The imminent introduction of the Diverted Profits Tax (DPT) is the Federal Government’s latest response to perceived tax evasion by multinational enterprises operating in Australia.
In its current form, the new legislation will provide the Australian Taxation Office (ATO) with globally unprecedented powers to raise tax assessments in relation to a range of related party dealings within a multinational group. But has the current legislation gone too far? And what does it mean for multinationals heavily dependent on the use of intangibles and intellectual property as part of their business?
The new DPT was initially developed as Australia’s version of the UK ‘Google Tax’, a tax introduced by the UK to reduce potential profit shifting associated with the exploitation of intellectual property within multinational groups.
Australia has followed suit with this initiative and from July 1 this year the Commissioner of Taxation will be able to impose a 40% tax on any profits judged to have been shifted to a lower tax jurisdiction.
It should however be noted that the DPT only applies to multinational groups with a global turnover of more than A$1 billion, and an Australian turnover of more than $25 million. In the event the Commissioner raises an assessment under the DPT provisions, taxpayers must pay the assessment within 21 days, with delayed rights to appeal the assessment.
The DPT applies to all related party transactions with countries that have a tax rate of 24% or less. This currently includes transactions between Australia and the UK, Ireland, Switzerland and Singapore, which (according to the ATO) accounts for approximately 60% of international related party dealings. A significant proportion of these transactions relate to payments associated with the use of various forms of intellectual property, such as technology, brands, know how, customer lists, trademarks, etc.
If President Trump is successful in pushing through his tax agenda to reduce the corporate tax rate in the US to 15%, the proportion of international related party transactions caught within the ambit of the DPT will skyrocket, to include the major proportion of transactions between Australia and US international related parties, particularly transactions involving intangibles and IP.
It is clear that the DPT signals the ATO’s intention to stake its claim to the profits of a multinational enterprise it believes has been ‘diverted’ from Australia. While such a ruling by the ATO would be to the benefit and advantage of Australia (as a result of increasing taxing revenue), it will also be at the expense of another taxing jurisdiction (ie lost taxable income) and this is an issue that is likely to create significant complexity within the international transfer pricing landscape.
The rights of countries to assert and defend their taxing rights when it comes to the ownership and use of (for example) intellectual property is an area laden with increasing controversy, an issue that was recently highlighted by Michael Crocker, tax leader for Chartered Accountants Australia and New Zealand. In a recent interview with the Australian Financial Review, Mr Croker noted that
“intangibles were the key battleground in transfer pricing… as IP is highly mobile and locating it in low tax jurisdictions has long been a strategy for multinational companies.”
Interestingly, the favoured locations for the holding of IP assets within a multinational group are Ireland, Switzerland and Singapore, all jurisdictions covered by the new DPT.
It is safe to assume that if Australia imposes a DPT on a multinational, it will be to the detriment of another tax jurisdiction (such as Ireland). It is also safe to assume that the disadvantaged tax jurisdictions will eventually seek to protect their revenue base from potential tax erosion associated with the use of DPT legislation, by introducing their own protective legislation. The result being a global race to introduce the most aggressive, protectionist transfer pricing legislation, in order to protect each country’s revenue base.
Australia is unambiguously leading this race with the DPT legislation only adding to Australia’s armour to combat multinational profit shifting – Australia has the Multinational Anti-Avoidance Law, the reconstruction provisions of the Australian transfer pricing legislation, the country-by-country reporting requirements, Part IVA as well as now the DPT.
While the potential imposition of a DPT will, by itself, create increased complexity in how multinationals deal with the transfer and use of intellectual property within their group, the Federal Government’s recent introduction of the ‘Combating Multinational Tax Avoidance Bill 2017’ (‘the Bill’) will only add to that complexity.
As part of the Bill, the Federal Government is seeking to amend Australia’s current transfer pricing laws in order to adopt and give effect to the OECD’s 2015 transfer pricing recommendations. Within these recommendations is the OECD’s guidance material on how intellectual property and ‘hard to value’ intangibles should be valued (from a transfer pricing perspective), which includes a significant about-face in the use of the comparable uncontrolled price (CUP) methodology as a technique to price the use of IP within multinational groups.
The introduction of the DPT, coupled with Australia’s arsenal of legislation against multinational profit shifting, is likely to lead to widespread restructuring of the way most multinational groups hold and exploit their IP as it relates to their Australian operations.
Some of these efforts are likely to cause other tax related consequences (such as CGT issues, etc), which in turn are likely to affect the economic returns associated with doing business with Australia.
With the Government adopting such an aggressive tax regime when it comes to how multinational groups engage with Australia, the question has to be asked – is it now too hard for multinationals to do business with Australia and are we driving future international investment away for the sake of current tax dollars?
While the answer to this question is unclear at the moment, Australia’s economic growth trends over the next few years will no doubt provide clarity.