Australia follows UK’s diverted profits tax lead

The Australian government has announced proposals in its recent Budget for a diverted profits tax on large multinationals to take effect on 1 July 2017.

The proposals are largely based on the UK’s DPT, which took effect from 1 April 2015. The Australian DPT would:

·       impose a penalty tax rate of 40% , rather than the usual 30% rate, on profits transferred offshore through related party transactions with insufficient economic substance that reduce the tax paid on the profits generated in Australia by more than 20%;

·       apply where it is reasonable to conclude that the arrangement is designed to secure a tax reduction and lacks economic substance;

·       impose a liability when an assessment is issued by the Australian Tax Office (ATO) (that is, it will not operate on a self-assessment basis);

·       require upfront payment of any DPT liability, which can only be adjusted following a successful review of the assessment; and

·       put the onus on taxpayers to provide relevant and timely information on offshore related party transactions to the ATO to prove why the DPT should not apply.

Details of the proposals are subject to consultation until 17 June (see www.bit.ly/23oSMn1).

The proposed DPT follows the recent enactment of Australia’s multinational anti-avoidance law (MAAL). Whereas the proposed DPT would broadly adopt the second limb of the UK’s DPT, the MAAL is similar to the first limb of the UK’s DPT. The two Australian measures are said to generate AUD 650m over four years, and affect multinational companies operating in Australia with global annual revenue in excess of AUD 1bn.

The proposed DPT forms part of a package of measures designed to ensure that multinationals pay the appropriate amount of tax on the profits they make in Australia. Other key measures include:

·       eliminating hybrid mismatch arrangements where corporates take advantage of differences in the tax treatment of financial instruments or entities in different countries to avoid paying tax;

·       implementing the OECD’s recently updated transfer pricing guidelines; and

·       establishing a new tax avoidance taskforce within the ATO to enhance its audit activity for large corporates and high wealth individuals.