International tax considerations
This section outlines the key international tax considerations that you need to be aware of when doing business or investing in Australia.
BEPS 2.0 project
BEPS 2.0 project is an initiative by the Organisation for Economic Co-operation and Development (OECD) and G20 countries to address cross-border profit shifting through a two-pillar approach:
- Pillar One is aimed at reallocating rights to tax certain multinational enterprises (MNEs) to ‘market jurisdictions’. These rules will only apply to multinationals with an annual global revenue exceeding €20 billion and with a pre-tax profit to revenue ratio exceeding 10%.
- Pillar Two is aimed at ensuring certain MNEs with revenue above €750 million are subject to a global minimum corporate tax rate of 15% by introducing Global anti-Base Erosion (GloBE) rules.
The Australian legislative framework to implement Pillar Two was fully enacted on 23 December 2024. As a result:
- A 15% global minimum tax applies to relevant MNEs in Australia, with an income inclusion rule applying to fiscal years starting on or after 1 January 2024, and an undertaxed payment rule applying to fiscal years starting on or after 1 January 2025.
- A 15% domestic minimum top-up tax applies to relevant MNEs in Australia that are subject to an effective tax rate below the 15% global minimum rate for fiscal years starting on or after 1 January 2024.
‘Relevant MNEs’ for the purposes of the global and domestic minimum tax in Australia include members of a multinational enterprise group (MNE group) with annual consolidated revenue of €750 million in at least two of the four fiscal years immediately preceding the test year. However, there are certain carveouts and exceptions available under the legislation.
For entities subject to Australia’s Pillar 2 rules, there are four new lodgment requirements:
- GloBE Information Return (GIR)
- Foreign lodgment notification
- Australian IIR/UTPR Tax Return (AIUTR)
- Australian DMT Tax Return (DMTR).
For relevant MNEs in Australia with a 30 June balance date, the first set of lodgments will generally be due 31 December 2026.
Australian double tax treaty network: Multilateral Legislative Instrument
Australia has a complex system of bilateral DTAs with 48 countries. Consistent with its plan to significantly expand the tax treaty network, in September 2024 the Australian Government entered into its first DTA with Slovenia in September 2024, and is negotiating its first tax treaties with Ukraine and Brazil. In addition, Australia is working to update its treaties with New Zealand, the Republic of Korea, and Sweden.
The purpose of the DTA network is to allocate taxing rights between different jurisdictions and Australia in respect of income or gains derived by non-resident taxpayers. DTAs also address common tax issues such as taxation of interest, dividends, royalties, permanent establishments and dealing with issues of ‘source’. The intention is to prevent double taxation of the same income or gain in different jurisdictions by way of either a full tax exemption or foreign tax offsets.
The Multilateral Legislative Instrument (MLI) is a multilateral treaty that came into force in Australia on 1 January 2019. The MLI modifies the operation of applicable Australian DTAs by implementing measures to prevent multinational tax avoidance and resolve tax disputes more effectively.
Whether the MLI applies to certain treaties will depend on whether both jurisdictions have taken the necessary actions to implement the MLI for that specific DTA and as such, must be considered on a treaty-by-treaty basis.
The intention of the Multilateral Legislative Instrument is to prevent double taxation of the same income or gain in different jurisdictions by way of either a full tax exemption or foreign tax offsets.
Australian withholding taxes
Interest, unfranked dividends, and royalty payments made by Australian residents to non-residents are subject to a final withholding tax. Unfranked dividends and royalty payments are generally subject to a 30% withholding tax, while interest payments are generally subject to a 10% withholding tax.
However, these rates may be modified by the relevant DTA. To prevent double taxation, withholding tax is not payable on franked dividends, as franked dividends are paid out of profits that have already been subject to corporate tax in Australia. Certain interest payments to non-resident super funds and sovereign entities are exempt from withholding tax, where the relevant provisions are satisfied.
An exemption from interest withholding tax is also available to Australian resident companies where they satisfy the ‘public offer test’ on the issue of debentures and syndicated loan facilities (this is commonly referred to as the 128F exemption).
