On 23 June 2023, the Australian Government released updated exposure draft legislation in the form of Treasury Laws Amendment (Measures for Future Bills) Bill 2023: Deductions for payments relating to intangible assets connected with low corporate tax jurisdictions (Revised ED) for the previously announced intangibles integrity measure, forming part of the Government's comprehensive multinational tax integrity package.

While the Revised ED adopts a number of proposed amendments arising from the consultation process, it remains very broad in scope, and continues to limit significant global entities (SGE) (being multinational groups with annual consolidated global revenue of at least A$1 billion) from claiming deductions for payments made to associates in respect of intangible assets in low corporate tax jurisdictions.

This revised proposed section 26-110 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) is part of the Australian Government's legislative agenda to limit deductibility for payments which it considers will erode the Australian tax base.

This intangibles integrity measure denies an Australian tax deduction for amounts paid to, liabilities incurred with or amounts credited to (henceforth referred to collectively as payments) associates from 1 July 2023, to the extent that the payment is attributable to a right to exploit an intangible asset, if the:

payer is a SGE;

• the payer makes the payment (directly or indirectly) to an associate, wherever that associate is located; and
• the arrangement under which the payer makes the payment (either alone or together with any other related arrangement) results in:

• the payer (or an associate) acquiring the intangible asset or a right to exploit the intangible asset, or exploiting the intangible asset; and
• the associate recipient of the payment, or another associate of the payer, deriving (directly or indirectly) in a low corporate tax jurisdiction, income from exploiting the intangible asset, or a related intangible asset.

Examples of intangible assets include intellectual property, information or data (including a customer database) or an algorithm.

Summary of proposed changes

Feedback from the consultation process has to some extent been implemented, with the scope and application of certain elements of the previous exposure draft legislation (Original ED) now narrowed. However, the Revised ED remains broad in scope, with the definition of key terms such as intangible assets, exploit and arrangements remaining unchanged in substance from the Original ED.

A summary of the key differences between the Original ED and the Revised ED is set out below.

Update to definition of low corporate tax jurisdiction

Clarity has been provided as to how a foreign country is determined to be a low corporate tax jurisdiction, with the new definition resulting in exemptions for particular industries and particular types of income being disregarded. Importantly, the 15% rate now refers to the headline corporate income tax rate applicable to income derived by a SGE in the ordinary course of carrying on a business.

Disregarding income from Intangible Assets that has been taxed

Under the Revised ED, a deduction for a payment will no longer be denied where the income:

• is assessed as attributable income in any year under Australia's controlled foreign company (CFC) regime; or
• is, or will be, subject to foreign income tax at a 15% rate or more (after taking into account municipal taxes and, in the case of a federal foreign country, State taxes), including by virtue of being included as part of a country's foreign hybrid mismatch or CFC equivalent rules.

It is not clear whether any income taxed at 15% under a qualifying domestic minimum top-up tax (QDMTT) regime will be subject to foreign tax and thus fall outside these rules. This will need to be confirmed and may ultimately depend on how any QDMTT is drafted in the relevant foreign country.

Royalty withholding tax

In circumstances where:

• a deduction is denied by reason of this new measure and no other law would deny any part of the deduction of the payment; and
• the taxpayer has withheld an amount from this payment on the basis that it is a royalty and this amount has been remitted to the ATO as required,

the amount of the deduction that is denied will be reduced to reflect the amount of the royalty withholding tax (RWT) that has been paid.

New penalty provisions

Although certain requirements in respect of income and headline rates appear to have been relaxed in the Revised ED, a significantly increased penalty for SGEs has been introduced.

The Revised ED has doubled the penalty that results from an application of section 26-110, which is applied in addition to the existing doubled base rate penalty amounts that already apply to SGEs. Therefore, any shortfall penalty in respect of, for example, false or misleading statements that arise from a failure to take reasonable care, will result in a quadrupled penalty.

Transfer pricing

Australian transfer pricing provisions must be interpreted and applied alongside the intangibles anti-avoidance measure. The Explanatory Materials state that the ED will enable the ATO to assess the substance of arrangements, including whether arrangements have been mischaracterised and in substance are for the right to exploit intangible assets. The application of Australia's transfer pricing reconstruction provisions may result in the recharacterisation of cross-border arrangements, potentially bringing the arrangement in or out of the scope of the Revised ED.

Next steps

Unlike the Original ED, there was no announcement of a consultation process. The Government is further considering interactions of this intangibles integrity measure with global minimum taxes and domestic minimum taxes under Pillar Two of the OECD's Base Erosion and Profit Shifting Pillar Two rules. We anticipate that the Revised ED may be tabled when Parliament returns after 31 July 2023, and when passed, will apply with retrospective effect from 1 July 2023.

SGE groups should immediately review all arrangements where the group's intangibles are used in any way in Australia, and whether any direct or indirect payment (including incurring liabilities or crediting amounts) by an Australian taxpayer is in connection with the use of the intangible. Where such a connection exists, SGEs will need to determine whether the payment is made to a low corporate tax jurisdiction recipient (as defined), which will require an analysis of the SGE's global supply chain.

Read our previous update on these proposed changes to intangible asset exploitation.

Please get in touch with our team if you need assistance with navigating the proposed new measures.