Australia Aims To Attract More Foreign Regional Headquarters

by Mary Swire, Tax-News.com, Hong Kong

23 February 2011

The Gillard Government is hoping to attract more investment by encouraging foreign-based companies to establish regional headquarters in Australia, as well as making Australian businesses with foreign operations more competitive. This follows the release of exposure draft legislation relating to Controlled Foreign Company (CFC) and Foreign Accumulation Fund (FAF) rules. The Assistant Treasurer Bill Shorten has released the exposure draft legislation for public comment.

The rewrite and modernization of the CFC rules, together with the proposed FAF rule, form part of a wider package of reforms to Australia's foreign-source income attribution rules that were announced in the 2009-10 Budget.

“This package of reforms will improve the competitiveness of Australian companies with offshore operations by reducing the costs of complying with the CFC rules. They will also encourage foreign groups to establish regional headquarters in Australia and improve Australia's attractiveness as a continuing base for our multinational companies," the Assistant Treasurer said.

"The exposure draft legislation takes into account submissions received in response to consultation papers released last year. This process illustrates how the Government will work with business to enhance Australia's tax competitiveness."

"Given the scale, complexity and importance of these rules, however, it is desirable that a further round of consultation occur in respect of the development of the enabling legislation before it is introduced into Parliament," said Mr Shorten.

The Government is providing a more modern approach, by incorporating an active business income exemption that reflects modern business practices and increasing globalization. It is better targeting the CFC rules by focusing them on single Australian controllers; providing relief for intra-group transactions; treating rent in respect of real property as being active income; allowing royalty income to be treated as active where it has not originated from Australia; removing the base company income rules; retaining the existing listed country, active income de minimis, and AFI subsidiary exemptions.

The Government is also rewriting the CFC laws using coherent principles, resulting in more streamlined and simpler legislation (reducing the number of pages of CFC law from 181 to around 35 operative pages). It will provide more access to dividend exemptions as well as methods to prevent the double taxation of previously attributed income. It will improve the integrity of the Australian revenue base by denying eligibility to dividend exemptions where they are paid in respect of debt interests, and introducing a FAF rule.

The Government is requesting submissions from interested parties on the legislative design of the proposed reforms, and they are asked to note that consultation on this exposure draft legislation will be done in the context of the Government's fiscal strategy. This would require any changes to the policy originally announced be broadly revenue neutral. Submissions close on March 18, 2011.

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