Australia proposes anti-hybrid law to combat multinational tax avoidance, announces plans for “targeted integrity rule”

The Australian government on November 24 released a draft law and explanatory materials implementing hybrid mismatch rules to combat multinational firm tax avoidance. The Australian government is also developing a “targeted integrity rule” to prevent circumvention of the hybrid mismatch rules as well as branch mismatch rules to further clamp down on MNE tax avoidance.

The hybrid mismatch rules are patterned after provisions developed by OECD and G20 nations in the 2015 base erosion profit shifting (BEPS) plan.  Australia’s intent to adopt these rules was previously announced in the 2016-17 budget and 2017-18 budget.

The rules are designed to combat tax avoidance techniques commonly used by multinational firms that take advantage mismatches in the laws of different countries concerning the characterization of entities or concerning whether instruments are debt or equity.

These techniques allow multinational firms to claim double deductions for the same expenditure in two different countries or allow one group member in a related party transaction to claim a tax deduction while the other group member does not include the corresponding amount in the income.

The new law would apply to payments made six months following the date of the law’s Royal Assent.

Stakeholder comments on the proposal are requested by December 22.

Targeted integrity rule

Australia’s Treasury said in a statement that the government is concerned that multinationals will circumvent the the hybrid mismatch rules through use of other structures designed to reach a double non-taxation outcome.

“For example, foreign headquartered groups investing into Australia may use financing arrangements through interposed entities in zero tax countries which reduce Australian profits without those profits being subject to foreign tax,” Treasury observed. As such, the Australian government said it would develop a “targeted integrity rule” to address these arrangements.

The government said it also intends to introduce branch mismatch rules, as outlined in separate OECD guidance.

The targeted integrity rule and branch mismatch rules will be addressed in separate exposure draft legislation and consultations, the government said. The intention is for these additional rules to bear the same effective date as the hybrid mismatch rules, though, namely, six months after Royal Assent of the bill introducing hybrid mismatch rules.