On 29 November 2016, the Government released draft legislation for comment to implement its proposed Diverted Profits Tax (DPT), which was announced in the 2016-17 Federal Budget.
It proposes to enable the Commissioner to impose a penalty tax rate of 40% on profits diverted in breach of the rules – that is: on profits that have been artificially diverted from Australia by multinationals. The draft legislation proposes to strengthen Part IVA and amend the Taxation Administration Act 1953 and associated Acts to give effect to the decision.
The measure is intended to target entities with annual global income of $1 billion or more, and Australian turnover of more than $25m, that shift profits to offshore associates where:
- the resulting increase in the foreign tax liability is less than 80% of the corresponding decrease in the Australian tax liability (broadly to countries whose tax rate is less than 80% than our corporate rate – viz: less than 24%, whilst our corporate rate is 30%);
- there is insufficient economic substance; and
- one of the principal purposes is to obtain a tax benefit.
An important aspect is that the DPT imposed will still give rise to franking credits, albeit at a 30% rate (the other 10% is regarded as a penalty that should not give franking credits).
The DPT would apply from 1 July 2017.
[Treasury website – consultations; Draft Bill & EM] [LTN 231, 29/11/16]
FJM note – harsh provisions to drive adequate disclosure and cooperation
The tax is not only designed to allow the Commissioner to issue assessments with a lower threshold of certainty. There are a range of harsh features designed to drive ‘transparent’ and ‘cooperative’ behaviour by multinationals. They are the following.
- The tax rate is 40% (well over our current rate of 30%).
- The tax is payable out of what is left (in Australia) after the profits are diverted (out of Australia).
- DPT assessments can be issued on more limited information as the tests are couched in ‘reasonable to conclude’ language.
- The threat of this tax applying, alone, will be enough for many to consult the Commissioner about whether arrangements will attract the tax and agree a future safer course of conduct.
- And, upon a DPT assessment being issued, the taxpayer has to pay the tax (within 21 days) before it can engage in any of the appeal mechanisms.
- Then there is a ‘period of review’ (usually 12 months) in which the taxpayer can make submissions of fact and law, with relevant evidence, about why the tax ought be less or nil.
- As a result the Commissioner may (or may not) amend the assessment.
- If the taxpayer remains dissatisfied with any remaining assessment it appeal to the Federal Court, but the Court will (broadly) be limited to the material before the Commissioner by the end of the Period of Review.
There is much debate about whether these provisions are too harsh and likely to drive foreign investment and business away and/or force Australian companies to leave.
EM – Context of the amendments
1.3 The DPT will provide the Commissioner with extra powers to deal with taxpayers who transfer profits to offshore associates using arrangements entered into or carried out with a principal purpose of avoiding Australian tax.
1.4 Australia’s anti-avoidance and transfer pricing rules, already amongst the strongest in the world, will be bolstered by the DPT, which will be inserted into Part IVA of the ITAA 1936.
1.5 By making it easier to apply Australia’s anti-avoidance provisions and applying a 40 per cent rate of tax, which will need to be paid immediately to the Commissioner, the DPT will:
- complement the application of the existing anti-avoidance rules in Part IVA of the ITAA 1936;
- encourage greater compliance by large multinational enterprises with their tax obligations in Australia, including with Australia’s transfer pricing rules in Division 815 of the Income Tax Assessment Act 1997 (ITAA 1997); and
- encourage greater openness with the Commissioner, address information asymmetries and allow for speedier resolution of disputes.
1.6 The DPT will apply to large multinationals (‘significant global entities’ with annual global income of $1 billion or more) which also have total Australian turnover of more than $25 million. It will apply to schemes that involve associated entities in lower tax jurisdictions that do not have the economic substance to justify their income.
1.7 By changing the payment and appeal processes in these situations and supporting the Commissioner to act on limited information, the DPT will encourage taxpayers to be more transparent and cooperative with the Commissioner. In many cases this will enable an agreed outcome to be reached with the Commissioner, under the existing taxation provisions, during a 12 month period of review.
1.8 Similar to the previously enacted multinational anti-avoidance law, the DPT will apply a lower threshold test, making it easier to apply Australia’s anti-avoidance provisions. This lower threshold is aligned with Organisation for Economic Co-operation and Development (OECD) guidance on anti-abuse rules for international tax treaties. While not expanding the coverage of the corporate tax base, this will make it easier for the Commissioner to apply anti-avoidance provisions to the situations targeted by the DPT.
EM – penal procedural provisions
1.12 If the DPT applies to a scheme, the Commissioner may issue a DPT assessment to the relevant taxpayer. Under the DPT assessment, tax is payable on the amount of the diverted profits at a penalty rate of 40 per cent.
1.13 Where the Commissioner makes a DPT assessment, the taxpayer will have 21 days to pay the amount set out in the DPT assessment.
1.14 Following the notice of the DPT assessment, the taxpayer will be able to provide the Commissioner with further information disclosing reasons why the DPT assessment should be reduced (including to nil) during the period of review (generally 12 months after notice is given of the DPT assessment).
1.15 If, at the end of that period of review, the relevant taxpayer is dissatisfied with the DPT assessment, or the amended DPT assessment, the taxpayer will have 30 days to challenge the assessment by making an appeal to the Federal Court of Australia. However, when considering the appeal, the Federal Court will generally be restricted to considering evidence that was provided to the Commissioner before the end of the period of review.
Draft Bill
177H Diverted profits tax—application
Scheme for a purpose including obtaining a tax benefit etc.
(1) This Part also applies to a scheme if:
(a) it is reasonable to conclude that (having regard to the matters in subsection (2)) 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 a taxpayer (a 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
(b) the relevant taxpayer is a significant global entity for a year of income in which the relevant taxpayer, or one or more other taxpayers, would (but for this Part):
(i) obtain a tax benefit; or
(ii) reduce one or more of their liabilities to tax under a foreign law;
in connection with the scheme; and
(c) 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 177H(1)(b); and 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
(d) it is reasonable to conclude that none of the following sections apply in relation to the relevant taxpayer:
(i) section 177J ($25 million turnover test);
(ii) section 177K (sufficient foreign tax test);
(iii) section 177L (sufficient economic substance test).
…
177L Diverted profits tax—sufficient economic substance test
(1) This section applies in relation to the relevant taxpayer if the income derived, received or made as a result of the scheme by each entity covered by subsection (2) reasonably reflects the economic substance of the entity’s activities in connection with the scheme.
(2) This subsection covers an entity if any of the following apply:
(a) the entity entered into or carried out the scheme or any part of the scheme;
(b) the entity is otherwise connected with the scheme or any part of the scheme.