Australia’s Diverted Profits Tax (DPT) came into effect on 1 July 2017. Where it applies, it imposes tax at the rate of 40% on the amount of the diverted profit.
The ATO has now released the following documents by way of guidance on the DPT:
- Draft Law Companion Guideline LCG 2017/D7 for public consultation, with a due date for comments of 16 February 2018 (the LCG).
- Law Administration Practice Statement PSLA 2017/2, which focusses on administrative processes related to making a DPT assessment (the PSLA).
Draft Law Companion Guideline
When finalised, the operative parts of the LCG will constitute a public ruling. Some of the issues considered in the LCG are as follows:
- The sufficient foreign tax test/exception: The LCG addresses a range of issues, such as: the meaning of “foreign income tax”; determining the amount of a foreign tax liability; foreign consolidated groups; fiscally transparent or flow-through entities, and the (non) recognition of losses and foreign taxes.
- The sufficient economic substance test/exception: Amongst other things, the LCG makes it clear that it will be necessary to examine the functions, assets and risks not only of the relevant Australian taxpayer, but also all other entities connected to the scheme. All entities that are a party to or connected with the scheme are to be tested for sufficient economic substance unless the entity's role in the scheme is minor or ancillary. The practicalities and compliance issues associated with this test, especially where an Australian entity is a minor part of a global group with complex operations and transactions, are not addressed.
- Interaction of the DPT and the thin capitalisation rules: The Commissioner can seek to adjust the interest rate on a loan – which is to be applied to the debt interest actually issued - in determining the amount of any DPT tax benefit. That is, the DPT will not alter the debt levels used to fund Australian operations that are allowed under the thin capitalisation rules. This ensures that the DPT does not defeat the object of the thin capitalisation rules.
- Quantifiable non-tax financial benefits: The LCG does not provide much in the way of additional guidance on this important issue, as compared to the commentary in the explanatory memorandum (EM). It does not squarely address the inconsistency in the EM as to whether such benefits can be considered on a “look back” basis (as the legislation appears to contemplate) or only on an anticipatory or forwarding-looking basis.
The LCG also does not address some of the difficulties with the somewhat rushed drafting of the DPT. In particular, there is no consideration of the apparent deficiency in the all-important “tax benefit” concept – see paras 20 to 23, and Appendix 2, of our March 2017 submission to the Senate Economics Legislation Committee on the then draft DPT.
Law Administration Practice Statement
The PSLA provides guidance to ATO staff on the administrative process for making a DPT assessment, and the processes that follow after such an assessment is made. It notes that the PSLA, and the processes outlined in it, have been developed in recognition of the seriousness of making a DPT assessment.
There are a number of steps which must be taken prior to the making of a DPT assessment (unless it is an “exceptional case”):
- Approval from the DPT specialist team to commence a DPT analysis.
- Engagement with the ATO’s Tax Counsel Network, and the taxpayer (to obtain information and discuss issues).
- Endorsement from the DPT Review Committee.
- Advice from the GAAR Panel at an “initial hearing”.
- Deputy Commissioner endorsement on the decision to make a DPT assessment.
The ATO does not propose to allow the taxpayer and/or its representatives to attend the initial GAAR Panel hearing. This is most unfortunate and prevents the taxpayer being able to present its side of the facts, which may prevent the need for a DPT assessment to be issued. The taxpayer will however “usually” be invited to the subsequent GAAR Panel hearing during the “period of review”, i.e. after the DPT assessment has already been issued.
Appendix 1 to the PSLA has a “process map” for the making of a DPT assessment.
Other ATO guidance
The ATO is still developing a Practical Compliance Guideline, which is expected to contain a number of worked examples on the operation of the DPT.