The ‘gist’ of the GILTI rules is not quite right

By Ryan Leslie

The ATO issued its final determination on whether the US GILTI rules ‘correspond to’ Australia’s CFC rules for the purposes of applying Australia’s anti-hybrid rules – the determination maintains the position outlined in draft in 2019 that the rules do not correspond meaning that hybrid-mismatches can be taken to exist even though a payment is taxed in the US under the GILTI rules.

Background

Australia’s anti-hybrid mismatch rules require a consideration of the tax outcomes of transactions between related parties (and structured arrangements) to determine whether the different treatment of payments or entities in 2 or more jurisdictions results in an amount being deductible in one jurisdiction and not assessable in another, or an amount being deducted in 2 jurisdictions. The rules are complex, and require an analysis of the tax rules of foreign countries.

In working out whether an amount is assessable in a foreign country, section 832-130(5) provides that an amount is assessable in a foreign country if it is included in a foreign tax base under provisions which ‘correspond to’ Australia’s CFC rules. The question being considered was whether the US GILTI rules meet that description.

GILTI rules

The US GILTI rules were introduced in 2017 with the broad aim of ensuring certain foreign income of US groups is subject to a minimum rate of tax. The rules apply to the net income of CFCs above a deemed normal return on the CFC’s tangible property on an aggregate basis (i.e. the income of multiple CFCs is grouped) and subject the income to tax in the US at a rate of between 10 and 13% (currently).

GILTI does not correspond to Australia’s CFC rules

The ATO consider that:

• the test of comparativeness is to be determined by reference to the ‘gist’ of the rules;
• the gist of the CFC and GILTI rules differ, essentially because they were enacted to serve different purposes – the CFC rules as an anti-deferral mechanism and the GILTI rules to impose a minimum tax on certain types of income – notwithstanding that both sets of rules operate to tax the income of foreign subsidiaries in the home jurisdiction of the parent.

As a result, the ATO states that amounts which are taxed in the US under the GILTI rules are taken not to be subject to foreign income tax under Australia’s anti-hybrid rules – an outcome which is demonstrated by Example 1 in the determination and is arguably not consistent with the policy of the anti-hybrid rules which were concerned with whether amounts were taxed in a jurisdiction rather than the rate at which they are taxed. This is a departure from the draft determination which left open the possibility that GILTI amounts may be ‘subject to foreign income tax’ under Australia’s anti-hybrid rules on a basis other than the GILTI rules corresponding to the CFC rules.

Relevance for other jurisdictions

While the determination was limited to considering implications of the US GILTI rules, it provides an indication of the approach the ATO may take in considering whether CFC or CFC-like provisions in other countries ‘correspond to’ Australia’s rules. However, given the 3 year timeline to finalise this ruling (no doubt largely contributed to by COVID-related changes in ATO priorities) it seems unlikely that guidance on the rules in other foreign jurisdictions will be forthcoming soon.