Royalty withholding tax and ‘intangibles’
In PepsiCo,[1] the majority of the Full Federal Court overturned the decision at first instance,[2] finding that there was no ‘embedded royalty’, and payments expressed as consideration for concentrate were just that. The decision cast doubt on the ATO’s view that royalty withholding tax obligations may apply to arrangements involving intellectual property licensing, whether or not the relevant payments are expressed as consideration for intellectual property.
The decision was appealed to the High Court. The outcome of that appeal is expected sometime in the second half of 2025 and may have a significant impact on multinational companies, with global business models, similar to Pepsi’s, that license intellectual property into Australia.
Notwithstanding the ongoing PepsiCo litigation, the ATO have stood by taxation ruling TR 2024/D1 which sets out its views on when payments made in respect of software and intellectual property rights will be characterised as ‘royalties’ to which separate withholding tax obligations may apply. Whether these views survive the High Court appeal remains to be seen.
These issues remain a priority for the ATO. Pending the outcome of the appeal, multinationals should continue to undertake careful commercial analysis in relation to the character of cross-border related party arrangements and consider the risk that some of the payments made pursuant to such arrangements may be characterised as royalties for Australian royalty withholding tax purposes.
CGT withholding
Australia also has a CGT withholding regime. Subject to limited exceptions, a purchaser is required to withhold and remit to the ATO 12.5% of the purchase price from a transaction where the vendor is a foreign resident (or deemed foreign resident), and the transaction involves TAP (as discussed under the CGT section above) with a value of $750,000 or more under the foreign resident capital gains tax withholding (FRCGTW) regime.
On 10 December 2024, the Treasury Laws Amendment (2024 Tax and Other Measures No. 1) Bill 2024 received royal assent, introducing new measures announced in the 2023-24 Federal Budget to reduce the withholding tax rate for foreign residents
As of 1 January 2025:
- the withholding tax rate has increased from 12.5% to 15%; and
- the $750,000 de minimis threshold no longer applies, bringing all TAP transactions under the FRCGW regime.
In addition, the Government have flagged new measures to ensure that Australia can tax capital gains made by foreign residents on assets with a close economic connection to Australian land or natural resources.
The proposed measures:
- clarify and broaden Australia’s foreign resident CGT base to ensure a range of assets with a close economic connection to real property or natural resources are expressly designated as taxable Australian property.
- extend the testing period for the ‘principal asset test’ to the previous 365 days before the disposal, rather than the current point in time test. This brings Australian domestic law in line with OECD guidance.
- introduce a new notification requirement for a foreign resident vendors to notify the ATO before entering into a transaction to sell membership interests worth more than $20 million, irrespective of the underlying assets held in the structure.
Though the precise scope of these amendments is yet to be seen, no transitional relief has been announced and we expect they will have a significant impact on foreign investors.
Limitations on interest deductions – Thin Capitalisation and Debt Deduction Creation Rule
The thin capitalisation rules (or ‘Thin Cap’ for short) is an integrity regime aimed at preventing excessive gearing of Australian businesses. After an extended process of drafting and consultation, the details of the new Thin Cap regime were finalised in early 2024 with the release of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (Cth), which received Royal Assent on 8 April 2024.
Old Thin Cap rules
The old Thin Cap rules seek to deny Australian taxpaying entities tax deductions for interest and other financing costs where, broadly, the average total debt of the entity exceeds 60% of the average value of total assets. Where the level of debt exceeds this threshold, debt deduction denial will occur unless the entity satisfies the “arm’s length debt test” or elected to apply the “worldwide gearing test”.
Financial entities and authorised deposit institutions (ADI) can elect to continue to apply the old Thin Cap rules. All other taxpayers will be subject to the new Thin Cap rules, if Thin Cap applies to those entities.
New Thin Cap rules
Broadly, the new Thin Cap rules apply to “general class investors” – a new, broad concept including old law concepts of ‘inward’ and ‘outward’ investors – and work by disallowing an entity’s debt deductions based on the entity’s earnings or profits for the income year, determined by reference to either:
- a “fixed ratio” test of 30% of an entity’s earnings before interest, taxes, depreciation, and amortization for tax purposes (Tax EBITDA),
- a “group ratio” test of the group’s worldwide net interest expense and Tax EBITDA as based on its financial statements; or
- a “third party debt” test will apply to deny debt deductions attributable to related party debt (thus limiting debt deductions to external debt only).
