Peter Madden and Liam Delahunty, International Tax Specialists, discuss the implications of the proposed Diverted Profits Tax for global companies.
On 29 November 2016, the Australian Treasury released Exposure Draft (ED) legislation and an accompanying Explanatory Memorandum (EM) in relation to the proposed Australian Diverted Profits Tax (DPT).
In summary, the DPT is intended to provide the Australian Taxation Office (ATO) with additional powers, within the general anti-avoidance regime framework, to deal with global groups who have “diverted” profits from Australia to offshore associates, using arrangements that have a “principal purpose” of avoiding Australian income or withholding tax. The DPT can apply to both Australian inbound and outbound groups, where the global group has annual global income of A$1 billion or more.
If the DPT applies, income tax will be payable on the amount of the “diverted profit” at a rate of 40 percent. There appears to be a risk that the Mutual Agreement Procedure in Australia’s tax treaties would be unavailable where DPT applies – in which case unalleviated double taxation would result.
Importantly, the DPT will not apply where it is reasonable to conclude one of the following exemptions apply:
It is noteworthy that the ED and EM are open to a condensed 3.5 week consultation period in the run-up to Christmas. Although there have been some relatively minor changes since the initial Consultation Paper from May, the core elements of what the DPT is targeting remain unchanged.
Notably, many of the submission points that were made in respect of the initial Consultation Paper do not appear to have been addressed. Therefore, and given this legislation is unlikely to encounter opposition in the Senate, the final legislation may well be similar in key respects to the current ED.
As the DPT is to be effective for income years commencing on or after 1 July 2017, its enactment will likely leave a limited window for groups to consider (and where necessary address) the potential application of DPT.