There have been very significant changes to the international tax regime targeting tax avoidance by multi-nationals.
Multinational Tax Measures
Diverted Profits Tax
The Government will introduce a new 40% tax aimed at multinational corporations that artificially divert profits from Australia. The 40% tax will apply to income years commencing on or after 1 July 2017 and apply whether or not a relevant transaction (or series of transactions) was entered into before that date. This measure is estimated to have a gain to revenue of $200 million over the forward estimates period.
This measure will apply to large companies which:
- have global revenue of $1 billion or more; and
- are either Australian residents or foreign residents with Australian permanent establishments.
Companies with Australian revenue of less than $25 million will be exempt, unless they are artificially booking their revenue offshore.
The new tax will target companies that shift profits offshore through arrangements involving related parties:
- that result in less than 80 per cent tax being paid overseas than would otherwise have been paid in Australia;
- where it is reasonable to conclude that the arrangement is designed to secure a tax reduction; and
- that do not have sufficient economic substance.
The determination of whether there is “insufficient economic substance” will be based upon whether it is reasonable to conclude, based on the information then available to the ATO, that the transaction was designed to secure a tax reduction. Similar to the UK approach, where the non-tax financial benefits of the arrangement exceed the financial benefit of the tax reduction, the arrangement will be taken to have sufficient economic substance.
How will diverted profits be calculated?
Where the deduction claimed is considered to exceed an arm’s length amount (so called “inflated expenditure” cases), the “provisional” diverted profits will be 30% of the transaction expense.
For other cases, the “provisional” diverted profits will be based on the best estimate of the diverted taxable profit that can reasonably be made by the ATO.
Where the debt levels of a significant global entity fall within the thin capitalisation safe harbour, only the pricing of the debt and not the amount of the debt will be taken into account in determining any diverted profits tax.
In calculating the diverted profits tax payable, an offset will be allowed for any Australian taxes paid on diverted profits. For example, Australian withholding tax and Australian tax paid on income attributed under the controlled foreign company (CFC) regime could be credited. The impact of these offset rules need to be carefully considered. Foreign tax paid by a CFC may reduce the Australian tax payable on attributed income of a CFC. Because of the operation of the offset rules, this may increase the diverted profits tax.
This is where the rubber hits the road. The ATO will initially issue a provisional diverted profit tax assessment (and has up to 7 years to do so). The taxpayer will then have 60 days to make representations to correct factual matters (but not on transfer pricing matters).
Following this, the ATO will issue a final diverted profits tax assessment within 30 days of the end of the representation period. The taxpayer will have 21 days to pay the assessment.
The ATO will have 12 months to review the final diverted profit tax assessment, during which time the taxpayer may provide information to the ATO to support an amendment to the assessment, which may include an adjustment on transfer pricing grounds.
At the completion of the review period, the taxpayer has 30 days to lodge an appeal (through the court process).
The diverted profits tax provides the ATO with another option to reconstruct related party transactions. This new measure appears to contain a threshold test which is different from Part IVA.
Although not discussed, we would expect the diverted profit tax to be subject to a separate assessment regime.
While penalties are not specifically mentioned, if these measures are treated the same way as the multinational anti-avoidance law (MAAL) enacted in 2015, penalties of up to 120% may be applied.
Treasury has released a consultation paper in relation to the implementation of the diverted profits tax (see http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/Implementing-a-diverted-profits-tax). Submissions close on 17 June 2016.
Tax Avoidance Taskforce
As part of the Government’s Tax Integrity Package, funding will be provided to the ATO to establish a new Tax Avoidance Taskforce, who will work closely with partner agencies such as ASIC, AFP and AUSTRAC to strengthen the ATO’s audit and compliance activities targeting multinationals, large public and private groups and high wealth individuals.
The Tax Avoidance Taskforce will be lead directly by the Commissioner of Taxation (backed by an appointed panel of experts) and will spearhead litigation in cases of deliberate tax avoidance. It is intended the Commissioner will provide regular progress reports to Government on the work of the Tax Avoidance Taskforce, with the first report due before the end of 2016.
The OECD has recommended that Governments implement domestic rules to eliminate the effect of hybrid entities or instruments. That is, Governments should implement legislation that nullifies any tax advantage arising from different tax treatment between jurisdictions. By way of example, such rules that would prevent exemption or non-recognition of payments in the jurisdiction of the receiver where the payment was deductible in the jurisdiction of the payer. These measures will apply broadly to related parties, members of a control group and structured arrangements.
The rules developed by the OECD to eliminate hybrid mismatch arrangements are proposed to be implemented from the earlier of 1 July 2018 or six months following the date of Royal Assent of the enabling legislation. However, before implementing these measures, the Government has asked the Board of Taxation to undertake further consultation on the interaction between the proposed “anti-hybrid rules” and Australia’s domestic legislation (e.g., the debt-equity rules and regulated capital requirements for banks) and its’ international obligations (including tax treaties).
The Government is amending Australia’s transfer pricing law to give effect to the 2015 OECD transfer pricing recommendations on Base Erosion and Profit Shifting. As part of the Government’s Tax Integrity Package, the transfer pricing rules in Division 815 of the Income Tax Assessment Act 1997 will be amended to incorporate the changes to the OECD’s guidelines, with effect from 1 July 2016.
These amendments are broadly focused on the transfer pricing rules relating to controlled transactions involving intellectual property and other hard-to-value-intangibles and ensuring that transfer pricing analysis reflects the economic substance of the transaction. Applying these changes to Australia’s transfer pricing rules will keep them in line with international best practice so that profits made in Australia are properly taxed in Australia.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2016-17.