The Government has introduced the Diverted Profits Tax Bill 2017 and the 35 page Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 into Parliament to implement the Diverted Profits Tax (DPT), as one of its first Parliamentary items of business in 2017, indicating the priority attached to this measure. The DPT was announced in the 2016 Budget and released in skeletal bill form in November 2016, with a more detailed bill the subject of limited consultation in January 2017.
The bills are accompanied by a 125 page Explanatory Memorandum, containing 16 relatively simple examples of how parts of the DPT are to operate. The ATO is expected in due course to provide more detailed guidance and examples.
The DPT has been constantly linked by the Government to the G20/OECD project on Base Erosion and Profit Shifting (BEPS) but is the antithesis of the cooperative approach being adopted in that project and has attracted criticism from other governments.
Compared to the exposure draft, there is some new material in the Bill which was missing in that draft, but otherwise it maintains the draft’s main features and continues to be tougher than its UK counterpart.
- The tax rate remains at 40% compared to the general corporate tax rate of 30%.
- The test of a principal purpose to obtain a tax benefit remains, though the language has now been otherwise conformed more closely to Part IVA and technical difficulties arising from the lack of adjustments to take account of income otherwise taxed (withholding tax, CFC) have been reduced.
- Exceptions have now been included for certain taxpayers including managed investment trusts, foreign collective investment vehicles, certain entities owned by foreign governments, complying superannuation entities and foreign pension funds.
- The relationship with the thin capitalisation rules has been clarified: a DPT assessment can only deal with the interest rate and not the quantum of the debt.
- The two main escape hatches of the sufficient foreign tax test and the sufficient economic substance test have retained their main features, though there is more explanation and examples of their operation in the Explanatory Memorandum and the OECD transfer pricing guidelines are incorporated by cross reference to the transfer pricing legislation Even so, the escape hatches are likely to remain very tight in practice. It is clear that the DPT is not just a back-up to transfer pricing rules.
- The pay-first-argue-much-later procedure for DPT and many areas of harsh procedural unfairness have been maintained.
- There is an exception for expert witnesses to the rule excluding evidence in later proceedings which the taxpayer has not previously presented to the ATO but such evidence must still be based on material made available to the ATO during the period of review (so additional comparables cannot be presented after that period).
It is intended that the Bills be passed in the current sittings to commence for income years starting on or after 1 July 2017 and to apply to schemes already in existence at that date. It is obvious that the Government views the DPT as a short term political winner so there has been no desire to remedy the more contentious elements in the original proposal, as set out in our submissions in June and December last year.
It will now be up to the ATO and the judges to try to ameliorate the potentially arbitrary nature of the DPT.
The draft bills also propose amendments to transfer pricing rules, to reflect the outcomes of the OECD BEPS project, and to increase administrative penalties that can be applied in certain situations to significant global entities.
We are working on a more detailed Tax Brief on the bills, which we will issue in due course.