Taxation of multinationals – things to keep an eye on heading into the new year

The taxation of multinationals has been a hot topic in Australia for some time. Further developments that have recently occurred or may arrive as we head into the New Year include:

• The High Court’s refusal of the taxpayer’s application for special leave to appeal from the decision of the Full Federal Court in Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29 (Singtel Case). Broadly, the Singtel Case deals with the application of Australia’s transfer pricing rules to interest charged on related party loans, including the extent to which parental support should be taken into account when determining the relevant interest rate. The decision of the Federal Court – which we analysed in our previous Insight, 'Federal Court agrees that deductions should be denied for interest on financing' – was upheld by the Full Federal Court.
  
  The special leave application was heard before Gageler CJ, Gordon J and Steward J on 25 October 2024 with special leave being refused. The High Court appeared interested in hearing, as a matter of principle, whether it was appropriate to impute a parental guarantee when pricing the related-party loan. However, the High Court concluded that the state of the evidence meant that the case was not an appropriate vehicle to test this point. This continues the low strike rate for taxpayers in obtaining special leave. Looking at tax-related special leave applications over the last five years, it appears that special leave has been granted in less than 20 per cent of special leave applications made by taxpayers.
  
  If you are preparing for a dispute with the Commissioner in relation to related-party debt, you should ensure that the evidence in relation to the issue of imputed parental guarantees is carefully managed so it can be dealt with as a separate issue. 
• A decision from the High Court on the Commissioner’s application for special leave to appeal from the decision of the Full Federal Court in PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86 (PepsiCo Case). Broadly, the PepsiCo Case deals with the potential application of royalty withholding tax and the diverted profits tax to payments for soft drink concentrate on the basis that a portion of the purchase price is for the right to use intellectual property. See our previous Insights on the decisions of the Federal Court, 'Royalty-free contracts will attract scrutiny by the ATO'; and Full Federal Court, ‘Commissioner’s embedded royalty hunt diverted'.
  
  If the Commissioner is successful in obtaining special leave, we expect the High Court appeal would be heard in the second half of 2025. Again, looking at tax-related special leave applications over the last five years, it appears that the Commissioner has been more successful in obtaining special leave (obtaining special leave in about half of his applications).
• Confirmation of changes to the disclosures in the Short Form Local File (including disclosures relating to intangibles). The ATO has proposed changes to the format and content of the disclosures required in the Short Form Local File. See, 'Local file changes from 1 January 2025' on the ATO website.
  
  The proposed changes arguably expand the data that needs to be disclosed and significantly increase the taxpayer effort and resources that need to be allocated to this compliance exercise. The ATO has received a significant number of submissions in relation to the proposed changes and is expected to release updated instructions before the end of the year. The changes are proposed to apply to reporting periods starting on or after 1 January 2024 so early December balancers will need to keep a close eye on the changes for their 2024 lodgements due in 2025.
• Practical guidance in relation to software royalties. The ATO has expressed its current views on the circumstances in which royalty withholding tax will apply to payments in respect of software in Draft Taxation Ruling TR 2024/D1. The ATO will likely hold off finalising Draft TR 2024/D1 until after the PepsiCo Case is resolved by the High Court. In the interim, the ATO has indicated that it will release a Practical Compliance Guideline (PCG) to assist taxpayers to better understand the ATO’s perception of risk in this area. A draft of the PCG is expected before the end of the year.
   
• Consultation on the new draft PCG in relation to the new debt creation rules. Draft PCG 2024/D3 was released by the ATO on 9 October 2024. It sets out the ATO’s approach to assessing risk in relation to the new debt creation rules that were enacted by the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024 on 8 April 2024.
  
  Draft PCG 2024/D3 addresses: transactions that the ATO views as requiring consideration of the new debt creation rules; and the circumstances in which restructures in response to the new debt creation rules will be considered high risk. Draft PCG 2024/D3 will ultimately also address the ATO’s views on the risks arising from restructures in response to the new thin capitalisation rules. An additional schedule will be added to Draft PCG 2024/D3 to cover this topic once the ATO has published its forthcoming draft public ruling on the third-party debt test.
  
  One of the more controversial aspects of the debt creation rules is that they apply to deductions claimed in relation to arrangements that were put in place before the debt creation rules were enacted. Such arrangements may have been in place for some time and relevant materials explaining the origins of these arrangements may be difficult to locate.
  
  Draft PCG 2024/D3 emphasises that the taxpayer bears the burden of proving that the debt creation rules do not apply to these arrangements. The ATO has so far rejected requests to limit the compliance resources that it will devote to older arrangements (e.g. arrangements entered into more than five years before the enactment of the new debt creation rules). The consultation period for Draft PCG 2024/D3 ends on 8 November 2024. The timeframe for finalising Draft PCG 2024/D3 has not been set.
   
• Further details in relation to unenacted measures. Significant changes announced by the Federal Government that are yet to be legislated include:

- a new penalty for large taxpayers that have mischaracterised or undervalued royalty payments to which royalty withholding tax would normally apply (Royalty Penalty);

- changes to the foreign resident capital gains tax regime to (amongst other things) broaden the types of assets on which foreign residents are subject to CGT and require foreign residents to notify the ATO of certain proposed share transactions before the relevant transaction is executed (CGT Changes); and

- the denial of deductions for interest charged by the ATO (ATO Interest Denial).

The Royalty Penalty was announced to take effect from 1 July 2026. As yet, there has been no formal public consultation on what these rules will look like. Although there would seem to be plenty of time before the Royalty Penalty takes effect, rushing legislation on this type of change could lead to penalty exposure in inappropriate circumstances. Ideally consultation will commence soon.

Treasury released a consultation paper on the CGT Changes in July 2024. Consultation concluded in August and we are expecting exposure draft legislation before a bill is presented to Parliament. The changes were announced to be effective from 1 July 2025 so consultation may be compressed.

Consultation on the exposure draft legislation to implement the ATO Interest Denial concluded on 16 October 2024. This measure was also announced to take effect from 1 July 2025, so look out for a quick turnaround on the draft legislation.

If you have any questions or comments about the court decisions, practical compliance guidelines or potential legislative changes discussed in this article, please contact Don Spirason, Annemarie Wilmore and Kathryn Bertram from the JWS Tax team.