Diverted Profits Tax legislated by the Australian Government.
On 27 March 2017, the Australian Government legislated the Diverted Profits Tax (DPT). Generally speaking, this is a new tax charged at 40% on profits considered to be artificially shifted from Australia to a country with a lower tax rate.
There is a misconception that only complex or intricate structures will be caught. However, the “tax benefits” that may be caught by the DPT include:
Inappropriate or excessive deductions (such as royalties, interest and charges);
Non-recognition of revenue;
Creation of losses;
Avoidance of Australian withholding taxes; and
Inappropriate use of tax concessions.
The new DPT legislation will be inserted into Part IVA of the Income Tax Assessment Act 1936 (general anti -avoidance provisions). This is of significant relevance because the application and scope of Australia's tax treaties are subject to the operation of Part IVA. This avoids the contentious argument in the United Kingdom that their DPT is not income tax/corporations tax and therefore falls outside of the ambit of its international tax treaties.
The new Law will apply in respect to income years starting on or after 1 July 2017. It does not matter if the structures were put in place before that date.
The DPT rules are generally subject to a seven year amendment period limit.
With the introduction of the DPT, the ATO will have the current general anti avoidance measures, the multinationals anti-avoidance measures, the transfer pricing provisions and the DPT in its arsenal to attack profit shifting transactions which it believes erode the Australian tax base. The question then begs, in what circumstances would the Australian Taxation Office (ATO) apply the DPT?
When announcing the DPT rules on 3 May 2016, Treasury explained that “The DPT will provide the Australian Tax Office (ATO) with greater powers to deal with multinationals who transfer profits, assets or risks to offshore related parties using artificial or contrived arrangements to avoid Australian tax and who do not cooperate with the ATO.” In the author’s view, the corollary to this is that in the absence of these negative behaviours, the DPT trigger should not be pulled if the other integrity measures do not apply. This is highly important in balancing the desire to protect the Australian tax base with the need to promote Australia as a business friendly investment environment.
It is intended that the DPT will encourage transparent and cooperative behaviour on the part of taxpayers. Paragraph 1.7 of the explanatory memorandum (EM) accompanying the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 states:
“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.”
It is also noteworthy that the Federal Court, in considering the appeal by the taxpayer against a DPT assessment will generally be restricted to considering evidence that was provided to the Commissioner of Taxation (the “Commissioner”) before the end of the review period.
The chart below depicts when the DPT may apply.
In relation to the principal purpose test, a scheme may be entered into or carried out for a number of purposes, some or all of which may be principal purposes. The scheme will be caught as long as one of those principal purposes satisfies the tax benefit requirements of the principal purpose test.
In considering the extent to which quantifiable non-tax financial benefits have resulted, will result, or may reasonably be expected to result from the scheme, the amount of the quantifiable non-tax financial benefits should be compared to the amount of the tax benefits. If the amount of the quantifiable non-tax financial benefits exceeds the amount of the tax benefits, then this may indicate that it is reasonable to conclude that enabling a taxpayer to obtain a tax benefit is not a principal purpose of the scheme.
Where the DPT rules are triggered, the diverted profits will be taxed at a rate of 40% and no foreign tax offset will be available for any foreign taxes paid.
The diagram below depicts the DPT assessment and review process.
Information should be available to multinational groups to assess the risk of triggering the DPT. It is recommended that the company perform a DPT risk assessment and compile contemporaneous documentation (DPT defence file) to demonstrate the commerciality of the group structure. Information collated may include:
An explanation of the principal purpose(s) behind the relevant structure or any relevant arrangement including any industry practice, regulations, restrictions and controls which might have contributed to the formulation of the structure;
Analysis of the relevant contracts and key terms and whether the actions of parties are consistent with agreed terms;
Documentation demonstrating that the revenue derived by the relevant parties in the group reasonably reflects their functional, asset and risk profile;
The group’s transfer pricing documentation which will generally include the industry analysis, business strategies, functional analysis, transfer pricing methodologies and any comparability/benchmarking analysis;
Consideration of possible alternative structures (including the structure likely to be preferred by taxation authorities) and a discussion regarding why these structures were not selected; and
Quantification of the non-tax benefits of the structure if possible.
If you have any questions, please contact the author, Daren Yeoh on the details below, or your ShineWing Australia relationship partner.
P +61 3 8635 1888