On 29 November 2016, the Turnbull Government released draft legislation and a draft explanatory memorandum (EM) for the proposed Diverted Profits Tax (DPT) which was first announced in the 2016-17 Federal Budget. It is the latest in a suite of measures to combat multinational tax avoidance that includes the Multinational Anti-Avoidance Law (MAAL) which came into effect on 11 December 2015.
The DPT, colloquially known as the Google Tax, is modelled after a similar tax in the UK. Following the introduction of a DPT in the UK, Google agreed to pay the UK government £130 million while Amazon announced that it would start booking British retail sales in the UK, rather than in Luxembourg.
The DPT will apply in respect of significant global entities operating in Australia, where it is reasonable to conclude that profits have been artificially diverted from Australia. Where the DPT applies, tax will be payable on the diverted profits at the rate of 40 per cent.
When will the DPT apply?
The DPT will apply to an entity if, broadly:
- It is reasonable to conclude that a scheme (or any part of a scheme) was carried out for a principal purpose of, or for more than one principal purpose that includes, enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit. Note that the ‘principal purpose’ threshold is lower than the ‘sole or dominant purpose’ threshold that applies for Part IVA anti-avoidance purposes;
- The relevant taxpayer is a significant global entity (i.e. it has annual global income of $1 billion or more) for the income year in which it would obtain the tax benefit;
- A foreign entity that is an associate of the relevant taxpayer entered into, carried out or is otherwise connected to the scheme or part of it. Therefore, the DPT will not apply to a scheme with which only Australian entities are connected; and
- The relevant taxpayer obtains a tax benefit (as defined for Part IVA purposes) in connection with the scheme.
However, the DPT will not apply if it is reasonable to conclude that one or more of the following tests apply to the relevant taxpayer:
- The $25 million turnover test
This test applies where it is reasonable to conclude that the Australian turnover of the relevant taxpayer and other Australian entities that are members of the same global group does not exceed $25 million. Note that the $25 million turnover test will not apply if it is reasonable to conclude that sales have been artificially booked outside Australia.
- The sufficient foreign tax test
This test applies where it is reasonable to conclude that, in relation to the scheme, the increase in foreign tax liability is equal to or exceeds 80% of the corresponding reduction in the Australian tax liability. To work out the amount of the increased foreign tax liability, it is necessary to consider any specific tax relief provided by a foreign country to relation to the scheme.
We note that a number of OECD countries and Singapore currently have a corporate tax rate that is equal to or less than 24% (i.e. 80% of Australia’s 30% rate). These include the United Kingdom, Ireland, Poland and Switzerland. If President-Elect Trump’s tax plan is enacted, this list would also include the United States.
- The sufficient economic substance test
This test applies where it is reasonable to conclude that the income derived, received or made as a result of the scheme reasonably reflects the economic substance of the entity’s activities in connection with the scheme. Therefore, if a multinational entity structures its affairs in a way that reasonably reflects their economic substance, the DPT will not apply. For the purposes of applying this test, consideration should be given to the OECD transfer pricing guidelines.
If the DPT applies
If the DPT applies to a taxpayer, the Commissioner may make a DPT assessment and issue it to the relevant taxpayer. Tax is payable on the amount of diverted profits at a rate of 40 per cent. Furthermore, the DPT due and payable will not be reduced by the amount of foreign tax paid on the diverted profits. The DPT assessment will also include an interest charge.
The assessment and review process
If the Commissioner considers that a taxpayer is in scope of the DPT, he may make a DPT assessment at any time within 7 years of first serving a notice of assessment on the taxpayer for an income year. In practice, the Commissioner would only do this after communication with the relevant taxpayer had failed to reach an agreement about the correct amount of tax that should be paid.
The relevant taxpayer must then pay the amount set out in the DPT assessment no later than 21 days after the Commissioner gives the notice of assessment.
If the Commissioner gives an entity a notice of a DPT assessment, a period of review will generally apply. This review period gives the taxpayer the opportunity to provide additional documents and information relating to the DPT assessment to the Commissioner. This review period will typically end 12 months after the DPT assessment is given but can be shortened (for example if the taxpayer considers that it has provided the Commissioner with all relevant information and documents) or extended (for example where the entity provides information close to the end of the 12 month period and the Commissioner needs additional time to properly examine the material).
As a result of receiving additional information, the Commissioner may conclude that the DPT assessment is excessive or that the liability should be increased. He may then make an amended DPT assessment. Where an amended DPT assessment is made, interest will be payable (by the Commissioner on the refund where the liability is reduced or by the taxpayer on the additional amount payable where the liability is increased).
Objections to DPT assessments
The relevant taxpayer may object to the DPT assessment by appealing to the Federal Court within 30 days of the end of the period of review. However, any information or documents that were not provided to the Commissioner during the period of review, or that the Commissioner did not already have prior to the period of review, will not be admissible without either the Commissioner’s consent or the leave of the court.
It is intended that the new law will encourage greater compliance by large multinational enterprises with their tax obligations in Australia as well as greater openness and cooperation with the Commissioner. I applaud these aims and broadly welcomes the government’s efforts to address the issue of multinational tax avoidance.
I, note, however, the following concerns;
- Critical to the operation of the proposed DPT is the sufficient economic substance test. The EM provides two examples and a brief description of this test. However, given the importance of this test and the complexities of applying it in practice, it is hoped that further guidance will be issued before the law is enacted. In time, it will be interesting to see how the ATO and the courts interpret and apply this test.
- Treasury is accepting submissions on the proposed legislation until 23 December 2016. This will not leave much time between when this complex legislation is finally enacted and when it commences on 1 July 2017.
- The article does not constitute advice and is intended to be a general overview only. While I have attempted to ensure the accuracy of the article I do not give any assurances. Please seek your own professional advice.
- The views in the article are mine alone and do not necessarily represent those of my employer or anybody else.