Navigating global tax in a world of increased disruption and transparency

By Tsae Liew and Clement Lui

Right now, Australian businesses are navigating a unique mix of challenges: economic fluctuations, stricter regulations, and a strong drive for tax transparency. For CFOs and business owners guiding private groups through this terrain, these factors aren't just hurdles, they are openings to rethink debt structures, fine-tune transfer pricing strategies, and proactively tackle new reporting requirements. This is explored below.

The debt equation has changed

Debt is becoming a significant hurdle for Australian businesses as inflation remains high, growth slows, and borrowing costs climb. For those impacted by the thin capitalisation rules (broadly, applicable to Australian businesses with foreign investors or operations) opting for the 'default' Fixed Ratio Test this means net interest deductions are typically capped at 30% of tax EBITDA annually. If borrowing costs exceed this cap, deductions are denied but can be carried forward for up to 15 years. As borrowing costs rise and profits stagnate or decline, more businesses find themselves crossing this threshold without increasing their borrowing.

But the 30% cap isn't the only path. The Third Party Debt Test can offer a more favourable outcome, sometimes allowing full deductibility of all third-party interest costs. However, the conditions are stringent: the lender must be a genuine third party, with recourse only to Australian assets, and the loan must primarily fund Australian commercial activities. Guarantees from an offshore parent typically disqualify the arrangement. Yet, we're witnessing a growing number of private businesses successfully refinancing under these terms.

Timing also plays a role. Groups restructuring to meet the Third Party Debt Test conditions by 1 January 2027 might benefit from the ATO's 'compliance approach' in PCG 2025/2 Schedule 3. This approach can allow the test to apply retroactively, preserving deductions that might otherwise be lost.

Transfer pricing under pressure

Transfer pricing models are effective in stable, profitable settings. But when the landscape shifts (due to inflation, supply chain issues, or changing demand) these models can falter. This was evident during the COVID years, where existing policies often didn't deliver the right outcomes amidst supply shortages, shutdowns, and unexpected losses. Today’s disruptions present similar challenges.

Australia's transfer pricing rules demand that pricing between related entities mirrors what truly independent parties would agree to, known as the 'arm's length' principle. Simple annual roll-forwards of documentation are less likely to be sufficient in an uncertain environment. When policies stray from economic realities, CFOs should refine their transfer pricing strategies, backing any changes with thorough economic analysis, solid commercial evidence, and formal transfer pricing documentation.

Since 2024, the transfer pricing rules have been expanded so that the quantum of your inbound cross‑border debt must also be arm’s length (not just the interest rate). Australian businesses that have borrowed from overseas related parties now need to ensure their transfer pricing analyses are updated to support both the arm’s length interest rate and the arm’s length quantum of debt.

Increased transparency and reporting

For very large multinational groups with an Australian entity or presence, two new regimes deserve close attention:

• Public country-by-country reporting: Effective for reporting periods commencing on or after 1 July 2024, large multinational groups with, broadly, A$1 billion or more in annual global income and an Australian presence must now publicly disclose breakdowns of revenue, profit before tax, taxes paid and accrued, employee numbers, and tangible assets for certain specified jurisdictions including Australia, Singapore, Switzerland, Hong Kong and 37 others (sourced from audited consolidated financial statements and submitted to the ATO within 12 months of year-end). This may be a fundamental change for private groups that are accustomed to confidentiality over their international tax footprint.

• Pillar Two: Multinational groups with consolidated revenue of at least €750 million in at least 2 of the last 4 fiscal years are subject to a 15% global minimum effective tax rate in each jurisdiction in which it has a presence (including Australia). Australia has implemented both a global minimum tax (comprising the Income Inclusion Rule which applies to fiscal years commencing on or after 1 January 2024, and the Under Taxed Profits Rule that applies to fiscal years commencing on or after 1 January 2025) and a Domestic Minimum Tax (which applies to fiscal years commencing on or after 1 January 2024), bringing complex new obligations to in-scope multinational groups. Returns and notifications are generally due 15 months after the fiscal year end (subject to transitional rules).

What steps should you take in the coming year?

With these pressures converging, the priority for CFOs and their advisers is to shift from awareness to decisive action. Here are three key steps to consider:

• Evaluate the Third Party Debt Test: If your group is losing interest deductions under the default Fixed Ratio Test, explore eligibility for the Third Party Debt Test and, if necessary, make updates to your arrangements in a manner that may be able to benefit from the ATO’s administrative approach (if completed by 1 January 2027). 

• Revisit your transfer pricing policies: Ensure your intercompany pricing reflects the current economic landscape, not last year's assumptions. Keep thorough records to ensure compliance if the ATO comes calling. 

• Assess new reporting requirements: If you're affected by Public CbCR and Pillar Two, start preparing now. These measures demand extensive data collection and governance. Acting early will help you avoid the pitfalls of rushed compliance and protect brand reputation.