Australia has finalized significant changes to its thin-capitalization regime and the new Debt Deduction Creation Rules (DDCR), marking a major shift in how multinational companies can claim interest deductions on debt within the country. The changes apply to income years beginning on or after July 1, 2024, and taxpayers are being urged to reassess their financing arrangements immediately.
Major Impacts on Multinational Groups
The newly finalized rules restrict the deductibility of interest on related-party debt and introduce several tests that companies must pass to validate their deductions. Importantly, the DDCR introduces strict compliance standards, and violations can fall under Australia’s anti-avoidance provisions.
According to Nitin Saby, tax principal at Saby+Partners and former ATO director, companies should waste no time in reviewing their structures:
“The message is clear: Review group financing structures now, upgrade documentation, and consider third-party refinancing where needed. The era of easy interest deductions is definitely over.”
He also noted that transfer pricing adjustments can’t be used to correct thin-capitalization breaches, warning that such attempts may attract additional ATO scrutiny.
Limited Flexibility Despite Industry Feedback
Joanna Black, managing director at Alvarez & Marsal Tax, Australia, explained that while the ATO incorporated some industry feedback—such as allowing companies in certain cases to replace intercompany debt with third-party debt—the overall framework remains tight.
“The Finalised Guidance does not provide a huge amount of breathing room for groups with complex intragroup arrangements and taxpayers will still need to undertake a comprehensive review of their intra-group arrangements and uses of borrowed funds,” she said.
Regional Developments: India Introduces Block Assessments
Elsewhere in the region, businesses in India will benefit from a new “block assessment” framework, allowing a single audit to cover three years of intercompany tax positions instead of conducting separate annual reviews. This change is expected to reduce administrative burdens while offering more consistency for taxpayers.
Additionally, demand for bilateral advance pricing agreements (APAs) in India continues to grow as multinational groups seek tax certainty across borders, according to Vinay Kumar Singh of the Central Board of Direct Taxes.
Global TP Litigation: Data Access vs. EU Privacy Rules
In the US, a recent federal appeals court ruling on IRS access to data in its transfer pricing dispute with Eaton Corp. may create challenges for multinationals that must navigate both US tax requirements and EU data-privacy laws. The decision could prompt the IRS to pursue similar actions against other global companies.
International tax director Justen Ghwee noted:
“Some of these companies have come to regret transferring their HQ overseas.”