Tuesday, 30 May 2017

Australian diverted profits tax becomes law

Legislation that introduces a diverted profits tax (DPT) became enacted law on 4 April 2017, and will be effective for income years starting on or after 1 July 2017. The legislation also includes measures significantly increasing penalties for taxpayers taking insufficient care in calculating their tax liability or failing to file certain documents on time, as well as an updating of the transfer pricing rules.
The DPT aims to prevent multinational corporations from “shifting profits” made in Australia offshore to reduce the Australian tax on those profits, by imposing a 40% tax charge on such profits. This also should help to ensure that the Australian tax payable by significant global entities properly reflects the economic substance of the activities that those entities carry on in Australia. The DPT also enhances the power of the Australian Taxation Office (ATO) to combat “artificial” or “contrived” tax avoidance arrangements.
The 40% DPT will be imposed on tax benefits obtained from cross-border arrangements that:

  • Result in profits being diverted from Australia and taxed at a rate of less than 80% of Australia’s corporate tax rate of 30% (the “sufficient foreign tax test”);
  • Lack economic substance (the “sufficient economic substance test”); and
  • Were entered into for a principal purpose of obtaining the relevant benefit.

Where the ATO imposes the DPT, the taxpayer will have to pay the full amount of the assessed tax within 21 days, irrespective of whether the taxpayer intends to challenge the assessment. The taxpayer then will be required to enter a review process with the ATO to be able to have the assessed tax reduced. If the taxpayer is not satisfied with the review outcome, it can further challenge the assessment through the court process; the legislation also includes some constraints on the manner in which this can occur.
While the DPT is very broad in scope, there is an exception for financial arrangements – for these arrangements, the effect of the DPT should be limited to adjusting the interest rate, but not the amount of debt (in line with current rules dealing with the interaction of the thin capitalization rules and the transfer pricing rules). In addition, the DPT should not apply if the relevant Australian taxpayer:

  • Is not a member of a group with annual global turnover of more than AUD 1 billion;
  • Does not, as a separate entity, have turnover exceeding AUD 25 million; or
  • Is a pension fund, collective investment vehicle or similar entity, as specified in the law.

The legislation also includes the following measures:

  • Significantly increased penalties will be imposed for failure to timely file tax documents (including tax returns and country-by-country reports) and for making false and misleading statements (e.g. a tax return filed one week late could result in a failure-to-file penalty of over AUD 100,000); and
  • Australia’s transfer pricing rules will be updated to include the new OECD transfer pricing guidelines released as part of the BEPS process, effective for income years starting on or after 1 July 2016. 

Source: Deloitte