The Australian government has released an international tax proposal targeting deductions for payments for intangibles, and it could affect U.S. multinationals claiming the deduction for foreign derived intangible income (FDII).
The measure is a part of the larger tax integrity package and is not necessarily aligned with Pillar 2 global minimum tax concepts. The legislation is not final but appears to be moving toward enactment.
The proposal would apply to Australian entities that are a part of a global group with revenue exceeding 1 billion in Australian dollars (approximately $670M U.S. dollars). In its current form, the proposal seeks to deny Australian entities deductions for payments made to “exploit” intangibles in jurisdictions with corporate rates of less than 15%. This includes preferential rates for patent box regimes without sufficient economic substance. The effective rate of income in which the FDII deduction applies can be as low as 13.125%, meaning payments to U.S. entities related to intangibles that benefit from a FDII deduction may be implicated.
Intangible assets are defined broadly, as is the term “exploit.” The measures seek to capture payments that may be mischaracterized to disguise their true nature, so the proposal could extend beyond traditional royalty payments. The provision is proposed to be effective July 1, 2023, and the calculation will likely be complex. U.S. multinationals with Australian operations should assess the potential impact, as there could be planning opportunities.
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