Grant Wardell-Johnson and Robyn Basnett discuss on Australia's treatment of hybrid loans.
Recently we contributed a paper to Bloomberg BNA Tax Management International Forum (Forum). The Forum is a comparative tax law journal which poses a cross-border tax issue to be addressed by each Forum Member from the perspective of their own country.
The Spring (June) 2017 issue of the Forum examined how countries deal with transactions that may fall under the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) recommendations dealing with hybrid transactions in the form of loans. The OECD’s principal rule calls for a “payer jurisdiction” to deny a deduction if a payment gives rise to a deduction/non-inclusion outcome.
The Forum presented the example of a corporation (FCo) in a foreign country (FC) that has advanced funds to a corporation (HCo) in your country (HC), where the transaction is recorded as a liability by HCo. The tax treatment of this transaction, and the possibility of the tax authorities recharacterising the loan, were then considered under the following scenarios:
A key characteristic of Australian income tax law is the set of substance-over-form debt and equity rules in Division 974, that are fundamental to the tax treatment of financing arrangements. The rules formed the basis of our paper’s discussion into the Australian Taxation Office (ATO) ability to recharacterise transactions (the loan will be assessed against the Div 974 criteria), the lack of loan documentation (in itself does not affect the assessment), and the consequences for thin capitalisation and transfer pricing purposes.
We noted that Australia has rejected the OECD’s approach to limiting interest deductions, but has embraced rules to eliminate hybrid mismatch arrangements. Australia was also one of the first signatories to the OECD’s Multilateral Instrument (MLI) in June 2017, and (like the recent Australia-Germany tax treaty) any tax treaty development going forward is likely to include anti-abuse measures.
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