Diverted Profits Tax
A new Diverted Profits Tax (DPT) is to be introduced imposing a 40% tax charge on large multinational entities that artificially divert profits from Australia. The tax is proposed to be effective from 1 July 2017.
The new tax will target companies that shift profits from Australia through related party transactions. It will apply to large companies with global revenue over $1 billion.
The DPT is based on the second leg of the UK’s diverted profits regime. This widens the scope of the arsenal available for the ATO to tackle perceived anti avoidance for multinationals.
The Multinational Anti-Avoidance Tax (MAAL) introduced last year targeted technology companies avoiding a taxable presence in Australia, with its anticipated impact restricted to a limited number of multinationals. The application of the new DPT could have a far wider impact. The DPT is more broadly focused at value chain planning structures or excessive payments which lack sufficient economic substance.
The consultation paper on the DPT anticipates that a charge will arise where two conditions are met:
- Effective tax mismatch: This occurs where, as a result of the cross border transaction or series of transactions, the Australian company has a reduction in its tax liability while the other party to the transaction has an increased tax liability of less than 80% of this reduction in liability. This would catch tax havens or transactions with lower taxed countries like Singapore or even the UK with a rate reducing to 18% by 2020
- Insufficient economic substance test: This occurs where the transaction or series of transactions lack sufficient economic substance.
Where these conditions are met and the ATO issues an assessment, there will be a 40% penalty tax rate on profits diverted from Australia.
The DPT is proposed to be effective from 1 July 2017 regardless of when transactions were first entered into. One interesting aspect of the proposal is the requirement for preliminary tax to be paid upfront once the ATO issues an assessment. Taxpayers will then need to prove an alternative position to have the assessment reduced or reversed. This is also similar to the UK requirement of ‘pay now, argue later’.
The DPT will apply to large companies with global revenue over $1 billion, which is the same turnover threshold used for MAAL and for base erosion and profit shifting (BEPS) transparency measures. There is an exclusion where the Australian company has revenue of less than $25 million. However, this exclusion will not apply if the Australian entity’s income has been artificially reported offshore. This is an interesting concept which will need to be clearly defined in the new law.
A consultation process has commenced in relation to the proposed DPT. The consultation paper outlines three examples that could be caught by these arrangements including management fees, leasing companies and royalty arrangements.
The examples in the consultation paper illustrate the DPT is intended to have a wide remit, including arrangements one might expect are already caught by Australia’s existing transfer pricing laws. Regardless of whether such arrangements are subject to existing or proposed new laws, any transfer pricing planning arrangements without economic substance are likely to be subject to intense scrutiny and potential adjustment.
The DPT is a significant new weapon for the ATO and completes its package of anti-avoidance tools to combat perceived transfer pricing risks. Any transfer pricing study – compliance or planning – requires a robust and comprehensive analysis of the facts, circumstances and economic substance of a business or transaction to support a company’s position.