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Diverted Profits Tax - An Early Christmas Present?

Diverted Profits Tax - An Early Christmas Present?

Angela Wood, Sarah Blakelock and Liam Delahunty discuss the latest guidance on the Diverted Profits Tax.

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Almost 6 months after the Diverted Profits Tax (DPT) started to impact many significant global entities (SGEs) with Australian operations, two greatly anticipated gifts have finally arrived in their Christmas stockings - in the form of a draft Law Companion Guideline (LCG) 2017/D7 (with a consultation period concluding on 16 February 2018) and what appears to be a final Practice Statement Law Administration (PSLA) 2017/2. Once finalised, the LCG will apply the law as described in it, and it will constitute a public ruling. The PSLA provides internal instructions to Australian Taxation Office (ATO) staff only.

However, at least in the case of the LCG, SGEs may find the gift was not quite as useful as they had hoped for. Whilst the PSLA provides the first guidance on how the DPT will be administered by the ATO, it lacks guidance as to the way the ATO intends to administer the all-important “restricted evidence” rule.

The LCG essentially re-states what has already been set out in the Explanatory Memorandum. Specific guidance is largely confined to comments in respect of the following:

  • Principal purpose test – the comments in Law Companion Guideline 2015/2 in respect of the Multi-national Anti-Avoidance Law (MAAL) are also relevant for DPT
  • Quantifying non-tax benefits – even if significant non-tax benefits arise, this is just one factor in considering whether the principal purpose test is satisfied.
  • Thin capitalisation interaction – the Commissioner may use the DPT to adjust the rate of the actual debt issued, but may not adjust the actual quantum of debt as is permitted under the thin capitalisation rules.
  • Losses / foreign tax credits and “sufficient foreign tax” – this exclusion must be determined by reference to the foreign tax actually paid in any year. Foreign losses, foreign tax credits, foreign exemptions and refunds may well prevent this exclusion being satisfied.
  • “Sufficient economic substance” – this exclusion requires consideration not just of the functions, assets and risks of each entity connected with the scheme (to consider whether they are appropriately remunerated), but the economic/commercial context of the activities, and their object and effect from a practical/business point of view.

No doubt SGEs would have appreciated more definitive guidance as to what types of transactions will or will not be impacted by the DPT so they can have some degree of certainty as to whether they have any exposures that need to be remediated and/or reported on in their financial statements. Unfortunately, they need to wait until the ATO issues its Practical Compliance Guideline outlining the relative risks associated with particular arrangements and structures in the context of the DPT.

The PSLA provides guidance to ATO personnel about approvals required to conduct a DPT analysis, and how DPT assessments are to be raised. The first step requires ATO client teams to obtain approval from the DPT specialist team prior to embarking on a DPT analysis, and to determine whether it is appropriate to notify the taxpayer that it is intended that DPT analysis occur (Paragraph 2 of PSLA2017/2 implies that taxpayers may not be informed that a DPT analysis is being considered). If approval is received, the client team must then engage the Tax Counsel Network to assist them in undertaking the DPT analysis. Where that analysis suggests a DPT assessment may be appropriate, the further steps required are:

  • Obtaining endorsement from the DPT Review Committee (which will consist of an Assistant Commissioner from the relevant business line, an Assistant Commissioner from the DPT specialist team and a Tax Counsel Network officer);
  • Seeking advice from the General Anti-Avoidance Rule (GAAR) Panel at an initial hearing (which will ordinarily include a non-ATO member but which will not include the taxpayer) and then
  • Obtain Deputy Commissioner Endorsement to issue a DPT assessment.

In exceptional circumstances, the PSLA provides that the three steps above are not mandatory for the ATO to complete prior to issuing a DPT assessment. Examples of exceptional circumstances include where delay would frustrate the application of DPT to a taxpayer, or could result in a DPT assessment being unenforceable.

The PSLA further exemplifies that a DPT liability is due and payable within 21 days of the DPT assessment being issued. The Commissioner will issue a written statement outlining the basis upon which the Commissioner has applied the DPT within 7 days of issuing the DPT notice of assessment. It is unclear how much detail this statement will contain.

During the 12-month review period which follows a DPT assessment, the taxpayer can provide further information to the ATO directed to establishing that the DPT assessment is excessive in whole or in part. Likely towards the end of this 12-month period, a full GAAR Panel will need to be held, at which the taxpayer will usually be invited to attend and address the panel (unless it has been deemed uncooperative by the ATO). Processes exist for extending (by consent of a taxpayer, or by order of the Federal Court) or shortening (by provision of notice by the taxpayer) this period.

Towards the end of the review period, the ATO client team will need to review the information available – and any advice from the GAAR Panel – to determine whether or not to amend the DPT assessment. Again, this will need to occur in consultation with the DPT specialist team and Tax Counsel Network.

A taxpayer cannot "object" to the DPT assessment – rather, it must appeal directly to the Federal Court, and face the perils of the restricted evidence rule.

Although the PSLA provides some guidance to SGEs regarding how the ambulance at the bottom of the cliff will take them to hospital and what may occur in the operating theatre, they remain in the situation where they cannot fully identify where the fence at the top of the cliff is, to keep them from falling in the first place. Many will now need to assess and calibrate their position, without fulsome practical guidance. KPMG has unique insights into the application of the DPT and the professional judgment to help SGEs in assessing their DPT risk levels for both current and future transactions. Our team includes dispute resolution specialists to assist taxpayers to appropriately evidence their position both before and after a DPT assessment issues, engage with the ATO and most effectively navigate the GAAR panel processes.

© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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