The Australian diverted profits tax (DPT) will apply to multinational groups with more than 1 billion Australian dollars (AUD) global group-wide revenue, otherwise called significant global entities (SGEs), via the imposition of a penalty tax rate of 40% in circumstances where the amount of Australian tax paid is reduced by diverting profits offshore through related-party arrangements. Both financing and non-financing arrangements are in scope. The DPT will apply to tax benefits arising in income years starting on or after July 1, 2017, even if the scheme commenced in a prior period.
The 40% DPT penalty tax rate will apply to the amount of an Australian tax benefit if it would be concluded for a principal purpose of obtaining an Australian tax benefit, or both to obtain an Australian tax benefit and reduce foreign tax liabilities. A ‘reduction’ of foreign tax can include a deferral of foreign taxes for these purposes.
As foreshadowed in the Exposure Draft legislation (previously discussed in the January edition of this publication), the DPT will not apply to SGEs if it is reasonable to conclude that one of three specific carve-out clauses apply.
The bill introduced into Parliament diverges significantly from the equivalent UK DPT provisions on the basis that it uses the framework of Australia’s existing general anti-avoidance provisions to identify schemes and tax benefits to which the DPT could apply.
The Australian Taxation Office (ATO) has indicated that it is developing a Law Companion Guideline to provide guidance on some of the new concepts in the DPT. In addition, the ATO is developing guidance on the framework that will be established on the administration of the DPT.
PwC observation: The DPT is extremely broad. It will apply to a significant number of multinational groups and is likely to create uncertainty for affected entities. All existing or anticipated cross-border arrangements in the value chain should therefore be closely reviewed. Taxpayers should not consider that providing transfer pricing documentation under Australian rules will apply as a defence against a DPT assessment.