When George Osborne announced the UK’s diverted profits tax (DPT) in his Autumn Statement last December, I predicted that other countries would follow suit. Sure enough, the Australian Treasurer Joe Hockey has announced detailed proposals in his recent Federal Budget.
In the UK, the DPT was widely seen as a political pre-Election measure, rushed through in response to the Public Accounts Committee’s rhetoric about companies not paying their ‘fair share’. Commentators on the Australian measure note the ‘febrile atmosphere’ surrounding the Senate economic committee’s enquiry into corporate tax avoidance. This, they say, is ‘not conducive to getting the right legislative response’ and could lead to a ‘gross overreaction’. Clearly, similar forces are acting in both countries.
Australia has decided that it does not need a separate DPT, but will simply strengthen its existing anti-avoidance laws. This is clearly a simpler solution legislatively, and is likely to be much more robust to treaty challenge. In practice, though, it may be harder to enforce. It is interesting that there was no revenue estimate attached to the Australian proposals, as Hockey has said that he ‘was not going to make the mistake of banking money that was not identifiable’. Unlike the UK, perhaps?
Australia’s GAAR (Part IVA) was introduced in 1981. Tax arrangements with a ‘sole or dominant purpose’ of avoiding tax are ignored, and in 2013 additional power was given to the Commissioner to recharacterise transactions. The proposed amendments will have an effective date of 1 January 2016. They refer to arrangements with a ‘principal purpose’ of avoiding an Australian PE, and acknowledge that there can be more than one principal purpose.
The new rules will apply where income is derived by a foreign entity from the supply of goods or services to unrelated Australian customers; and there are activities carried out in Australia by an Australian resident that is related to the foreign entity. It must be ‘reasonable to conclude that the scheme is designed’ to avoid the foreign entity having a PE in Australia, and that the scheme has a principal purpose of avoiding a charge to tax. Finally, the foreign entity must be connected with income arising in a tax haven.
The wording is very similar to that in the UK’s avoided PE provisions (FA 2015 s 86), but with more emphasis on the purpose of the transactions. In addition to apportioning profits to the avoided PE, withholding tax will apply to any deemed interest or royalty payments of the PE, and there may be penalties of up to 100% of the tax.
It seems that both countries are firing warning shots across the bows of US multinationals, making it clear that if BEPS does not deliver, unilateral attacks will be launched. The US has begun to threaten retaliation, and it may be that the threat of other countries taxing their multinationals will finally lead the US to implement reform of its own tax system. After all, if US companies are going to pay more tax, surely the IRS will want to take the first bite of the cherry?
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Australia's answer to the diverted profits tax
When George Osborne announced the UK’s diverted profits tax (DPT) in his Autumn Statement last December, I predicted that other countries would follow suit. Sure enough, the Australian Treasurer Joe Hockey has announced detailed proposals in his recent Federal Budget.
In the UK, the DPT was widely seen as a political pre-Election measure, rushed through in response to the Public Accounts Committee’s rhetoric about companies not paying their ‘fair share’. Commentators on the Australian measure note the ‘febrile atmosphere’ surrounding the Senate economic committee’s enquiry into corporate tax avoidance. This, they say, is ‘not conducive to getting the right legislative response’ and could lead to a ‘gross overreaction’. Clearly, similar forces are acting in both countries.
Australia has decided that it does not need a separate DPT, but will simply strengthen its existing anti-avoidance laws. This is clearly a simpler solution legislatively, and is likely to be much more robust to treaty challenge. In practice, though, it may be harder to enforce. It is interesting that there was no revenue estimate attached to the Australian proposals, as Hockey has said that he ‘was not going to make the mistake of banking money that was not identifiable’. Unlike the UK, perhaps?
Australia’s GAAR (Part IVA) was introduced in 1981. Tax arrangements with a ‘sole or dominant purpose’ of avoiding tax are ignored, and in 2013 additional power was given to the Commissioner to recharacterise transactions. The proposed amendments will have an effective date of 1 January 2016. They refer to arrangements with a ‘principal purpose’ of avoiding an Australian PE, and acknowledge that there can be more than one principal purpose.
The new rules will apply where income is derived by a foreign entity from the supply of goods or services to unrelated Australian customers; and there are activities carried out in Australia by an Australian resident that is related to the foreign entity. It must be ‘reasonable to conclude that the scheme is designed’ to avoid the foreign entity having a PE in Australia, and that the scheme has a principal purpose of avoiding a charge to tax. Finally, the foreign entity must be connected with income arising in a tax haven.
The wording is very similar to that in the UK’s avoided PE provisions (FA 2015 s 86), but with more emphasis on the purpose of the transactions. In addition to apportioning profits to the avoided PE, withholding tax will apply to any deemed interest or royalty payments of the PE, and there may be penalties of up to 100% of the tax.
It seems that both countries are firing warning shots across the bows of US multinationals, making it clear that if BEPS does not deliver, unilateral attacks will be launched. The US has begun to threaten retaliation, and it may be that the threat of other countries taxing their multinationals will finally lead the US to implement reform of its own tax system. After all, if US companies are going to pay more tax, surely the IRS will want to take the first bite of the cherry?
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