On November 29, the Australian Treasury released an exposure draft of the proposed Australian version of the DPT, together with an explanatory memorandum. The consultation period for the draft legislation closed on 23 December, 2016.
The DPT will apply from 1 July 2017 at the rate of 40 per cent and will complement the Multinational Anti-Avoidance law (MAAL) which has been in operation since 1 January, 2016. Both measures aim to stop profit-shifting out of Australia and both carry penalty tax rates. The government’s intent is to encourage affected taxpayer groups to restructure their operations in and with Australia to align tax outcomes with economic substance, rather than simply collect the tax at the higher rate.
The stated purpose of the DPT is to force reticent multinationals to provide sufficient information to the ATO so it can properly assess whether there has been avoidance of Australian tax. The government is presumably trying to force non-complying taxpayers to restructure, bringing additional profits into the Australian tax net.
Australia continues to act unilaterally in passing international tax changes that are inconsistent with and go well beyond internationally-accepted rules, which have been negotiated over the last two years through the monumental G 20/OECD BEPS process. This is ironic given the role Australia played in the BEPS process during its presidential year, and the fact that it will presumably be lining up to sign the multilateral convention which will implement the treaty-related BEPS measures.
The Australian government also continues to pass legislation that is out of step with the globally-agreed standards and in a manner that inevitably will lead to double taxation of corporate profits. Again, ironically, Australia has committed to accepting binding mandatory arbitration for the resolution of double tax disputes that arise under Australia’s many double tax treaties. However, the DPT and MAAL amendments preclude access to those double tax relief procedures.
When will the DPT apply to Australian organisations?
The DPT will apply where there is a scheme between parties and it is reasonable to conclude that the scheme was carried out for the principal purpose of obtaining a tax benefit for one or more Australian taxpayers or a tax benefit together with a reduction in a taxpayer’s foreign tax liabilities. In other words, when Australian profits are diverted overseas.
It will also target taxpayers who are part of a global group with an annual global turnover in excess of A$1 billion (described as a Significant Global Entity or SGE).
Where there is a non-Australian associate of the Australian taxpayer and the associate was involved in the scheme to any extent, they will also be in the sights of the tax office under the new proposals.
Despite all these positive requirements being satisfied, the DPT will not apply to an arrangement if any one of the following ‘exit’ provisions apply:
- The de minimus income test: the potentially-targeted Australian turnover is less than A$25 million;
- The de minimus tax benefit test: the foreign tax payable on the diverted Australian profits equals or exceeds 80 per cent of the Australian tax that would have been payable on those profits had they not been diverted; and
- The economic substance test: the arrangements between the Australian and associated foreign companies satisfy the transfer pricing rules for economic substance and the tax liabilities align with that economic substance.
Australia and the arm’s length standard
A key issue that was heavily negotiated through the BEPS project was whether or not the arm’s length standard should remain the centre piece of sharing taxing rights between sovereign states. The answer was a resounding yes, with the alternative proposition, global formulary apportionment (GFA), again losing the competition.
The idea of the arm’s length standard as a common basis for all countries, particularly with regard to the globally-agreed transfer pricing standards, means that there should be little or no double taxation of underlying corporate profits. If double taxation should arise in a particular situation, a treaty process of negotiations between the revenue authorities of the competing jurisdiction should take place. The outcome, under the BEPS changes, will lead to a binding arbitration in the absence of a negotiated result.
Recent experience with the ATO’s application of the MAAL indicates the arm’s length standard is no longer the key plank of international taxation that it once was. Rather, it seems the ATO is adopting what can be described as a near-GFA approach to international taxation. This is contrary to Australia’s commitment to global consensus. It may lead to double taxation of corporate profits by a means which will exclude taxpayers’ access to the treaty relief arrangements that have been globally designed.
Rule, upon rule, upon rule
The DPT will operate in an area that is already well covered by relevant tax law. Exactly how it will interact with the existing rules remains to be seen. What will happen is that affected taxpayers will incur significant compliance costs to determine whether or not they are even covered, let alone demonstrating that they should not be covered.
Cynics will say this is entirely in line with the government’s objective to make the area so confusing and compliance so expensive that multinationals will throw up their hands and simply maximise the reported Australian profits, and thus Australian tax.
Pay now, argue later
Where a DPT assessment is issued, a taxpayer must pay the assessed tax liability within 21 days. There is no opportunity at this point to object to the assessment.
There follows a 12-month review period during which the taxpayer can provide arguments and evidence to the ATO in support of contentions that the DPT is inappropriate or excessive. In practice, those arguments will be directed towards the three exit provisions and as the A$A25 million turnover test should be self-evident, and the ‘sufficient foreign tax’ test should also be relatively straightforward, it might be expected the focus will be on the ‘sufficient economic substance’ test.
That test is all about transfer pricing rules and the appropriate application to the particular circumstances. Where a taxpayer had appropriate contemporaneous transfer pricing documentation in place at the time the DPT assessment was issued, it seems circular to consider the matter stands to be determined (following payment of the assessed DPT liability) by reference to that same transfer pricing documentation.
The aim of DPT is to essentially help the ATO to identify organisations avoiding Australian tax. Businesses need to understand these changes to ensure they are aware of the restructures needed with the organisation.
By Craig Cooper, director, RSM Australia
