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Australia To Legislate For Diverted Profits Tax

by Mary Swire,, Hong Kong

29 November 2016

The Australian Government has released draft legislation for the implementation of the proposed Diverted Profits Tax (DPT).

The policy was originally announced at the 2016-17 Budget. If passed, the legislation would impose a 40 percent penalty tax on profits that have been "artificially diverted" from Australia by multinationals.

The DPT is intended to target entities with annual global income of AUD1bn (USD748.5m) or more that shift profits to offshore associates where:

  • The resulting increase in the foreign tax liability is less than 80 percent of the corresponding decrease in the Australian tax liability;
  • There is insufficient economic substance; and
  • One of the "principal purposes" is to obtain a tax benefit.

If the DPT applies to a scheme, the Commissioner of Taxation may issue a DPT assessment to the taxpayer in question. Once an assessment is issued, the taxpayer will have 21 days to pay the amount stipulated.

The taxpayer will be able to provide the Commissioner with further information disclosing reasons why the DPT assessment should be reduced during the period of review (generally 12 months after notice is given of the DPT assessment). If at the end of the review period the taxpayer is dissatisfied with the DPT assessment, or amended DPT assessment, they will have 30 days to appeal to the Federal Court of Australia.

The DPT will not apply if it is reasonable to conclude that one of the following tests applies to the relevant taxpayer:

  • The AUD25m turnover test – this will apply if, broadly, the sum of the Australian turnover of the relevant taxpayer and the Australian turnover of any other Australian entities that are part of the same global group does not exceed AUD25m;
  • The sufficient foreign tax test – this will apply if, broadly, the increase in the foreign entities resulting from the scheme is 80 percent or more of the reduction in the Australian tax liability of the relevant taxpayer; or
  • The sufficient substance test – this will apply if, broadly, the income derived, received, or made as a result of the scheme by each entity that entered into or carried out the scheme, or is otherwise connected to it, reasonably reflects the economic substance of the entity's activities in connection with the scheme.

The DPT will commence on July 1, 2017. The Government expects it to raise AUD200m over the next four years.

TAGS: compliance | tax | business | tax compliance | tax avoidance | corporation tax | Australia | tax authority | offshore | multinationals | legislation | transfer pricing | Tax | Tax Evasion | BEPS

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