Australia has continued its aggressive, unilateral approach to tackling Base Erosion and Profit Shifting, with the Diverted Profits Tax (DPT) introduced to combat multinational companies shifting profits out of Australia.
The DPT aims to ensure that the tax paid by global entities properly reflects the economic substance of their activities in Australia and prevents the diversion of profits offshore through contrived arrangements. The DPT is expected to raise about $100 million in revenue a year from 2018-19.
Who does DPT affect?
The DPT will apply to large multinational companies (Significant Global Entities or SGE’s) that have an annual global income of $1 billion or more) with a total Australian turnover of more than $25 million (provided that the Australian company’s income has not been artificially shifted offshore).
The tax does not apply to managed investment trusts, a foreign collective investment vehicle with wide membership, an entity owned by a foreign government that is a foreign entity, a complying superannuation entity, and a foreign pension fund.
When does the DPT apply?
The primary condition for the DPT to apply is that it is reasonable to conclude that there was a ‘Principal Purpose’ of obtaining either an Australian or foreign tax benefit. This Principle Purpose test is the same as the Multinational Anti-avoidance Legislation (MAAL) and lowers the evidentiary hurdle of ‘sole and dominant purpose’ contained in Part IVA, the general anti-avoidance rules for income tax.
If the ‘Principal Purpose’ test is met, the DPT will apply if the following requirements are satisfied:
- The transaction(s) with a related party have given rise to an effective mismatch (tax paid on profits generated in Australia is taxed in a foreign jurisdiction at a rate of less than 80 percent of what the tax would have been in Australia), and
- The transaction(s) have insufficient economic substance (where it is reasonable for the ATO to conclude based on the information available at the time that the arrangement is designed to secure a tax reduction).
The DPT rules will apply to income years commencing on or after 1 July 2017 and apply irrespective of when a relevant transaction was entered into.
How does the DPT apply?
If the above requirements are met, the ATO can issue a DPT assessment, where tax is payable on the amount of the diverted profits (i.e., the income profits transferred offshore) at a penalty rate of 40 percent - that is a 10 percent penalty on top of the 30 per cent Australian company tax rate.
How to defend a DPT assessment
The DPT employs a ‘big stick’ approach to SGE tax compliance. Significantly, the DPT has reversed the onus of proof. The burden of proof lies with the SGE to demonstrate the DPT does not apply.
It is concerning that the ATO is able to make its determination as to the application of the DPT in the absence of any necessary information from the SGE. The legislation confirms that the ATO can issue a DPT assessment without first taking reasonable steps to obtain information from the relevant taxpayer. Further, in an effort to encourage the timely resolution of disputes between SGE and the ATO, the DPT allows the ATO to impose upfront liability and collect tax within 21 days of an assessment on allegedly diverted profits.
Why you should act - greater pressure on multinationals
With the DPT, Australia joins the UK by adopting measures that are inconsistent with the global community expressed in the OECD/G20 BEPS project.
The DPT, along with the Country-by-Country (CbC) reporting requirements, MAAL, provides the ATO with an unprecedented transparency on SGE’s financial and tax arrangements, as well as unprecedented powers to attack their cross-border arrangements.
SGE’s will need to closely consider the DPT rules when planning their cross-border supply chains or proposing business restructures.
What you should do?
Taxpayers need to be prepared. Activities that fall within the scope of the DPT legislation will need to be closely monitored to ensure that appropriate supporting documentation is prepared. We recommend all companies should:
- review their existing cross-border transactions, in particular, identify transactions with jurisdictions with corporate tax rates of less than 24%, such as the UK, Singapore, and Hong Kong
- consider if there is sufficient economic substance to support these transactions,
- undertake a risk assessment and restructure the transactions if required,
- clearly, document all supporting information.