On Tuesday 21.3.2017, the Lower House passed the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 and the Diverted Profits Tax Bill 2017. The Diverted Profits Tax Bill was passed without amendment but the Multinational Tax Avoidance Bill was amended to clarify the interaction between the controlled foreign companies (CFC) rules in Pt X of the ITAA 1936 and the DPT.
Then, on 27.3.17, both Bills passed the Senate and await Royal Assent.
Extract from Avoidance Bill – EM
Overview
Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936), the Taxation Administration Act 1953 (TAA 1953) and associated Acts to introduce a new diverted profits tax (DPT). If the DPT applies, the Diverted Profits Tax Act 2017 will impose tax on the amount of the diverted profit at a rate of 40 per cent.
The DPT aims to ensure that the tax paid by significant global entities properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through contrived arrangements. It will also encourage significant global entities to provide sufficient information to the Commissioner of Taxation (Commissioner) to allow for the timely resolution of tax disputes.
Date of effect: This measure will apply in relation to tax benefits for an income year that starts on or after 1 July 2017 (whether or not the tax benefits arise in connection with a scheme that was entered into, or was commenced to be carried out, before 1 July 2017).
Main points:
- The DPT will complement Australia’s transfer pricing and anti-avoidance rules by:
- ensuring the tax paid by significant global entities properly reflects the economic substance of their activities in Australia;
- preventing the diversion of profits offshore through contrived arrangements; and
- encouraging significant global entities to provide sufficient information to the Commissioner to allow for the timely resolution of tax disputes.
- The DPT will impose a penalty rate of tax and require that tax to be paid irrespective of whether the assessment is the subject of an unresolved dispute. This will place the onus on taxpayers to provide relevant information on related party transactions to the Australian Taxation Office (ATO), making it easier for the ATO to apply current transfer pricing and anti-avoidance rules.
- The combination of the upfront payment and the greater disclosure is expected to both expedite the resolution of disputes and the consequential tax payment, and to capture taxable income that would otherwise have been diverted.
- While the DPT is expected to apply in only very limited circumstances, there are approximately 1,600 taxpayers with income that is sufficiently large that they potentially fall within the scope of the new law and who are likely to seek legal and tax advice on whether the new law impacts existing and future transactions.
Extract from Avoidance Bill – Supplementary EM
1.2 Amendment 1 clarifies that where an amount of attributable income is included in the assessable income of the relevant taxpayer (or an associate of the relevant taxpayer) due to the operation of the CFC rules, then that amount reduces the relevant taxpayer’s DPT tax benefit.
1.3 The DPT tax benefit is only reduced to the extent that the amount is included in assessable income as a result of the scheme and is directly referable to the DPT tax benefit. [Amendment 1, subsections 177J(6) and (6A) of the ITAA 1936]
1.4 The amendment ensures that, for example, the reduction to the relevant taxpayer’s DPT tax benefit is calculated correctly in situations where a partner in an Australian partnership, a beneficiary of an Australian trust or the trustee of an Australian trust is treated as having suffered a tax detriment for the purpose of section 460 of the ITAA 1936. In each of these cases, the decrease in the taxpayer’s DPT tax benefit does not include the amount of that tax detriment.
Extract from Text of Bill as passed – s177J (the core provision)
177J Diverted profits tax—application
Scheme for a purpose including obtaining a tax benefit etc.
(1) This Part also applies to a scheme, in relation to a tax benefit (the DPT tax benefit) if:
(a) a taxpayer (a relevant taxpayer) has obtained, or would but for section 177F obtain, the DPT tax benefit in connection with the scheme, in a year of income; and
(b) it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a principal purpose of, or for more than one principal purpose that includes a purpose of:
(i) enabling the relevant taxpayer to obtain a tax benefit, or both to obtain a tax benefit and to reduce one or more of the relevant taxpayer’s liabilities to tax under a foreign law, in connection with the scheme; or
(ii) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit, or both to obtain a tax benefit and to reduce one or more of their liabilities to tax under a foreign law, in connection with the scheme;
whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers; and
(c) the relevant taxpayer is a significant global entity for the year of income mentioned in paragraph (a); and
(d) a foreign entity is an associate (within the meaning of section 318) of the relevant taxpayer at any time in the year of income mentioned in paragraph (a); and
(e) that foreign entity:
(i) is the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme; or
(ii) is otherwise connected with the scheme or any part of the scheme; and
(f) the relevant taxpayer is not any of the following:
(i) a managed investment trust (within the meaning of the Income Tax Assessment Act 1997);
(ii) an entity covered by paragraph 275-20(4)(f) of that Act (foreign collective investment vehicle with a wide membership);
(iii) an entity covered by paragraph 275-20(4)(h) of that Act (entity owned by foreign government etc.) that is a foreign entity;
(iv) a complying superannuation entity (within the meaning of that Act);
(v) a foreign pension fund (within the meaning of that Act); and
(g) it is reasonable to conclude that none of the following sections apply in relation to the relevant taxpayer, in relation to the DPT tax benefit:
(i) section 177K ($25 million income test);
(ii) section 177L (sufficient foreign tax test);
(iii) section 177M (sufficient economic substance test).
[APH – Bills Digest: Avoidance Bill, DPT Bill; Avoidance Bill – Text of Bill as passed, EM & Supplementary EM; related Tax Month article; LTN 54, 22/3/17; LTN 58, 28/3/17]