Chapter 1
Introduction
1.1
On 9 May 2018, the Senate agreed that all bills introduced into the
House of Representatives after 10 May 2018 and up to and including 31 May 2018
that contain substantive provisions commencing on or before 1 July 2018 be
referred to committees for inquiry and report by 18 June 2018.[1]
1.2
On 24 May 2018, the Senate referred the provisions of the Treasury Laws
Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 (the bill) to the
Economics Legislation Committee for inquiry and report by 18 June 2018.
1.3
As outlined by the Hon Michael Sukkar MP, Assistant Minister to the
Treasurer, in his second reading speech, the bill seeks to implement a range of
measures including:
...the OECD hybrid mismatch rules, which are designed to strengthen
the integrity of the tax system, continuing the Turnbull government's work on
combating multinational tax avoidance. It also includes an amendment to
strengthen the Producer Offset and encourage filmmakers to employ Australian
cast and crew, as well as measures to provide tax exemptions to support the
International Cricket Council to hold the World Twenty20 in Australia and an
update to the registered list of Deductible Gift Recipients.[2]
1.4
The bill contains 5 schedules:
- Schedules 1 and 2 pertain to the Tax Integrity Package measures
from the 2016–17 and 2017–18 Budget and the 2017–18 MYEFO, which seek to amend
the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax
Assessment Act 1936 (ITAA 1936) to implement part of the OECD hybrid
mismatch rules.[3]
- Schedule 3 seeks to implement part of the 2017–18 Budget
measure—'Broadcasting and Content Reform Package—funding for Australian film
and television content and SBS'—by amending the ITAA 1997 to limit what is
qualifying Australian production expenditure under the producer offset.[4]
- Schedule 4 seeks to support to the International Cricket Council
in staging the ICC World Twenty20 in Australia in 2020 by amending the ITAA
1997 and the ITAA 1936 to provide an income tax exemption for the ICC Business Corporation
FZ-LLC (IBC). Schedule 4 also provides an exemption from interest, dividend and
royalty withholding tax liability for amounts paid to the IBC.[5]
- Schedule 5 seeks amend the ITAA 1997 to list Melbourne Korean War
Memorial Committee Incorporated as a deductable gift recipient (DGR).[6]
Conduct of the inquiry
1.5
The committee advertised the inquiry on its website. It also wrote to
relevant stakeholders and interested parties inviting written submissions by 8
June 2018. The committee received five submissions, which are listed at
Appendix 1.
1.6
The committee would like to thank all the individuals and organisations
that participated in the inquiry.
Overview of the bill
Schedule 1: OECD Hybrid Mismatch
Rules
1.7
Schedule 1 of the bill contains two parts:
- Part 1 of Schedule 1 seeks to amend the ITAA 1997 to implement
part of the OECD hybrid mismatch rules by preventing entities that are liable
to income tax in Australia from being able to avoid income taxation, or obtain
a double non-taxation benefit, by exploiting differences between the tax
treatment of entities and instruments across different countries.[7]
- Part 2 of Schedule 1 seeks to amend the ITAA 1936 to implement
part of the OECD hybrid mismatch rules by: limiting the scope of the exemption
for foreign branch income; and preventing a deduction from arising for payments
made by an Australian branch of a foreign bank to its head office in some
circumstances.[8]
Hybrid mismatch arrangements
1.8
The explanatory memorandum explains the circumstances in which hybrid mismatch
arrangements arise:
In broad terms, hybrid mismatch arrangements arise where
entities exploit differences in the taxation treatment of an entity or
instrument under the laws of at least two tax jurisdictions to defer or reduce
income tax. This can result in double non-taxation, including long term tax
deferral.[9]
1.9
There are two types of hybrid mismatch arrangements; deduction/deduction
mismatch arrangements and deduction/non-inclusion mismatch arrangements:
- A deduction/deduction mismatch occurs when a business receives a
deduction in two countries for the same payment.
