Corporate tax developments to watch in 2024

Diverted Profits Tax Decision Expected (Coca-Cola)

In 2024, the Commissioner of Taxation (Commissioner) and Coca-Cola are expected to plead their case in the Federal Court in what will be the second time that Australia’s diverted profits tax (DPT) has been considered by the Courts. The DPT is charged at a rate of 40% on the profits the Commissioner deems were diverted offshore.

The Commissioner is alleging Coca-Cola owes $173.8 million in DPT for the 2018 and 2019 income years. Coca-Cola is arguing that it did not obtain a tax benefit or enter into any scheme for the purpose of obtaining one (a requirement under the DPT provisions).

The first case to consider the DPT was handed down in the Federal Court on 30 November 2023. In that case the Commissioner alleged that one of Coca-Cola’s biggest competitors (PepsiCo) obtained similar benefits on the underpayment of royalties by the Australian subsidiary of the US parent entity. Justice Moshinsky was ultimately not required to decide the DPT issue but did provide comments for the sake of completeness. A summary of the findings in that case can be found in our review of Corporate Tax Developments from 2023 here.

Australia’s implementation of Domestic Minimum Tax (OECD Pillar 2)

In 2024, we expect to see Australia’s domestic implementation of a 15% minimum effective tax rate under the Federal Government’s commitment to Pillar Two of the OECD’s Global Anti-Base Erosion (GLoBE) rules. The Government announced in May as part of the Federal 2023/24 Budget that it will introduce legislation to implement the Pillar Two rules. Under an OECD Inclusive Framework, more than 135 countries have agreed to implement changes to address the tax challenges of a digital economy.

The minimum effective tax rate is expected to apply to income years commencing on or after 1 January 2024 and apply to multinational enterprises with consolidated revenue over €750 million (c. AUD $1.2 billion). Adoption of the rules is not unexpected and has been part of the ongoing work Australia has been undertaking since OECD’s 2015 Base Erosion and Profit Shifting project.

Broadly, implementation of the GLoBE rules will involve:

• The Income Inclusion Rule which will provide Australia with the ability to collect an allocation of top-up tax where the group’s ultimate parent entity (or sometimes an intermediate entity) is located in Australia. This is expected to be effective for income years commencing on or after 1 January 2024.
• The Undertaxed Profits Rule which is intended to apply as a backstop if low-taxed income is not fully collected under the Income Inclusion Rule. This is expected to be effective for income years beginning on or after 1 January 2025.

The ATO has already established a dedicated team for the implementation of the GLoBE rules to develop their compliance approach and provide guidance to taxpayers and advisers. However, the OECD implementation framework and domestic legislation is yet to be released.

Development in the treatment of intangible assets

As part of the 2022-23 Federal Budget, the government announced a proposal to introduce an anti-avoidance rule to prevent significant global entities (with global revenue of at least $1 billion) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low or no-tax jurisdictions. These payments include royalties and payments in relation to other intangibles such as customers' databases and advertising algorithms. The measure is expected to apply to payments made on or after 1 July 2023.

The rule will not disallow a deduction to the extent that the income is derived in the low tax jurisdiction is attributed or assessed under Australia’s controlled foreign company rules or will be subject to certain foreign income tax at a rate of at least 15%. This measure is in addition to the diverted profits tax (DPT) which was introduced in 2017 and attacks the underpayment of royalties. The DPT has been the subject of a one case already decided by the Federal Court with another case due to be heard in 2024 (see our comments above).

This anti-avoidance rule aims to prevent large multinationals from securing an unfair tax advantage over other Australian businesses and seeks to ensure that large multinational enterprises are paying their fair share of tax in Australia. Exposure draft legislation has been released and stakeholders have been consulted at various stages. The Government is now further considering the interactions of the intangibles measure with other measures aimed at international tax avoidance, such as those proposed under Pillar Two.

Changes to Thin Capitalisation Rules

As mentioned in our review of corporate tax developments in 2023, we are expecting legislative amendments to be made to the Australian thin capitalisation rules. Refer to our comments regarding these proposed changes here.

Changes to the Promoter Penalty Regime

Significantly increased penalties, broader applicability and an extension of time limitations are coming to bolster the promotor penalty regime in the wake of the PwC tax leaks saga.

The ‘promotor penalties’ target entities engaged in promoting tax exploitation schemes. A tax exploitation scheme is defined as one which is entered into by an entity with the sole or dominant purpose of reducing a tax-related liability or increasing a tax credit for the entity, referred to as a ‘scheme benefit’. To trigger promoter penalties, the offending entity must play a substantial role in marketing, promoting or otherwise encouraging the tax exploitation scheme rather than merely providing advice about the scheme. The existing promoter penalty regime includes a four-year limitation period for the Australian Taxation Office (ATO) to take action against entities involved in promoting such schemes.

In response to perceived deficiencies and as part of broader reforms, in August 2023 the Federal Government announced changes to strengthen the tax system's integrity and regulatory frameworks.

The proposed amendments, outlined in the Treasury Laws Amendment (Measures for Consultation) Bill 2023 (Bill), are intended to strengthen regulatory oversight, address deficiencies, and ensure accountability for those promoting tax exploitation schemes. The reforms include widening the application of promoter penalty rules, broadening the meaning of key definitions, and extending the time frame for the ATO to commence civil penalty proceedings from four to six years. Maximum civil penalties have also been increased to a maximum of:

• Individuals – the greater of $1.57 million or 3 times the benefit received for individuals.
• Bodies corporate – the greater of $15.7 million, 3 times the benefit received, or 10% of the aggregate turnover (capped at $782.5 million).

The Bill has a provisional commencement date of 1 July 2024.

It is imperative for lawyers, accountants and other advisors review taxation plans and advice given to clients to avoid the application of the significantly broadened and increased promotor penalties.

This publication has been mentioned in the fifth Thomson Reuters Weekly Tax Bulletin 2024. To read the bulletin, click here.

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