The second major crackdown on multinational tax avoidance in as many budgets will help fund the Coalition’s pledge to cut the corporate tax rate over the longer term.
Changes to thin capitalisation rules will reduce from 60 per cent to 50 per cent the amount of debt a multinational company can load into their Australian operation.
The change will be part of a suite of measures in next month’s budget designed to crank up the government’s response to profit shifting by multinationals, industry sources said.
Resources companies stand to be among the most affected by tighter thin capitalisation rules because they generally carry a large level of debt funding in Australia.
To get the business community on side, the government will commit to reducing the company tax rate over the longer term.
The existing 60 per cent “safe harbour” debt-to-assets ratio will be reduced to 50 per cent – the second tightening of Australia’s thin capitalisation rules in as many years.
While the move will open Malcolm Turnbull up to criticism for discouraging foreign investment, he will be able to argue that a lower corporate tax rate is the best way to attract foreign capital.
“Labor and the Greens are targeting tax as a real weak spot for the Coalition,” a source said.
“So there will be a whole series of announcements from the government which are in the form of, ‘We’re working hard to constrain multinational tax avoidance.'”
Public anger growing
The Coalition dedicated much of its last budget to multinational tax avoidance, including doubling penalties for companies found profit shifting.
But community anger has continued to grow over the past 12 months and hampered the government’s ability to sell a company tax cut on its own, even though many economists agree the benefits would eventually flow to wage earners.
The thin capitalisation rules discourage companies from loading up their Australian operations with tax-deductible debt, which means they pay less tax here.
At present, companies can have $1.50 debt to every $1 equity. The government plans to reset the ratio at $1 to $1, a reduction of 17 per cent.
Companies with debt exceeding that level may not be eligible for tax deductions on the outstanding amount. It is unclear how many companies would be affected and how much extra revenue would be generated.
PwC international tax leader Peter Collins urged caution.
“A number of foreign investors have based their investment decisions on the existing thin capitalisation rules and, given our heavy reliance on foreign capital, they should not be tightened again without careful consideration of the impact on current and new investment in Australia,” he said.
“Any such change would also affect the competitiveness of Australian companies with offshore investment.”
The thin capitalisation changes will give the Coalition a counter policy to Labor’s, which is to assess a company’s debt allowance according to its worldwide gearing ratio.
Under Labor, companies would no longer be able to claim up to the 60 per cent debt-to-equity ratio for their Australian operations. The relevant test would instead be the rate of gearing for a company’s entire global operations.
This means that if a company has an average 30 per cent debt-to-equity ratio across its different subsidiaries, it would only be able to claim tax deductions up to that level.
Final tax report due
Labor says this and a number of other “tax integrity” measures will generate $1.9 billion in the first three years.
In a submission to a Senate inquiry into corporate tax avoidance, International Transport Workers’ Federation president Paddy Crumlin estimated the Labor policy would cost the Gorgon partners $3.2 billion in tax over four years.
The final report of the Senate’s high-profile inquiry into multinational tax avoidance, which called executives from the likes of Google and Apple to give evidence, is due this week.
KPMG tax leader Grant Wardell-Johnson said the Coalition’s plan could work.
“A corporate tax reduction-thin cap tightening deal is a political solution, but one would need to do the maths to see if it is truly an economic one,” he said.
“There is more to corporate tax than the headline rate.”
It was only two years ago that the then-Labor government reduced the thin capitalisation safe harbour threshold from 75 per cent to 60 per cent.