Draft legislation was released on 29 November 2016 bringing the Diverted Profits Tax (DPT) in Australia one step closer to reality. The legislation is slated to apply from 1 July 2017.
How is the DPT law proposed to operate?
Originally announced in the 3 May Federal budget, the Australian DPT will be an extension of the tax anti-avoidance rules. It will apply to multinationals with annual global revenues of greater than AUD 1 billion that derive tax benefits from shifting profits to offshore associates where the foreign tax is less than 80% of the Australian tax rate.
There are exceptions where the combined Australian turnover is below AUD 25 million or the arrangement reflects economic substance of the activities.
Shifting profits with the principal purpose of obtaining an Australian tax benefit will result in a penalty tax rate on diverted profits of 40%, rather than the usual 30% company tax rate, and without allowance for any foreign tax paid.
The tax is payable within 21 days of assessment, with a subsequent review over the next 12 months to provide further information to the tax office.
Thereafter appeal rights can be invoked, but evidence is limited to that provided during the review period. This is to encourage full disclosure during the review period, and therefore requires companies to have their house in order and be ready to explain their situation and provide transfer pricing documentation.
Because the provisions are anti-avoidance laws, they are not subjected to override by double tax treaties which apply to normal tax laws.
The implications for potentially affected multi-nationals
We recommend that all cross-border arrangements be reviewed well before an assessment could be issued. Cross-border contractual asset or ‘passive’ risk transfer transactions between related parties such as financing, leasing, captive insurance, licensing or sale of intangibles and some transfer pricing models could be susceptible to the new law.
Its important to note that transfer pricing documentation will not necessarily provide a defence against a DPT assessment.
Further developments expected after Christmas
Submissions on the draft law are being called for until 23rd December 2016, which will then allow the elves to work on the package over Christmas, ready to be put to parliament when it resumes sitting in February.
