The Australian government has recently passed new legislation to implement a Diverted Profits Tax (DPT) on Significant Global Entities (SGEs). The DPT rules come into effect from 1 July 2017 and can apply to transactions or arrangements which commenced prior to 1 July 2017.
The DPT law applies a 40% income tax rate to profits which have been diverted from Australia to a country with a lower corporate tax rate than Australia’s. Based on the current 30% Australian corporate tax rate, DPT can potentially be triggered where the foreign corporate tax rate is less than 24%. Given that most other countries around the world have reduced their corporate tax rate or are in the process of reducing their corporate tax rates to lower than 24%, the DPT has a potentially very broad application to Australian businesses.
Application of the DPT
The DPT will only apply to SGE’s. An SGE is an entity:
- With global income of AUD $1 billion (approximately EUR €670 million or USD $700 million); or
- That is a member of a group of consolidated entities for accounting purpose that has annual global income of AUD equivalent of $1 billion.
The DPT will apply where an Australian entity enters into an arrangement, understanding, promise or undertaking with the principal purpose of receiving a tax benefit. A tax benefit will be either an overstatement of deductions or an understatement of assessable income of an Australian entity that fails the sufficient foreign income test and the sufficient economic substance test (discussed below).
Exclusions to the DPT Regime
Where an entity satisfies one of the following tests, the DPT will not apply:
|$25 million income test||The Australian entity and associated Australian entities’ assessable income, exempt income and non-assessable non-exempt income does not exceed $25 million.|
|Sufficient foreign income test||Broadly, this exception requires that the increase in foreign tax as a result of the diversion of income offshore is at least 80% of the reduced Australian tax liability. In other words, the DPT can potentially be triggered where the foreign corporate tax rate is less than 24%.|
|Sufficient economic substance test||Broadly, this exception is based upon whether it is reasonable to conclude based on the information available at the time to the Australian Taxation Office (ATO) that the transaction(s) was designed to secure the tax reduction. 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.|
We expect that the amount of ‘diverted profits’ will be identified by the ATO from more tax return disclosures (or lack thereof) and Transfer Pricing reviews of taxpayers. Taxpayers who have the following international arrangements with related parties in lower tax jurisdictions may be more likely to be scrutinised from a DPT perspective:
- Payments overseas for the use of intellectual property;
- Payments overseas for the use of marketing and / or administration services;
- Payments overseas for interest on non-commercial loans;
- Taxpayers who have created foreign branches or subsidiaries to receive revenue.
If an initial DPT assessment is issued, the taxpayer will have 21 days to pay the tax to the Australian ATO. Taxpayers then have 12 months to review the DPT assessment with the ATO.
After the 12 month review, the ATO may issue an addendum assessment to increase or decrease the original assessment based on the information provided. Appealing the DPT assessment is available but the appeal process has been made deliberately more restrictive than ordinary income tax appeals processes.
In the event that an entity is issued with a DPT assessment, we strongly recommend the entity seeks taxation advice to implement risk reduction strategies.
To discuss your compliance with Australian income tax rules for foreign transactions, transfer pricing and DPT assessments please contact your local advisors.