A proposed new tax
On 1 July 2017, the Government proposes to apply a diverted
profits tax (DPT) (popularly known as a ‘Google tax’). This will apply where
companies shift profits offshore through arrangements with related parties in
jurisdictions with lower corporate tax rates than apply in Australia. Broadly
based upon similar legislation introduced in the UK in 2015 (see below), this
new tax will apply to large companies with global revenue of $1 billion or more
where their tax arrangements:
- result in less than 80 per cent tax being paid overseas than
would otherwise have been paid in Australia
- are reasonably viewed as being designed to secure a tax reduction
- do not have sufficient economic substance.
The proposed penalty tax rate is 40 percent. This is substantially
above both the current and proposed final Australian corporate tax rates (30 and 25 percent respectively; see separate Budget Brief on Corporate Tax Rate
Reduction – Large Businesses). This suggests that the proposed tax is aimed
at diverting previously unassessed profits into the normal corporate tax system.
Other proposed features are that the DPT will:
- provide the ATO with more options to reconstruct the alternative
arrangement on which to assess the diverted profits where a related party
transaction is assessed to be artificial or contrived;
- impose a liability when an assessment is issued by the ATO (that
is, it will not operate on a self-assessment basis);
- require upfront payment of any DPT liability, which can only be
adjusted following a successful review of the assessment; and
- put the onus on taxpayers to provide relevant and timely
information on offshore related party transactions to the ATO to prove why the
DPT should not apply.
The measure is expected
to yield $200 million over the period of the forward estimates.
This new tax comes in the wake of several legislative initiatives and public inquiries concerning tax avoidance,
along with substantial policy development work by the Organisation for Economic
Cooperation and Development (OECD). The public is concerned
about this issue, and both the government the ATO have identified further
action against multinational tax avoidance as a high priority.
The United Kingdom DPT
The proposed Australian DPT was inspired by the United
Kingdom legislation, under which a DPT was implemented, from 1 April 2015, at a
rate of 25 per cent (the current UK corporate tax rate being 20 per cent). Like the UK tax, the proposed design of the Australian version employs a ‘pay
first and argue later’ approach. The UK DPT is designed
to change the behaviour of companies so that they pay more tax on their UK
profits rather than risk paying a higher rate of DPT.
Effectiveness of the UK tax
The UK Government issued a consultation draft on the
proposed DPT prior to the introduction of the Finance Bill 2015.  It forecast that in 2015-16 the DPT would raise £25m rising to £270m in
2016-17. It is too early for the
actual full year DPT revenues to have been released.
In any case, in assessing the effectiveness of the UK DPT,
the traditional measures, such as the amount of revenue collected by the DPT,
are of little use, as the main purpose of the tax is to ‘divert’ previously
unassessed profits into the regular UK tax system. However, one indication of the
UK DPT’s effectiveness may be to ascertain if it has been subject to
substantial amendment since its introduction. The UK Finance Bill 2016
contained no such amendments. This lack of amendment may indicate that the UK
DPT is working well, or it may simply indicate that it is too early to assess
the effectiveness of the UK arrangements.
Available academic comment on the UK DPT is scant, though
one recent commentator has noted:
The diverted profits tax is controversial on a number of
grounds. For example, some question its reliance on broad economic
substance-type principles. The lack of clear guidelines might end up either
impeding effective implementation, or promote uncertainty if it does indeed end
up being a key feature of U.K. tax law on the ground. Critics have also
questioned its compatibility with tax treaties, with the ongoing BEPS [OECD
Base Erosion and Profit Shifting] process, and with the U.K. government’s asserted
“open for business” message to overseas investors.
Yet, however one views these issues, two aspects of the
diverted profits tax clearly weigh in its favour – at least as guidance to other
countries that they might choose, if they like, to implement quite differently.
The first is that, by addressing profit-shifting outside the CFC [Controlled
Foreign Company] rules, and also by backstopping the PE [Permanent
Establishment] rules, it avoids creating tax incentives to expatriate, or more
generally to invest in the United Kingdom via foreign rather than domestic
multinationals. In this regard, the diverted profits tax may reinforce the
U.K.’s worldwide debt cap as a countermeasure to profit-shifting by all large
multinationals. Second, if viewed as mainly a response to aggressive transfer
pricing (at least for companies that have an acknowledged U.K. PE), it may
cleverly make up, through its use of an effective penalty along with less than crystal-clear
boundaries, for the fact that such transfer pricing may be harder to
second-guess directly than the aggressive use of debt.
The design of the Australian DPT has yet to be finalised but
Treasury have begun the consultation process, with submissions due by 17 June
Reactions to the proposal
Prominent academic commentator on multinational Corporate
Tax Avoidance, Associate Professor A Ting has recently observed:
If properly designed, the new DPT is likely to have strong
deterrent effect. This is because its tax rate is 40%, which is 10% higher than
the standard corporate tax rate in Australia. The experience in the UK with its
version of the DPT suggests that this penalty rate will be an important factor
for MNEs to consider before entering into aggressive tax avoidance structures.
The new DPT is a welcome move by the government to combat tax
avoidance by multinationals.
The Corporate Tax Association has estimated that about 50
per cent of related party transactions undertaken by companies operating in
Australia would potentially be assessable under the proposed Australian DPT.
All online articles accessed May 2016.
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