International Best Practice doesn’t mean to say it’s good for Australia.
I recently participated in a Senate Inquiry into Multinationals loading up their Australian subsidiary with to much related party debt.
Related party debt is where a Multinational lends money to its Australian subsidiary. Interest paid on this debt is transferred offshore. If abused, related party debt can be used to strip the Australian company of its profits, enabling less tax to be paid.
Thin capitalisation provisions seek to limit how much money can be lent into Australia. In short a Multinational can’t overload its Australian subsidiary with debt.
There is a move to cap the amount of debt to around 30% for non-ADIs.
In my view this is reasonable but of course the rent seekers aren’t happy as interest paid offshore can be taxed at a lower rate than interest earned onshore.
While this might be good for the Multinationals, it’s not good for Australia if the debt structure is not at arms length.
It’s not a question of International Best Practice, it’s a question of what’s good for Australia.
Chamber: Committee on 31/01/2024
Economics Legislation Committee – 31/01/2024 – Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023
Senator RENNICK: I’ve read your submission, and what seems to be overlooked in a lot of submissions around a lot of this debt is that the question needs to be asked is whether or not it’s intercompany debt. With the withholding tax rate on all of this interest that’s paid offshore, or incurred, you can get a 30c tax deduction for it here and then go back and pay your head office the interest—and because of the withholding tax structures, depending on the company, the withholding tax rate may well be less than 30c. So my issue with looking at just the issues around the financial tax rules is that we’re not looking at the entirety of the withholding tax structure as well. I’m curious as to why the CPAs and chartered accountants haven’t picked up on that.
Mr Suppree: The withholding tax regime in Australia is international practice. There is technically a 30 per cent withholding tax on interest paid to any offshore affiliate subject to treaties. Treaties can reduce that to 10 per cent.
Senator RENNICK: Exactly. That’s right.
Mr Suppree: That’s international standard. If you’re suggesting we need to move away from an international standard, that’s probably another conversation.
Senator RENNICK: That’s a part of the conversation that has to be had in the context of the thin cap rules, because the onshore tax rate is 30 cents and the offshore tax rate for many treaties—I’m sure you’re well aware of 128B, the public offer test—is between zero and 15c. That creates an arbitrage between onshore profits and offshore profits. Do you not agree with that?
Mr Suppree: It’s a withholding tax. It very much depends on the underlying tax rate in the foreign jurisdiction. If the headline tax rate is 30 per cent, which is the withholding—
Senator RENNICK: It does. That’s right. It becomes a cumulative rate of tax. But you’re not looking at that and you’re saying we’ve got to attract foreign investment. I would argue that we actually need to attract domestic equity investment so that we retain profits onshore. If we were to leave this tax act to continue the way it is, we would end up selling all of our assets to foreign investors because of the tax arbitrage structure.
CHAIR: We’ll get a final response to your question, Senator Rennick, from Mr Suppree.
Mr Suppree: I don’t really know if there is much more I could add to what I’ve already said. It’s international best practice. The 10 per cent rate can apply. If we want to change from that, fine—but that’s not the conversation for the thin cap regime.
Senator RENNICK: I don’t see how having an onshore tax rate is best practice, with foreigners paying less tax. That’s not best practice.
