The ‘Diverted Profits Tax’ (DPT) legislation received Royal Assent on 4 April 2017, with Schedule 1 to the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017 implementing the DPT and the Diverted Profits Tax Act 2017 setting the 40% tax on profits.
The DPT law applies to DPT tax benefits arising in an income year commencing on or after 1 July 2017 and imposes a 40% tax. The DPT applies to significant global entities (SGEs), basically, have annual global income of A$1 billion or more. There is more detail about this below.
Law Companion Guide being developed
The ATO says it is currently developing a law companion guideline (LCG) which will explain how the DPT law will apply and will clarify new concepts introduced by the measure to provide taxpayers with greater certainty on the application of the new law. When the LCG is finalised, the ATO says it will specify which sections constitute a public ruling.
The ATO is developing a practical compliance guideline (PCG) which will provide examples to illustrate the relative risk of adopting certain types of arrangements in the context of the DPT measure. These examples will be based on different industry sectors to address the practical implications of the new DPT law.
Practice Law Administration guidance to ATO officers also being developed
The ATO is also developing a law administration practice statement (PSLA) which will provide:
- specific direction to ATO staff on its internal administrative oversight framework for the DPT; and
- an emphasis on the processes leading to the issuance of a DPT assessment which are designed to provide assurance to taxpayers that the new rules will be applied with the appropriate levels of internal review.
Administrative Framework of safeguards to ensure the DPT is reserved for deserving cases
The administrative framework introduces several levels of oversight and additional safeguards to provide assurance around the DPT process, including:
- An internal DPT Review Committee comprising senior executive representation, who approve the escalation of a DPT review to an initial General Anti-Avoidance Rules (GAAR) Panel.
- Consistent with the existing preliminary GAAR Panel process, the initial GAAR Panel will ordinarily comprise of at least one non-ATO member. Taxpayer representatives will not be invited to attend the initial hearing.
- The requirement for Deputy Commissioner endorsement before a DPT assessment can be issued.
- Full GAAR Panel hearing, which involves the taxpayer (and or their representative) being invited to attend and make a written submission. This will usually take place at the end of the period of review (generally 12 months following a DPT assessment). Note that where a taxpayer elects to shorten the period of review, there may not be sufficient time to assemble a GAAR panel, subject to any advanced notice provided.
This process ensures that DPT will only be applied in appropriate circumstances and is focused on tax avoidance arrangements by related parties to divert profits offshore.
What schemes does the DPT apply to?
The DPT applies to income years that start on or after 1 July 2017. The DPT can apply to schemes entered into before 1 July 2017.
Broadly, the new law applies if under the scheme, or in connection with the scheme:
- A taxpayer (‘the relevant taxpayer’) has obtained a tax benefit in connection with the scheme in an income year;
- A foreign entity, that is an associate of the relevant taxpayer, entered into or carried out the scheme or is otherwise connected with the scheme;
- The principal purpose, or one of the principal purposes of the scheme, is to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit; and
None of the following exceptions apply:
- The $25 million income test
- The sufficient foreign tax test
- The sufficient economic substance test.
Parties that the DPT does apply to
The DPT only applies to significant global entities (SGE). An entity is an SGE for an income year if it is:
- A global parent entity with anannual global income of A$1 billion or more; or
- A member of a group of entities (consolidated for accounting purposes) where the global parent entity has an annual global income of A$1 billion or more.
For the purposes of the DPT, this definition includes both:
- Australian-headquartered entities with foreign operations
- The local operations of foreign headquartered multinationals.
If global financial statements have not been prepared for the global parent entity, the Commissioner may make a determination that based on information available to him, the annual global income of the entity would be A$1 billion or more for the period.
Parties that the DPT does NOT apply to
The DPT will not apply to a relevant taxpayer who is one of the following types of entities:
- a managed investment trust;
- a foreign collection investment vehicle with wide membership;
- a foreign entity owned by a foreign government;
- a complying superannuation entity; or
- a foreign pension fund.
[ATO website: announcement; FJM; LTN 145, 2/8/17]