2023-24 Federal Budget: Multinationals

Australia will implement BEPS Pillar 2 from 1 January 2024

Australia will implement key aspects of the Pillar Two solution to address tax challenges from digitalisation of the economy for Action 1 of OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.

• A 15% global minimum tax will apply to large multinational enterprises, with the Income Inclusion Rule (IIR) applying to income years starting on or after 1 January 2024 and the Undertaxed Profits Rule (UTPR) applying to income years starting on or after 1 January 2025.
• A 15% domestic minimum tax will apply to income years starting on or after 1 January 2024.

Both the global and domestic minimum tax will be based on the OECD's Global Anti-Base Erosion Model Rules (or GloBe rules). These rules impose a top-up tax on a resident multinational parent or subsidiary company if the group's income is taxed below 15% overseas.

The IIR would allow Australia to apply a top-up tax on a resident multinational company, where the group’s income in another jurisdiction is being taxed below the global minimum rate of 15%. The UTPR would allow Australia to apply a top-up tax on a resident subsidiary member of a multinational group if the group’s income in another jurisdiction is being taxed below the global minimum rate of 15% and where no IIR applies.

The domestic minimum tax gives Australia first claim on top-up tax for any low-taxed domestic income. If a large multinational company's effective Australian tax rate is below 15%, the domestic minimum tax enables Australia to collect the revenue that would otherwise be collected via another country's global minimum tax.

The rules apply to multinational enterprises with an annual global revenue of EUR750 million (approximately $1.2 billion) or more.

Sources: Budget Paper No 2, pp 20–21; Budget Factsheet — Stronger foundations for a better future, p 63. 

Scope of Pt IVA general anti-avoidance rules expanded

The scope of the general anti-avoidance rules in Pt IVA of ITAA 1936 will be expanded to capture schemes that result in reduced Australian tax via lower withholding tax rates on income paid to foreign residents. The reach of this regime will also extend to schemes with a dominant purpose to reduce foreign income tax, so long as it achieves an Australian income tax benefit. The changes will apply to income years starting on or after 1 July 2024, regardless of whether the scheme was entered into before 1 July 2024.

Pt IVA generally applies to schemes entered into with the sole or dominant purpose of obtaining a tax benefit. A “scheme” means any agreement, arrangement, understanding, promise or undertaking — whether express or implied and whether legally enforceable or not — and any scheme, plan, proposal, course of action or course of conduct (s 177A of ITAA 1936). If Pt IVA applies to a scheme, the ATO may cancel the tax benefit, make compensating adjustments and impose substantial penalties.

Source: Budget Paper No 2, p 29. 

Changes to Petroleum Resource Rent Tax (PRRT)

Deductible expenditure for PRRT projects that produce liquefied natural gas (LNG) will be capped at 90% of assessable income from 1 July 2023. The government will also proceed with many recommendations to PRRT contained in the Treasury Review of Gas Transfer Pricing arrangements and the Callaghan Review.

The cap will limit deductible expenditure to 90% of each taxpayer's PRRT assessable receipts in respect of each project interest in the relevant income year (applied after mandatory transfers of exploration expenditure). Unused denied deductions will be carried forward and uplifted at the government long-term bond rate. Projects will not be subject to the cap until 7 years after the year of first production or from 1 July 2023, whichever is later, to minimise the impacts of upfront payments on project economics. The cap will not apply to certain classes of deductible expenditure in the PRRT — closing-down expenditure, starting base expenditure and resource tax expenditure.

Recommendations from the Treasury review

The expenditure cap was recommended by Treasury in the Review of Gas Transfer Pricing Arrangements Final Report. Other recommendations that the government will proceed with from the report include:

