The Government announced as part of the 2016 Federal Budget an intention to introduce a diverted profits tax (DPT) with effect for income years beginning from 1 July 2017. No grandfathering of existing arrangements is proposed.
The DPT is modelled on the second limb of the United Kingdom’s DPT. The first limb was introduced as Australia’s multinational anti-avoidance law (MAAL).
Broadly, the DPT targets arrangements with ‘insufficient economic substance’ between an Australian entity and an overseas related party that is taxed at a rate less than 80 percent of the applicable Australian tax rate.
Essentially, due to the ‘application rules’ (see below) the objective of the DPT is to change the balance of negotiating power between the Australian Taxation Office (ATO) and large business on transfer pricing and structuring issues.
Key features of DTP are:
- Size. The DPT will apply to Australian resident entities (or permanent establishments of foreign entities) which are members of a multinational group with an annual income of $1 billion or more (the threshold currently applicable for the MAAL) provided the Australian entity’s turnover is $25 million or more (subject to exceptions).
- Tax reduction. The applicable income earned by the non-resident member is taxed at less than 80 percent of the Australian tax rate.
- Insufficient economic substance. Currently, the ‘insufficient economic substance’ test is proposed to be satisfied if it is reasonable to conclude, on information available to the ATO, that the arrangement was ‘designed to secure’ a tax reduction. This new anti-avoidance test, if legislated, would be a significant reduction in the threshold at which anti-avoidance provisions apply.
- Application. It is proposed the DPT will impose a penalty tax rate of 40 percent and the tax is payable upfront (interest will also apply). If the ATO applies the DPT, it will issue a provisional DPT assessment and the taxpayer has 60 days to respond to the factual matters detailed in the provisional assessment. If the ATO subsequently issues a final DPT assessment, the taxpayer has 21 days to pay the assessment. However, after that date the taxpayer can, under certain circumstances, amend past tax returns to avoid the DPT applying.
Submissions to Treasury on the proposed DTP are due by 17 June 2016.