On 29 June 2022, the ATO issued Tax Determination TD 2022/9, which finalises the ATO’s view on whether the US global intangible low-taxed income (GILTI) rules correspond with the Australian controlled foreign company (CFC) rules for the purposes of the Hybrid Mismatch rules found in Division 832 of the Income Tax Assessment Act 1997 (ITAA 1997).
The final TD confirms the ATO’s original view contained in the prior draft (TD 2019/D12) released on 21 November 2019 being that the US GILTI rules do not correspond to the Australian CFC rules for the purposes of determining whether an amount is ‘subject to foreign income tax’ under the hybrid mismatch rules.
The impact of this view is quite significant as the term ‘subject to foreign income tax’ appears over 40 times in the hybrid mismatch rules. It primarily impacts whether there is a deduction / non-inclusion mismatch e.g. A payment made is tax deductible to the Australian payer, but the foreign recipient of the payment is not subject to foreign income tax. If the US GILTI rules applied to that payment, it may be taxed to the Parent company in the US, i.e. it would be subject to foreign income tax. However, as a result of the ATO view, the deduction could be denied in the Australian taxpayer’s tax return, or income that is otherwise taxed both in Australia and in the US is not considered dual inclusion income (DII) which is important in limiting the amount of deductions that are denied.
The ATO’s contention in arriving at such a view is that:
- The law requires the US GILTI rules to ‘correspond’ to the Australian CFC rules
- According to case law ‘correspond’ means that 2 things should agree, be similar or analogous or be equivalent in function
- The Australian CFC rules are an anti-deferral measure for taxing certain foreign-source income of an Australian controlled foreign entity. When the CFC rules apply, the calculation of the income that is taxable in an Australian return is largely similar to if that foreign entity is an Australian tax resident
- A feature of the GILTI rules result in the applicable tax rate under the GILTI regime to be significantly reduced to between 10% to 12.5%
- This particular feature in the GILTI rules makes the GILTI rules more akin to a minimum tax regime
- Generally, GILTI is the excess of the CFCs’ net income over a deemed ‘normal’ return on the CFCs’ tangible property, which is generally taxed at a rate of 10.5% in the US
The ATO did not consider it important that the GILTI rules sit within the broader US CFC rules or that their view can result in an inequity outcome for an Australian taxpayer.
A positive note
Interestingly in the compendium to TD 2022/9, the ATO had acknowledged there are some similarities between the US traditional subpart F rules (s 951(a) of the Internal Revenue Code, (standard US CFC rules)) and Australia's CFC rules. The ATO states that the standard CFC rules in the US do 'correspond' to our CFC rules. Although these comments are not binding on the ATO, the ATO considers that the purpose of s 951(a) of the US Internal Revenue Code is more aligned with the purpose of our CFC rules (in s 456 and s457 of the ITAA 1936) and therefore s 951(a) is likely to be a provision that corresponds to s456 or s457. Under Australia's CFC rules, s456 or s457 are assessing provisions which include the attributable income of a CFC in the assessable incomes of certain Australian residents that have a defined controlling interest in the CFC (attributable taxpayers). Accordingly, those amounts subject to tax under the standard CFC rules in the US may be considered to be 'subject to foreign income tax' for the purposes of Australia's hybrid mismatch rules.
Recommended actions
Australian subsidiaries of US multinationals that have transactions which fall within the Australian hybrid mismatch rules should reassess their existing hybrid mismatch position and determine whether previous analysis had relied on income being taxed under the US GILTI regime as a basis for not having a deduction denied. Also, if a conservative position has previously been taken that the US CFC rules do not correspond to the Australian CFC rules, this position may now be reconsidered.
Please reach out to a BDO adviser if you would like to discuss your exposure to this ATO tax determination.