Sarah Blakelock, Liam Delahunty and Glen Hutchings investigate Australia's proposed Diverted Profits Tax legislation.
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.
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.
To determine if your group could be affected by the DPT, you should be considering:
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.
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.
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.