Where the taxpayer does not satisfy one of the above Thin Cap tests, debt deductions will be denied (where the ‘fixed ratio test’ is elected, denied deductions can be carried forward for up to 15 years). Despite an extensive consultation process, industry and tax professionals have raised significant concerns on the application of the new Thin Cap regime and the potential to generate inequitable tax outcomes for genuine commercial structures.
There is a de minimis threshold of $2 million of the pre-tax value of the interest and debt deductions which must be met before the Thin Cap regime will apply to an entity. Australian groups which are not foreign controlled with 90% or more of their assets in Australia are exempted from the Thin Cap regime. The regime is complex as there are multiple thresholds and tests depending on how the Australian taxpayer is classified. The regime will apply to Australian entities investing overseas, their associates (outward investors) and foreign entities investing into Australia (inward investors).
On 4 December 2024, the ATO published Draft Taxation Ruling TR 2024/D3 and updated Draft Practical Compliance Guideline PCG 2024/D3, providing detailed guidance and the Commissioner’s view on various aspects of the new thin capitalisation third-party debt test. Specifically, TR 2024/D3 sets out the Commissioner’s view on certain interpretative issues in relation to the third-party debt test, and the additional Schedule 3 and Schedule 4 to PCG 2024/D3 outlines the ATO’s third party debt test compliance approach and guidance on how the new rules apply to restructures undertaken after 22 June 2023.
While TR 2024/D3 articulates the Commissioner’s narrow interpretation of the conditions of the third-party debt test and his conservative view as to when the third-party debt test is available, PCG 2024/D3 sets out a favourable compliance approach that allows taxpayers the opportunity to take advantage of the third-party debt test for specific types of restructure arrangements.
Debt Deduction Creation Rule
As part of the overhaul of the Thin Cap regime, the Debt Deduction Creation Rules (DDCR) were introduced and will apply from 1 July 2024, to disallow debt deductions to the extent that they are incurred in relation to certain debt creation schemes. Being, those schemes that lack genuine commercial justification and operate to create artificial interest-bearing debt to shift profits out of Australia through tax-deductible interest payments. The DDRCR are primarily aimed at the following two types of related party/associate transactions:
- Debt used to fund the acquisition of an asset from a related party, and
- Debt used to fund the payment of amounts or distributions to an associate. These rules will apply to both pre-existing arrangements and new arrangements (i.e. there is no grandfathering of existing financing arrangements) and will require careful consideration in relation to intragroup debt financing arrangements.
Transfer pricing
Australia, like many OECD countries, has a complex regime of transfer pricing rules which apply to cross-border related party transactions. The intention is to prevent related party transactions resulting in higher deductions or lower income being recognised in Australia, resulting in an overall lower level of tax being paid (commonly referred to as a ‘transfer pricing benefit’).
The regime requires a reconstruction of transactions to determine whether the transaction is on ‘arm’s length’ terms. This involves a study into what comparable independent parties transacting under similar conditions to the related parties would pay or receive for a particular transaction.
Transactions include the supply of goods and services, property, technology, and loan arrangements. Transfer pricing is currently a focus area for a lot of taxpayer disputes with the ATO, including Glencore[3] and SingTel.[4]
The case against Glencore concerned the pricing mechanism used in the purchase of copper concentrate by Glencore’s Swiss-based company from its Australian subsidiary. The decision marked a surprising but much-welcomed win for taxpayers.
The Federal Court found in favour of Glencore on 3 September 2019 and the Full Federal Court went on to dismiss the Commissioner of Taxation’s appeal on all but one issue. Bringing the matter to a close, the High Court dismissed the Commissioner’s application for special leave to appeal on 21 May 2021. Glencore provides some key takeaways with respect to arm’s length dealings with offshore related parties, such as the emphasis that should be placed on surrounding economic circumstances.
On 8 March 2024, the Full Federal Court handed down its decision in Singtel, confirming the first instance decision to deny SingTel a deduction for interest paid on a related party cross-border loan from its parent company.[5] In contrast to Glencore, the decision represented a significant victory for the ATO on the application of the transfer pricing rules in Australia, and provides guidance on the Commissioner’s application of the transfer pricing benefit rules and ‘arms-length’ interest deduction rules.
