The new Bills introduce anti-avoidance measures to ensure that tax paid by significant multinational entities properly reflects the economic substance of their activities in Australia and prevent multinationals shifting profits made in Australia offshore to avoid paying Australian tax.
The Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 and Diverted Profits Tax Bill 2017) implement the new diverted profits tax (DPT) announced in the 2016-2017 budget. The DPT arms the ATO with additional powers under the general anti-avoidance rule to deal with multinationals who enter into arrangements to divert their Australian profits to offshore related parties in low tax jurisdictions in order to avoid paying Australian tax, and puts the onus of disproof onto the taxpayer.
Broadly, the DPT:
- target multinationals with annual global income of more than AU$1 billion and Australian income of more than $AU25 million who divert profits to offshore related parties in low tax jurisdictions using arrangements entered into or carried out with the “principal purpose” of avoiding Australian tax; and
- imposes a 40% tax rate on the diverted profit (although regard is to be had to any foreign tax paid on the diverted profit to assess the extent of which the DPT applies).
Under current draft legislation, we note that any jurisdiction with an effective tax rate of lower than 24% may be captured under the DPT.
- is to apply in relation to tax benefits for an income year that starts on or after 1 July 2017 (whether or not the tax benefits arise in connection with an arrangement that was entered into, or was commenced to be carried out, before 1 July 2017); but
- will not apply to managed investment trusts or similar foreign entities, sovereign wealth funds and foreign pension funds (which have been excluded on the basis that they are low risk from an integrity perspective, are widely held and undertake passive activities).
The DPT demonstrates the Government’s willingness to take unilateral action in order to protect the Australian tax base outside of the BEPS initiative. We recommend all large groups (of greater than $1 billion global turnover and $25 million Australian income) seek advice regarding their corporate structures and tax affairs.
The Bills also introduce two further measures to combat multinational tax avoidance:
- increasing administrative penalties that can be applied by the Commissioner of Taxation to significant global entities to encourage them to better comply with their taxation obligations, including lodging tax documents on time and taking reasonable care when making statements – with such increased penalties applying generally from 1 July 2017; and
- amending Australia’s transfer pricing law to give effect to the 2015 OECD transfer pricing recommendations – with such amendments applying in respect of income years commencing on or after 1 July 2016.
- The Senate has referred the Bills to the Economics Legislation Committee for inquiry and report by 20 March 2017. Submissions close on 1 March 2017.