The newest diverted profits tax: a brief glimpse down under
Donald Drysdale looks at Australia’s latest Federal Budget from a multinational perspective.
Another 'Google tax'
When the UK unilaterally announced that a new diverted profits tax (DPT) would apply from 1 April, 2015, it was seen to be jumping the gun on concerted international action that was expected to follow on from the OECD’s base erosion and profit shifting (BEPS) project. Our move embarrassed the OECD and, as highlighted in Implications of the UK's new diverted profits tax, it arguably risked our international tax competitiveness.
As it turned out, we were not alone for long. On 1 January, 2016 Australia moved some way towards a similar measure by adopting its new multinational anti-avoidance law (MAAL) (see Australia's new multinational anti-avoidance law).
Now Australia plans to go a step further. In his Federal Budget of 3 May, Australia’s Treasurer Scott Morrison announced that Canberra’s Liberal-National coalition government intends to introduce a DPT. This move to combat tax avoidance seems designed to win votes in a general election expected in July 2016.
How Australia’s DPT will work
From 1 July, 2017, multinational companies that shift profits offshore to avoid Australian tax will face DPT at a penal rate of 40% instead of the usual 30% rate of corporation tax. The new tax will potentially apply to large companies which have global revenues of A$1bn (£511m) or more and are either resident in Australia or operating through a permanent establishment there.
Companies that shift profits offshore using related party arrangements which lack sufficient economic substance will be targeted; the DPT is charged where those companies deliberately secure that less than 80% tax is paid overseas than would otherwise have been paid in Australia. As in the UK, an arrangement will be regarded as having sufficient economic substance where the non-tax financial benefits of the arrangement exceed the financial benefit of the tax reduction.
Complex rules will be used by the Australian Taxation Office (ATO) to calculate diverted profits, based either on 30% of the transaction expense where excessive deductions are claimed or (in all other cases) on the best estimate that can be made by the ATO. Special provisions will deal with the interaction between DPT and the rules on thin capitalisation, and with offsets for other Australian taxes paid; interaction with the controlled foreign company (CFC) regime could even increase exposure to DPT.
A penalty regime covering DPT has not yet been announced. However, it might well follow similar principles to that relating to MAAL, where penalties may amount to as much as 120% of the tax involved.
Companies with Australian revenues below A$25m (£12.8m) will be exempt from DPT unless they have taken artificial steps to shift their revenues offshore.
Other multinational tax measures
The Federal Budget announced that Australia’s transfer pricing laws are to be amended from 1 July, 2016 to incorporate changes to the OECD guidelines arising from the BEPS project. This will largely affect the transfer pricing rules for controlled transactions involving intellectual property and other hard-to-value intangibles, ensuring that the transfer price reflects the economic substance of the transaction.
The Australian government is to consult further before taking action by 1 July, 2018 on the OECD’s recommendation that countries should implement domestic rules to eliminate the misuse of hybrid entities or instruments – that is, arrangements that seek to gain tax advantage from differences in tax treatment between different jurisdictions.
Multinationals operating in Australia may also encounter a new 1,300-strong tax avoidance taskforce which is to be established to strengthen the ATO’s audit and compliance activities. This group will lead litigation in cases of deliberate tax avoidance.
Australia’s latest crackdown on tax avoidance by multinationals comes hard on the heels of the scandal over leaked papers from the Panamanian firm Mossack Fonseca & Co. ATO head Chris Jordan is reported to have told senators recently that Mossack Fonseca was not unique and that many other firms are running similar operations around the world.
In these circumstances it is hardly surprising that countries such as the UK and Australia are keen to reduce tax leakage from the diversion of profits to territories with lower tax rates. This appears to be particularly important for Australia where corporation tax, currently 30%, is planned to reduce to 25% by 2026/27. By comparison the current UK rate is 20%, reducing to 17% by 2020/21.
In this era of apparently rampant tax avoidance, it may come as a surprise that the Australian DPT is expected to raise revenues of only A$200m (£102m) in the first two years of its operation. Similarly, the UK DPT is forecast to raise no more than £360m (A$705m) a year. These hoped-for improvements in revenues seem paltry compared with press reports about the extent to which multinationals are supposedly underpaying their taxes worldwide.
One further point. Scott Morrison’s budget promised to improve protections for whistle-blowers who come forward to the ATO with information about tax avoidance. However, a word of warning. Eager Australians shouldn’t whistle too soon, because the improved protections won’t kick in until 1 July, 2018.
Article supplied by Taxing Words Ltd
Further reaction to the Australian budget can be found at 'Budget 2016: What it means for Australian business'.