As evidenced in SingTel, the Thin Cap regime and transfer pricing rules are often considered in conjunction when there are cross-border related party loan arrangements.
Hybrid mismatch rules
The hybrid mismatch rules operate in Australia to neutralise hybrid mismatches by cancelling deductions or including amounts in assessable income where there are:
- deduction or non-inclusion mismatches (D/NI) where a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction;
- deduction or deduction mismatches (D/D) where the one payment qualifies for a tax deduction in two jurisdictions; and
- imported hybrid mismatches where receipts are sheltered from tax directly or indirectly by hybrid outcomes in a group of entities or a chain of transactions.
The ATO released PCG 2021/5 in 2021 which finalised the ATO’s compliance approach to the assessment of relative levels of tax compliance risk associated with imported hybrid mismatches and updated the draft PCG with only minor changes.
PCG 2021/5 provides a framework of seven colour-coded risk zones ranging from white zone (where the ATO has provided clearance to the taxpayer), through green (low risk) to very high risk (red).
Unsurprisingly, the guideline is conservative in its approach and states that taxpayers should refrain from claiming any deductions that have not been through a full and extensive verification process as set out in the guideline. In other words, taxpayers are expected to prove that deductions should not be denied because of the hybrid mismatch rules, which may seem strange in the context of Australia’s self-assessment framework.
Practically speaking, meeting the demanding expectations of the guideline will likely be difficult and burdensome, noting the ATO’s recommended “top-down” and “bottom-up” approaches for non-structured arrangements.
General anti-avoidance rules
Australia has extensive general anti-avoidance rules, commonly referred to as Part IVA. The Commissioner may reverse a tax benefit (such as the non-inclusion of an amount of assessable income, or the inclusion of a deduction) obtained in connection with a scheme that was objectively entered into for the dominant purpose of obtaining the tax benefit. The Commissioner will take into account the specific facts and surrounding circumstances of the scheme, including the manner the scheme was entered into, its legal form, and its substantive effect.
In the context of discretionary trusts, the 2022 decision of the Federal Court in Minerva[6] had caused anxiety for trustees by applying Part IVA to seemingly routine distributions paid by trustees. However, on appeal the Full Federal Court unanimously found that choosing not to exercise a discretion to distribute income to one (resident) beneficiary rather than another was not a scheme to which Part IVA applied, finding that Part IVA does not require taxpayers to choose the transaction that results in the most tax being payable.[7]
This landmark appeal decision provides great relief for trustees in Australia by confirming a trustee exercising a discretionary power to make a distribution to a beneficiary does not trigger the general anti-avoidance provisions in Part IVA merely because another beneficiary would have paid more tax had they received the same distribution.
In the 2023-24 Federal Budget, the Federal government announced an unexpected expansion of the Part IVA legislation to include schemes:
- that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents, and
- that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.
These reforms are intended to apply for income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before or after 1 July 2024. However, as at the date of writing, no exposure draft legislation has been released for consultation.
Multinational Anti Avoidance Law and Diverted Profits Tax
Global entities with an annual income of $1 billion or more are subject to the Multinational Anti Avoidance Law (MAAL) and the Diverted Profits Tax (DPT).
The MAAL is designed to target contrived arrangements employed by large foreign enterprises to avoid paying tax in Australia, in circumstances where the enterprise is supplying goods or services to Australian customers. MAAL may apply where a significant global entity enters into or carries out such an arrangement for a principal purpose of for a principal purpose of obtaining an Australian tax benefit or an Australian tax benefit and a foreign tax benefit.
The DPT addresses complex arrangements where large entities may attempt to reduce the tax they pay in Australia by redirecting profits offshore. The DPT is a 40% tax applied to the ‘diverted profit’. DPT may apply where a significant global entity entered into or carried out a scheme for a principal purpose of obtaining an Australian tax benefit or an Australian tax benefit and a foreign tax benefit.