• requiring projects make an irrevocable election to use the shorter or longer asset life formula from 1 July 2024. This will remove the integrity risk that projects change the operating life of capital projects to benefit from higher rates of return allowable under the shorter asset life formula.
• equalising the treatment of the notional upstream and downstream entities between loss situations and profit situations from 1 July
• 2024 under the residual pricing method (RPM).
• updating the comparable uncontrolled price (CUP) rules from 1 July 2024 to align with the OECD guidelines. In particular, the analysis for the CUP should be broadened to consider all reasonable conditions of a comparable transaction. Reasonably accurate adjustments would continue to be permitted.
• modifying the Advance Pricing Arrangement (APA) rules from 1 July 2024 to provide guidance to industry and the Commissioner on the principles that the Commissioner must have regard to in agreeing an APA. If the RPM is retained, the use of an APA should be limited to circumstances where it is required to give practical effect to the statutory residual profit split.
• updating the regulations for tolling arrangements from 1 July 2024 to support the effective operation of the RPM and to ensure that arm’s length/commercial transactions for parts of the LNG production chain (that reflect the underlying resource ownership and risks to parties) are used as far as possible as a reference for establishing a gas transfer price.
• updating both the PRRT general anti-avoidance rule and the arm’s length rule from 1 July 2023 to clarify that they apply to the     Petroleum Resource Rent Tax Assessment Regulation 2015 (PRRT Regulation). This follows a recommendation made by the Callaghan Review that the Government amend the PRRT anti-avoidance rules to be in line with the income tax anti-avoidance rules (see below).
• updating the PRRT Regulation to ensure that, from 1 July 2024, where an LNG facility enters the PRRT regime (either solely for the purposes of the PRRT Regulation or for broader PRRT calculations) for the first time for backfill or tolling purposes, the value of the plant for use in PRRT calculations is the historical cost of the LNG facility, uplifted by the GDP deflator to the date of first production for PRRT purposes.

Recommendations from the Callaghan review

The government will proceed with the following 8 recommendations of the Callaghan Review, which were announced but unenacted measures of the former Coalition government:

• allowing PRRT taxpayers to lodge annual returns after they start holding an interest in an exploration permit, retention lease or production lease rather than having to wait until they receive assessable receipts from the project
• granting power to the Commissioner to treat a new project as a continuation of an earlier project, where it would be reasonable to do so
• granting discretion to the Commissioner to recognise more than one project from a production licence area where there are genuinely separate and independent petroleum operations
• extending the option to have all interests held by a group taken together and reported as a single PRRT return to offshore projects
• allowing PRRT taxpayers to adopt a substituted accounting period for PRRT so it can align with their choice to use a substituted accounting period for income tax
• allowing PRRT taxpayers operating with a multiple entry consolidated (MEC) group to make a functional currency choice for PRRT purposes that aligns with the functional currency choice made for income tax purposes
• granting power to the Commissioner to administratively exempt projects from PRRT obligations where they are clearly unlikely to pay PRRT in the foreseeable future, and amending the PRRT anti avoidance rules to be in line with the income tax anti-avoidance rules.

The government will consult on the design and implementation details for the deductions cap and draft PRRT rules later this year. Consultation on other policy changes, including recommendations from the Callaghan Review and the anti-avoidance rules, will be undertaken in early 2024. The government will not remake the PRRT Regulation (due to sunset on 1 April 2026) until legislation implementing the deductions cap has been enacted.

Sources: Budget Paper No 2, p 23; Treasurer's press release Changes to the Petroleum Resource Rent Tax, 7 May 2023. 

“Exploration for petroleum” meaning clarified; timing of depreciation

• Legislative amendments will be made confirming that mining, quarrying and prospecting rights can only be depreciated for income tax purposes from the time they are used not from the time they are held.
• Legislative amendments will be made to the reflect the decision of the Full Federal Court in FC of T v Shell Energy Holdings Australia Ltd 2022 ATC ¶20-816, the Commissioner's application for special leave to appeal to the High Court having been refused.
• Amendments will be made to clarify that mining, quarrying and prospecting rights can only be depreciated for income tax purposes from the time they are used. Merely, holding such assets does not trigger depreciation deductions. The circumstances in which the issue of new rights over areas covered by existing rights lead to tax adjustments will be limited. This limitation will apply in respect of all rights that are acquired or commence to be used from the date of the announcement, ie 9 May 2023.
• The meaning of “exploration for petroleum” in the Petroleum Resource Rent Tax Assessment Act 1987 s 37(1) will also be amended to be consistent with the government's policy intent and the ATO's administrative guidance, as set out in Taxation Ruling TR 2014/9, namely it is limited to the discovery and identification of the existence, extent and nature of the resource, and does not extend to an evaluation of the commercial recoverability of the resource. The amendments will apply to expenditure incurred from 21 August 2013, being the date of application of the ruling.

Source: Budget Paper No 2, p 16. 

General insurers to continue use of audited financial information for tax returns

Audited financial reporting information forms the basis of income tax returns for general insurers. The reissue of Australian Accounting Standard AASB 17: Insurance contracts, operative from 1 January 2023, resulted in a misalignment between taxation law and accounting standards and increased compliance costs for general insurers.

The government will amend the taxation legislation to realign the taxation law with the reissued accounting standard, effective for income years beginning on or after 1 January 2023.

Source: Budget Paper No 2, p 14.