.
  • The debt creation rules specifically apply for financial years commencing on or after 1st July 2024.

Additionally, due to an amendment proposed by Senator Hanson, the previous law (as of 30th June 2023) continues to be applicable to Australian plantation forestry entities, ensuring a smooth transition and regulatory clarity for these entities.

As the bill awaits royal assent, its implementation is anticipated to herald a new era in the realm of multinational taxation.

SOURCES:

• Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 – Parliament of Australia (aph.gov.au)
• Deloitte | tax@hand (taxathand.com)