As part of the 2024-25 Federal Budget, the Federal Government announced a new penalty for significant global entities that are found to have mischaracterised or undervalued royalty payments to which royalty withholding tax would otherwise apply.
The PepsiCo litigation is the first time the Australian courts have considered the DPT provisions. The first instance decision, including that ‘royalty-free’ licences granted under exclusive bottling arrangements were entered into for the dominant purpose of avoiding royalty withholding tax and reducing US tax, was overturned on appeal by the majority of the Full Federal Court.
The Full Federal Court found that there was no reasonable counterfactual to the scheme defined by the Commissioner, noting that the commercial and economic substance of the scheme was that the price agreed for concentrate did not include a royalty for the licence of intellectual property. The ATO have appealed the decision to the High Court. The appeal was heard in early 2025, with the highly anticipated judgment expected to shed further light on these anti-avoidance provisions.
The ATO view on the potential application of general anti-avoidance or transfer pricing rules to cross-border related party ‘intangibles migration arrangements’ is set out in TR 2024/D1 and PCG 2024/D1, including the ATO’s compliance approach for these issues. Pending the decision of the High Court in PepsiCo, these draft rulings are held in abeyance.
Changes to the foreign investment FIRB regulations
On 14 March 2025, Treasury updated its Guidance Notes on the foreign investment framework, introducing a suite of changes to its foreign investment policies modifying the FIRB regulations.
In particular, the changes overhaul the FIRB tax conditions framework by removing ‘standard’ tax conditions in favour of a case-by-case approach tailored to the circumstances of the proposed transaction and the identified tax risks of each investment proposal. Tax risks are assessed based on information gathered by the ATO, including through its ‘Tax Checklist’ which must now be completed by all FIRB applicants.
From a tax-planning and documentation perspective, this new bespoke approach means that parties to foreign investment proposals can’t rely on standard form tax conditions and precedent drafting for transaction documents.
In addition, from 1 April 2025 to 31 March 2027 foreign persons are prohibited from purchasing established dwellings in Australia. Limited exceptions apply in respect of:
- substantial redevelopment projects (being redevelopments of existing dwellings to at least 20 additional dwellings);
- commercial-scale developments (such as retirement villages, assisted living or aged care facilities and student accommodation); and
- BTR initiatives, provided that certain requirements are met.
Further, the Government has introduced provisions for partial refunds or credits of application fees for unsuccessful bidders in competitive bid processes, subject to specific criteria. Unsuccessful bidders will be offered a choice between a 75% refund of the FIRB application fee, or a 100% ‘competitive bid credit’ to be applied against a subsequent FIRB application made within 2 years of the failed bid.
These developments arise against a backdrop of heightened scrutiny by the ATO regarding tax arrangements in foreign investment proposals. The ATO has flagged several specific areas that attract greater scrutiny, including acquisitions linked to global restructures, transactions involving related party financing, acquisitions of entities subject to thin capitalisation rules, and private equity transactions.
In April 2025, the ATO launched a new ATO Foreign Investment Portal to streamline the FIRB application process and compliance reporting.
Research and development tax Incentives
The Australian Research and Development (R&D) tax incentive reduces R&D costs by offering tax offsets for eligible R&D expenditure for companies.
Eligible companies with an aggregate turnover of less than $20 million can receive a refundable tax offset, allowing the benefit to be paid as a cash refund if they are in a tax loss position. All other eligible companies receive a non-refundable tax offset to help reduce the tax they pay.
The program is available to companies that are:
- incorporated under Australian law, or
- incorporated under foreign law but an Australian resident for income purposes; or
- incorporated under foreign law and a resident of a country with which Australia has a double tax agreement.
Contact our team
If you have any questions about the above or would like assistance with tax advice for doing business in Australia, please contact one of our team members below.
Footnotes
[1] PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86.
[2] PepsiCo, Inc v Commissioner of Taxation [2023] FCA 1490.
[3] Federal Commissioner of Taxation v Glencore Investment Pty Ltd (2020) 112 ATR 378.
[4] Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29.
[5] Appeal from Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2021] FCA 1597; and Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation (No 2) [2022] FCA 260.
[6] Minerva Financial Group Pty Ltd v Commissioner of Taxation [2022] FCA 1092.
[7] Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28.