Australia is to get a Diverted Profits Tax (DPT). By a Treasurer’s media release, the Government has today released draft legislation and a draft explanatory memorandum (EM) for the proposed DPT, which was announced in the 2016-17 Federal Budget, and modelled off the UK’s DPT.
The stated objective of the DPT is to give increased powers to the Australian Taxation Office (ATO) to address multinational tax avoidance. The EM states that the DPT is designed to “encourage greater compliance by large multinational enterprises with their tax obligations in Australia, including with Australia's transfer pricing rules.” The EM also states that the DPT will apply in respect of a significant global entity (a member of a group whose annual global income is at least $1 billion) operating in Australia where, based on information available to the Commissioner, it is reasonable to conclude that profits have been artificially diverted from Australia.
The DPT will apply at a penalty tax rate of 40 per cent, from 1 July 2017, and will be inserted into the existing general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936. The rules will apply where it is reasonable to conclude that a scheme was carried out for a principal purpose, or for more than one principal purpose, of obtaining the relevant tax benefit.
The proposed legislation takes the use of economic substance in Australian tax law to a whole new level. Under the “sufficient economic substance” test, the DPT will not apply if it is reasonable to conclude that the income derived, received or made as a result of the scheme reasonably reflects the economic substance of the entity’s activities in connection with the scheme. There are only two simple examples in the EM, and very little detail, on how this elusive but critically important test will operate in practice.
The DPT will also not operate if either of the following tests applies:
- the $25 million turnover test — the sum of the Australian turnover of the relevant taxpayer and the Australian turnover of any other Australian entities that are part of the same significant global group does not exceed $25 million.
- the sufficient foreign tax test — the increase in the foreign tax liabilities of foreign entities resulting from the scheme is 80 per cent or more of the reduction in the Australian tax liability of the relevant taxpayer.
The DPT if enacted in its current form will make dramatic changes to the process of tax collection and a taxpayer’s appeal rights.
Submissions on the draft legislation are due by 23 December 2016. Greenwoods & Herbert Smith Freehills will be making a submission in conjunction with Herbert Smith Freehills, as a follow up to the submission we made on the consultation paper, which was released as part of the original announcement of the DPT.