- A deduction/non-inclusion mismatch occurs when a deduction is
provided for a payment in one country, but the corresponding income is not
included as assessable income in the recipient country.[10]
1.10
Hybrid mismatches pose a significant problem for the tax system when an
arrangement involves related parties or is deliberately structured to result in
a mismatch because it provides an opportunity to eliminate taxes that would
otherwise be payable on business income unrelated to the arrangement. Hybrid
mismatch arrangements can reduce the collective tax base of countries around
the world.[11]
1.11
Hybrid mismatch rules aim to neutralise the effects of hybrid mismatches
so that unfair tax advantages do not accrue for multinational groups as
compared with domestic groups.[12]
Background
1.12
In 2015, as part of the OECD/G20 Base Erosion and Profit Shifting
Project, the OECD released the report, Neutralising the Effects of Hybrid
Mismatch Arrangements (OECD Action 2 Report), which made recommendations to
neutralise the effects of hybrid mismatch arrangements.[13]
1.13
In the 2015–16 Budget, the government asked the Board of Taxation to
consult on the implementation of the OECD hybrid mismatch rules. The Board of
Taxation completed its Report to the Treasurer—Implementation of the OECD
Hybrid Mismatch Rules—in March 2015.
1.14
The hybrid mismatch rules inserted into the ITAA 1997 by Part 1 of
Schedule 1 to the bill implement the recommendations made in the OECD Action 2
Report, taking into account the recommendations made by the Board of Taxation. These
measures were announced in the 2016–17 Budget.[14]
1.15
In 2017, the OECD released the report, Neutralising the Effects of
Hybrid Mismatch Arrangements (OECD Branch Mismatch Arrangements Report),
which made recommendations to neutralise the effects of branch mismatch
arrangements.[15]
1.16
In the 2017–18 MYEFO, the government announced an extension of the OECD
extension of the OECD hybrid mismatch rules to implement the recommendations in
the OECD Branch Mismatch Arrangements Report. Part 2 of Schedule 1 to the bill
implements Recommendations 1 and 3 of that report.[16]
1.17
The OECD hybrid mismatch rules will apply to income years starting on or
after 1 January 2019.[17]
Schedule 2: OECD Hybrid Mismatch Rules—Branch
mismatch arrangements
1.18
As previously noted, in the 2016–17 Budget, the government announced
that it would implement the recommendations made in the OECD Action 2 Report,
taking into account the recommendations made by the Board of Taxation.
1.19
Consistent with Recommendation 2 of the OECD Action 2 Report, Schedule 2
of the bill seeks to implement part of the OECD hybrid mismatch rules by
modifying domestic income tax law to:
- deny imputation benefits on franked distributions made by an
Australian corporate tax entity if all or part of the distribution gives rise
to a foreign income tax deduction; and
- prevent certain foreign equity distributions received, directly
or indirectly, by an Australian corporate tax entity from being non-assessable
non-exempt income if all or part of the distribution gives rise to a foreign
income tax deduction.[18]
1.20
In the 2017–18 Budget, the government further announced that it would
eliminate hybrid tax mismatches that occur in cross border transactions
relating to Additional Tier 1 regulatory capital. Transitional rules for
Additional Tier 1 capital instruments issued before 9 May 2017 were also
announced.[19]
1.21
The Explanatory Memorandum outlines the application of these
transitional rules:
Transitional rules apply to Additional Tier 1 capital
instruments issued by ADIs [authorised deposit-taking institutions], general
insurance companies and life insurance companies before 9 May 2017. Under these
transitional rules, the amendments to deny imputation benefits do not apply in
relation to distributions on the instrument that are made before the first
available call date of the instrument that occurs on or after 9 May 2017.[20]
1.22
Subject to the transitional rules detailed above, the amendments to deny
imputation benefits and to make foreign equity distributions assessable apply
in relation to distributions made on or after 1 January 2019.[21]
Schedule 3: Strengthening the
integrity of the film producer offset
1.23
Schedule 3 of the bill seeks to amend the ITAA 1997 to limit what is
qualifying Australian production expenditure (QAPE) under the producer offset.
