Australia's diverted profits tax

by Stephanie Caredes, CTA *


In late November 2016, the government released for consultation the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017: Diverted profits tax exposure draft. **

The exposure draft contained the diverted profits tax proposed to be included in Australia’s tax system. Its features include:

  • it will apply to significant global entities with annual global income of $1b or more;
  • it will apply to significant global entities with Australian turnover of more than $25m; and
  • it concerns schemes that involve associated entities in lower tax jurisdictions that do not have the economic substance to justify their income.

A rate of 40% will apply. However, where any of the following tests applies to the entity, the diverted profits tax will not apply:

  • the $25m turnover test;
  • the “sufficient foreign tax” test; or
  • the “sufficient economic substance” test.

The Tax Institute maintains that the utility of a “diverted profits tax” being inserted into the Australian tax system is questionable. By its insertion, this will mean that Australia will become out of step with the majority of OECD countries in relation to the collective action being taken to address base erosion and profit shifting in a coordinated manner. In addition, Australia’s transfer pricing rules, together with the general anti-avoidance rules in Pt IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA36) and the various information-gathering provisions available to the Commissioner, should provide the Commissioner with sufficient power to address the concerns the diverted profits tax is aimed at.

Notwithstanding the above view, The Tax Institute accepts that the diverted profits tax is a priority measure for the current government as contained in the 2016-17 federal Budget. However, the Institute considers that the provisions, as currently drafted and contained in the exposure draft, amount to a significant overreach and will not serve to significantly increase integrity in the tax system to the extent that the government appears to be anticipating. Importantly, the exposure draft goes beyond the announcements made by the government, and goes beyond the UK legislation on which this legislation is purported to be based. The Institute considers this is the case, particularly given the strength of the legislative powers that the Commissioner already has paired together with the relatively new transfer pricing rules directed at ensuring that the correct amount of income is allocated to Australia for the purpose of applying income tax.

If it is the government’s intention that Australia’s tax base be broadened beyond that established by existing income tax laws, including the new transfer pricing rules, this should be made clear. If this is not the case, then the legislation should more clearly set out how the diverted profits tax is intended to interact with situations where the transfer pricing rules in Div 815 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) apply, in particular, when regard is given to the reconstruction provisions in s 815-130 ITAA97.

The uncertainty created by inserting the diverted profits tax into the general antiavoidance provisions, without specifically providing that the tax will only apply as a “provision of last resort”, is also problematic. In addition, the fact that the rules are drafted in broader terms than the rest of Pt IVA, and will apply if it is “reasonable to conclude” (per draft s 177H(1)(a) ITAA36) that there is a principal purpose of obtaining a tax benefit, contributes to the diverted profits tax creating (unnecessary) uncertainty if included in the Australian tax law as it is currently drafted.

There are also proposed restrictions on a taxpayer’s rights to the review of a “DPT assessment”. The process to review a DPT assessment appears to operate such that a taxpayer has no recourse to the Administrative Appeals Tribunal should it wish to dispute an assessment and must instead apply directly to the Federal Court for review. In the Institute’s view, a taxpayer that is subject to a DPT assessment should have the same rights to review as would be available for an income tax assessment.

In the Institute’s view, a diverted profits tax has questionable utility in the Australian tax system, particularly given the pre-existing transfer pricing rules, general anti-avoidance provisions and the Commissioner’s information-gathering powers that, collectively, should be capable of addressing the concerns that the diverted profits tax is directed at.

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* Stephanie Caredes is The Tax Institute's Tax Counsel.

** Note: The measure was tabled in Parliament on 9 February 2017 and is currently sitting with a Senate Committee for review.

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