Australia Adds To Diverted Profits Tax Guidance
The Australian Tax Office on February 7 released draft Practical Compliance Guideline 2018/D2 on the operation of Australia’s Diverted Profits Tax for consultation.
In the 2016-17 Budget, the Government announced that it would introduce a diverted profits tax (DPT), intended to ensure that the tax paid by significant global entities (SGEs) properly reflects the economic substance of their activities in Australia. It aims to prevent the diversion of profits offshore through arrangements involving related parties. It also encourages SGEs to provide sufficient information to the ATO to allow for the timely resolution of tax disputes.
The DPT came into effect on July 1, 2017, and imposes a 40 percent tax on diverted profits. The DPT can apply to schemes entered into before July 1, 2017.
An entity is an SGE for an income year if it is:
- A global parent entity with an annual global income of AUD1bn (USD782.8m) or more;
- A member of a group of entities (consolidated for accounting purposes) where the global parent entity has an annual global income of AUD1bn or more.
For the purposes of the DPT, this definition includes both Australian-headquartered entities with foreign operations and the local operations of foreign headquartered multinationals.
According to ATO guidance, broadly, the law applies if under the scheme, or in connection with the scheme:
- A taxpayer has obtained a tax benefit in connection with the scheme in an income year;
- A foreign entity that is an associate of the relevant taxpayer entered into or carried out the scheme or is otherwise connected with the scheme; and
- The principal purpose, or one of the principal purposes of the scheme, is to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit.
There are three exceptions that exclude entities from the law if satisfied:
- The AUD25m income test;
- The sufficient foreign tax test; and
- The sufficient economic substance test.
In addition, the DPT does not apply to a relevant taxpayer who is one of the following types of entities:
- A managed investment trust;
- A foreign collection investment vehicle with wide membership;
- A foreign entity owned by a foreign government
- A complying superannuation entity; or
- A foreign pension fund.
On December 18, 2017, the ATO released draft law companion guideline (LCG) 2017/D7 Diverted profits tax for public consultation, which will end on February 16, 2018. The draft LCG explains how the Commissioner will apply the new DPT law and, in particular, clarifies new concepts introduced by the measure to provide taxpayers with greater certainty on the application of the new law.
The ATO has also released law administration practice statement (PSLA) 2017/2, which, among other things, explains the internal administrative oversight framework for the DPT within the ATO and the process leading to the issuance of a DPT assessment, intended to provide assurance to taxpayers that the new rules will be applied with appropriate levels of internal review. It includes a graphic explaining the process taken within the ATO to determine DPT liability and issue an assessment and the steps that can be taken by a taxpayer to challenge an assessment and engagement required with the tax authority.
The new Practical Compliance Guideline (PCG) is aimed at providing guidance for those who may be affected by the DPT by setting out the ATO’s client engagement framework for the DPT; and outlining the ATO’s approach to risk assessment and compliance activity when the DPT is identified as a potential area of concern.
The draft PCG provides examples to illustrate the relative risk of adopting certain types of arrangements in the context of the DPT measure. These examples are based on different industry sectors to address the practical implications of the new DPT law, the ATO said.
It discusses the principal purpose test, how the value of tax benefits are assessed; the sufficient foreign tax test, including the treatment of losses arising overseas and foreign credits; the sufficient economic substance test and how this is determined, with reference to OECD guidance on substance; and interaction between the thin capitalization regime and the DPT.
The consultation on the PCG is to close March 9, 2018.