The principal objective of the proposed amendment is to ensure that the
producer offset is better targeted at supporting the Australian film industry
when an offshore location is used for principal photography.[22]
1.24
Currently under the ITAA 1997, companies are entitled to a producer
offset for QAPE incurred for a film with significant Australian content. Where
the subject matter of a film reasonably requires principal photography in a
location outside Australia, a company may claim towards the producer offset
expenditure incurred for the purchase of services performed in that location
from a company or permanent establishment that has an Australian Business
Number (ABN).[23] This provision in the ITAA 1997 is often referred to by the industry as the
'Gallipoli Clause'.
1.25
The amendment to the producer offset proposed in the bill imposes an additional
Australian residency requirement on individuals that perform services outside
Australia through a company or permanent establishment if a film reasonably
requires a foreign location to be used for principal photography.[24]
1.26
The amendment applies to expenditure incurred in relation to films that
commenced principal photography on or after 1 July 2017. The explanatory
memorandum explains that retrospective application 'is necessary as the
amendment is an integrity measure designed to ensure that the scope of the
producer offset is appropriate and targeted to supporting the Australian screen
industry'.[25]
Schedule 4: Income tax and
withholding exemptions for the ICC World Twenty20
1.27
Schedule 4 to the bill seeks to amend the ITAA 1997 and the ITAA 1936 to
provide an income tax exemption for the IBC, and also an exemption from
interest, dividend and royalty withholding tax liability for amounts paid to
the IBC.[26]
1.28
The income tax law exempts the ordinary and statutory income of a number
of categories of organisations from income tax liability. Payments of interest,
dividends and royalties made to non-residents by residents are not subject to
withholding tax in some circumstances if the non-resident is exempt from income
tax.[27]
1.29
The objective of these amendments is to provide support to the
International Cricket Council in staging the ICC World Twenty20 in Australia in
2020.[28]
1.30
The amendments apply on and from 1 July 2018 to 30 June 2023 inclusive
to income derived by the IBC and interest, dividend and royalty withholding tax
obligations for payments to the IBC.[29]
Schedule 5: Deductible Gift
Recipients
1.31
Schedule 5 to the bill seeks to amend the ITAA 1997 to list Melbourne
Korean War Memorial Committee Incorporated as a DGR.[30]
1.32
The income tax law allows income tax deductions for taxpayers who make
gifts of $2 or more to a DGR. DGRs are entities which fall within one of the
general categories set out in Division 30 of the ITAA 1997 or are specifically
listed by name in that Division.[31]
1.33
The proposed amendment ensures that Melbourne Korean War Memorial
Committee Incorporated receives appropriate support through the Commonwealth
tax system for building a memorial in Melbourne honouring Australians who
served in the Korean War.[32]
1.34
The amendment applies to gifts made to Melbourne Korean War Memorial
Committee Incorporated between 1 January 2018 and 31 December 2019 inclusive.[33]
Financial impact
1.35
The package of OECD hybrid mismatch reforms, contained in Schedules 1
and 2 of the bill, is expected to have an unquantifiable gain to revenue over
the forward estimates.[34]
1.36
The estimated financial impact of the producer offset amendments set out
in Schedule 3 is a reduction in expenditure of $6 million over the forward
estimates as follows:
Table 1: Financial impact—Strengthening the integrity of the
film producer offset[35]
2017–18 |
2018–19 |
2019–20 |
2020–21 |
- |
-$2m |
-$2m |
-$2m |
- Nil
1.37
The income tax and withholding exemptions measure in Schedule 4 is
estimated to have an unquantifiable impact on revenue over the forward
estimates.[36]
1.38
The cost to revenue of the deductible gift recipient measure in Schedule
5 was estimated in the 2017–18 MYEFO to be $1.1 million over the forward
estimates as follows:
Table 2: Financial impact—Deductible Gift Recipients[37]
2016–17 |
2017–18 |
2018–19 |
2019–20 |
2020–21 |
- |
- |
-$0.4m |
-$0.5m |
-$0.2m |
- Nil
Compatibility with Human Rights
1.39
As required under the Human Rights (Parliamentary Scrutiny) Act 2011,
the government has assessed the bill's compatibility with the human rights and
freedoms recognised or declared in the international instruments listed in
section 3 of that Act. The government considers that all schedules in the bill
are compatible.[38]
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