APAC Tax Matters: November 2012


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Consultation on potential lower company tax rates

On 13 August 2012, the Business Tax Working Group (BTWG) released a discussion paper on the potential for a reduction in Australia’s company tax rate over the medium-term from 30% to 25%.

However, the Government’s terms of reference require that a lower company tax rate be funded by reducing other business tax rate concessions. The BTWG paper has sought consultation input on options which include:

  • Changes to thin capitalization and interest deductibility
  • Changes to tax depreciating assets and capital expenditure
  • Changes to the research and development (R&D) incentive

If adopted, the first option in relation to changing the thin capitalization rules is likely to have the greatest impact for businesses with international transactions. In addition to the options outlined in the July 2012 edition of APAC Tax Matters (for example the potential removal of the arms length debt test and/or the reduction in the safe harbour debt amount limits for banks and non-banks from 75 to 60 per cent on debt-to-total asset basis either coupled with or without the removal of the arms length debt test) the BTWG discussion paper outlines additional options which include capping net interest expense deductions for certain business tax payers by reference to a set percentage of ‘earnings before interest, taxes, depreciation and amortisation’ (“EBITDA”).

Action required

  • Businesses need to plan their actions and consider both the potential impact of the reduction in the corporate tax rate and the options proposed to fund this reduction, including transitional issues. For example, businesses may consider preparing models addressing the potential impacts on their thin capitalization position.
  • Businesses should monitor the progress of these reforms and the wide range of options proposed (making their views known by way of the consultation process, either on their own behalf, or through their industry associations.

Significant Tax Bills continue their passage through Parliament and/or receive Royal Assent

A number of important tax Bills were introduced into Parliament or received Royal Assent in June and August 2012. A summary of these has been provided below.

Managed Investment Trust Tax (MIT) amendment laws enacted

On 29 June 2012, the MIT Withholding Tax legislation received Royal Assent increasing the concessional MIT withholding tax (MIT WHT) rate on fund payments to non-residents from 7.5% to 15% for years commencing on or after 1 July 2012.

In addition, on 10 October 2012, the Government introduced into Parliament a Tax Bill outlining a proposed concessional 10% withholding tax rate for certain fund payments made by "Clean Building" MITs to eligible foreign investors in information exchange countries.

Broadly, the new 10% rate is proposed to apply to fund payments in relation to the income years starting on or after 1 July 2012 in respect of office buildings, hotels or shopping centers where construction began on or after 1 July 2012 which meet relevant energy ratings.

MITs will now be able to receive up to 5% of their income from assets that are reasonably incidental to those buildings: as a result, new funds will need to qualify as Clean Building MITs. However, income from a Clean Building MIT can be channeled through interposed funds to foreign investors.

Action required

  • Fund payments made in relation to income years that commenced before 1 July 2012 continue to qualify for the 7.5% tax rate.
  • Managers and responsible entities need to implement processes and compliance changes related to the increased MIT WHT rates of 15% for fund payments. Marketing and general investor materials should also be updated accordingly.

Tax consolidation changes enacted

On 29 June 2012 the much anticipated tax consolidation changes in relation to rights to future income (RFI) and residual assets, and the Taxation of Financial Arrangements, received Royal Assent.

A separate Tax Laws Amendment Bill that received Royal Assent on 28 September 2012 provides possible concessions for RFI and residual asset claims in respect of interest and penalties in relation to amended returns. We expect the ATO to monitor consolidated groups for compliance with the law change.

Action required

Consolidated groups including multiple entry consolidated (MEC) groups should:

  • Consider the impact of the tax consolidation changes on any recent and proposed entity acquisitions.
  • Re-visit previous tax consolidation outcomes and determine whether the retrospective changes may apply
  • Consider their strategy in relation to amending previous claims if they find additional taxes payable compared with the claims in accordance with pre-existing rules
  • Consider financial reporting implications, including their deferred tax balances

Investment Manager (IMR) Regime laws enacted

On 13 September 2012, legislation implementing the first and second stages of the Australian IMR passed all stages of Parliament and received Royal Assent. This law in essence, reduces Australian tax risks for some foreign asset management funds which use Australian intermediaries in their international investing activities.

In addition, an enduring Investment Manager Regime (IMR) tax exemption was announced in 2011 for foreign investors that invest in certain widely held foreign funds where the funds invest in certain passive assets. The changes were to be effective from 1 July 2011. However, this policy development has been delayed.

Action required

Asset managers and investors should monitor the progress of these reforms and consider the potential application to their business.

Transfer pricing law changes

Tax Law Amendment (Cross-Border Transfer Pricing) Bill (No.1) 2012, affecting transactions with parties in double tax treaty countries and confirming an OECD-style profits-based administration of transfer pricing rules, passed parliament and received Royal Assent on 8 September 2012. The potential impact of these rules and action points were outlined in the July 2012 edition of APAC Tax Matters.

An exposure draft of the second tranche of proposed legislation (the Tax Laws Amendment (Cross-Border Profit Allocation Bill (No 2) 2012) is expected to be issued in October 2012. This second tranche will apply the OECD approach to non-treaty countries and is likely to include mandatory transfer pricing documentation.

Australian Shipping Reforms Laws enacted

On 21 June 2012, the Australian Shipping reforms (previously outlined in the July 2012 edition) received Royal Assent. These reforms include incentives for Australian shipping companies operating internationally by providing an exemption for certain income being derived by Australian ship operators, accelerated tax depreciation for certain vessels, roll-over relief for the replacement of vessels, refundable tax offset for withholding payments made to Australian resident seafarers and exemptions from royalty withholding tax.

Action required

Businesses should consider the potential impact of these reforms on their business and the incentives they may be eligible for.

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