New Diverted Profits Tax Bill | KPMG | AU

New Diverted Profits Tax Bill: 1,600 taxpayers in ATO’s sights

New Diverted Profits Tax Bill

Sarah Blakelock, Liam Delahunty and Glen Hutchings investigate Australia's proposed Diverted Profits Tax legislation.

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The Australian Government has today (9 February 2017) introduced legislation seeking to impose a 40 percent diverted profits tax (DPT) on significant global entities carrying on business in Australia. The DPT is expected to apply to income years commencing on or after 1 July 2017. As the Prime Minister said recently:

[the Government’s] continued efforts to stamp out corporate tax avoidance continue with the Diverted Profits Tax legislation, one of the most advanced and some would say draconian measures of its kind, in the world.

Notably, the accompanying Regulation Impact Statement asserts that 1,600 taxpayers are potentially within the scope of the rules, underlining its extremely broad reach at an estimated compliance cost of $16.4 million annually for 10 years.

Objects

The DPT is aimed at preventing companies reducing the amount of tax they pay in Australia by diverting profits offshore and to ensure that the tax paid reflects the economic substance of business activities carried on in Australia. A further object of the DPT is to encourage significant global entities to provide sufficient information to the Commissioner when so requested to allow for the timely resolution of disputes about Australian tax. These objects are underpinned by the granting to the Australian Taxation Office (ATO) of the power to make an ‘up-front’ DPT assessment, which clearly shifts the onus to the taxpayer to defend/displace that assessment.

Application

To determine if your group could be affected by the DPT, you should be considering:

  1. Is the Australian company (or permanent establishment) a significant global entity (being a member of a group with annual global income of AU$1 billion or more)?
  2. Is it reasonable to conclude that annual Australian income is less than AU$25 million (though this includes any DPT benefit)?
  3. Is it reasonable to conclude that sufficient foreign tax (effectively over a 24 percent rate) has not been paid/imposed in all jurisdictions directly or indirectly relevant to the supply chain into Australia? This may be challenging for many groups, given that the ‘sufficient foreign tax’ test is set at the relatively high bar of 24 percent – with a vast number of jurisdictions having regimes that will not allow this threshold to be met.
  4. Is it is reasonable to conclude that the sufficient economic substance test is not satisfied? You must prove the arrangement reasonably reflects the economic substance of the entity’s activities. In most cases, this will require a ‘two-sided analysis’, applying an Australian transfer pricing lens to the functions, assets and risks of the activities carried out in Australia and those activities carried out in one or more other jurisdictions; and/or
  5. Was obtaining a tax benefit a principal purpose (or one of the principal purposes) behind the taxpayer carrying out the scheme? This is a lower threshold than the existing general anti-avoidance rule (traditionally known as Part IVA), which requires a “dominant purpose” of obtaining a tax benefit.

In practice, questions 4 and/or 5 are likely to be the critical areas of focus for many groups. If the ATO can answer all of the questions in the affirmative, it will be able to apply the DPT to impose a 40 percent tax on the amount determined to be the tax benefit. Any DPT imposed is payable within 21 days of the initial assessment.

Supporting evidence

Even if groups consider that the answer to either of questions 4 or 5 should be ‘no’, they should consider whether they can provide sufficient evidence to support their position. This could include contemporaneous documentation going forward or, in respect of arrangements already in existence but continuing into later periods, it may be appropriate for a support or defense file to be compiled, justifying such a position.

Next steps

Taxpayers most likely to be at the highest risk of the ATO seeking to apply the DPT include taxpayers involved in a transfer pricing dispute with the ATO, taxpayers with cross-border transactions which have not fully addressed the functional profile outside Australia, taxpayers who have undertaken business restructures, taxpayers with arrangements covered by Taxpayer Alerts and taxpayers who have migrated intellectual property from Australia. Other arrangements, including cross-border leasing and borrowing from ‘cash boxes’, may also potentially warrant consideration of the DPT.

A welcome relief for managed investment trusts, collective investment vehicles, sovereign wealth funds, complying superannuation funds and foreign pension funds is that they may well be covered by a general exemption from the application of the DPT.

The proposed legislation, although not retrospective in operation, applies to arrangements that are in place upon commencement (i.e. it does not ‘grandfather’ any arrangements). In this respect, the provisions empower the Commissioner (where the conditions are met) to issue a DPT assessment at any time within 7 years after a notice of assessment is first issued to the taxpayer for a year of income commencing on or after 1 July 2017.

If you think the DPT may apply to you, you should start taking steps to review the relevant arrangements and exposure to manage the potential risk.

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