Diverted profits tax ('Google tax')

Budget Review 2016–17 Index

Les Nielson

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 and
  • do not have sufficient economic substance.[1]

The proposed penalty tax rate is 40 percent. This is substantially above both the current and proposed final Australian corporate tax rates[2] (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.[3]

The measure is expected to yield $200 million over the period of the forward estimates.[4]

Background

This new tax comes in the wake of several legislative initiatives[5] and public inquiries[6] concerning tax avoidance, along with substantial policy development work by the Organisation for Economic Cooperation and Development (OECD).[7] 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.[8]

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).[9] Like the UK tax, the proposed design of the Australian version employs a ‘pay first and argue later’ approach.[10] 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.[11]

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. [12] It forecast that in 2015-16 the DPT would raise £25m rising to £270m in 2016-17.[13] 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.[14]

The design of the Australian DPT has yet to be finalised but Treasury have begun the consultation process, with submissions due by 17 June 2016.[15]

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.[16]

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.[17]



[1]           Australian Government, Budget measures: budget paper no. 2: 2016–17, p.31.

[2].          ibid.

[3].          Treasury, Implementing a Diverted Profits Tax, Consultation paper, Treasury, Canberra, May 2016, p. 3.

[4]            Australian Government, ibid.

[6].          Senate Economics References Committee, You cannot tax what you cannot see, Corporate Tax Avoidance: part I, The Senate, Canberra, August 2015; Senate Economics References Committee, Gaming the system, Corporate Tax Avoidance: part II, The Senate, Canberra, April 2016.

[7].          OECD, ‘Base erosion and profit shifting’, OECD website.

[8].          ATO, ATO warns against profit-shifting arrangements, media release, 26 April 2016; S Morrison (Treasurer), Tougher measures to tackle tax evasion pass Parliament, media release, 29 February 2016.

[9].          J Hockey (Treasurer), Doorstop interview, transcript, Canberra, 9 December 2014. An excellent guide to the UK’s Diverted Profits Tax is S Picciotto, The UK’s Diverted Profits Tax: an admission of defeat or a pre-emptive strike?, Tax Notes International, 77(3), 19 January 2015, p. 239 and following. See also L Nielson, ‘The UK "Google tax": a model for Australia to follow?’, FlagPost, Parliamentary Library blog, 23 December 2014 for details of how the UK tax is assessed and applied. See also HM Revenue and Customs (HMRC), Diverted Profits Tax: guidance, HMRC, 30 November 2015.

[10].       Treasury, Implementing a Diverted Profits Tax, ibid, pp. 1-3.

[11].       HMRC, HMRC and multinational corporations, fact sheet, 9 February 2016.

[12]        United Kingdom government, Consultation draft on diverted profits tax

[13]        United Kingdom government, Consultation draft on diverted profits tax

[14].       D Shaviro, The crossroads versus the seesaw: getting a "fix" on recent international tax policy developments, New York University Law and Economics Working Paper, 408, New York University School of Law, 2015, p. 40.

[15]        Treasury, Implementing a Diverted Profits Tax, Consultation paper, op. cit.

[16].       A Ting, ‘Will there be a new Australian Google tax to crack down on tax avoidance?’, in H  Hodgson, A Ting, J Freebairn and M Vine, Government pitches for ‘integrity’ in tax and super: experts respond, The Conversion, 3 May 2016.

[17].       J Mather, ‘Budget 2016 – Tax Crackdown will be far reaching’, Australian Financial Review, 5 May 2016, p. 17.

 

All online articles accessed May 2016. 

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