Commonwealth Diverted Profit Tax Acts

Wednesday 19 April 2017 @ 11.30 a.m. | Taxation

Recently, the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017 (No. 27 of 2017) and the Diverted Profits Tax Act 2017 (No. 21 of 2017) were assented by the Federal executive government. The Acts introduce a new diverted profits tax to ensure that the tax paid by significant global entities properly reflects the economic substance of their activities in Australia. The scheme also attempts to prevent the diversion of profits offshore through contrived arrangements set up by global entities.

Background to the Acts

The Treasurer, Mr Scott Morrison, pointed out in his second reading speech that the current Australian taxation system has not kept pace with developments in global trade and investment and digital commerce. He further highlighted that there are entities operating on Australian shores who try to avoid paying tax by diverting Australian profits to low-tax countries.

Mr Morrison stated that the current Acts would ensure that any existing tax loopholes that were left open by the previous taxation system would be closed to multinational entities operating in Australia. 2015 saw a number of different pieces of legislation enacted with the purpose of combating multinational tax avoidance. The result has been increased penalties for large companies that enter into tax avoidance so that multinational entities are now restructuring to book their income in Australia.

Diverted Tax Profits

As the Treasurer explained:

“The diverted profits tax is targeted at multinationals entering into arrangements with offshore related parties that lack economic substance, in order to divert their Australian profits to lower tax countries and avoid paying Australian tax.”

The diverted tax profits will apply a 40% tax rate on the diverted profits of multinationals. This will apply to any tax profits diverted to low-tax countries. The scheme will not replace the operation of the transfer pricing rules that they apply to ordinary transfer pricing rules. Similarly, it does not apply to managed investment trusts or similar foreign entities, sovereign wealth funds and foreign pension funds.

The Acts also includes key features to encourage cooperation between multinationals and the Australian Taxation Office (ATO) in order to reduce the length of disputes between the two parties. These features include:

  • Placing the onus of proof on multinationals to demonstrate they have not diverted profits where the ATO have imposed diverted profit tax based on a reasonable assessment of available information;
  • Imposing an up-front diverted profits tax liability payable on the amount of the diverted profits at a penalty rate of 40 per cent; and
  • Prevents Multinationals from introducing new evidence on appeal that was not previously available to the ATO. 

The majority of both Acts commence on 1 July 2017.

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Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017, Bill, and Explanatory Material as published on TimeBase LawOne

Diverted Profits Tax Act 2017, Bill and Explanatory Materials as published on TimeBase LawOne

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