The Australian Diverted Profits Tax (DPT) has now been legislated. It is the most expansive cross-border tax change in Australia for many generations. The new tax is broadly written and there are very limited exemptions.
It was originally announced that the DPT would be based on the second limb of the UK DPT. However, the final Australian DPT now diverges significantly from the UK DPT. This is not just because of the higher DPT rate (40 per cent, compared to 25 per cent for the UK) and inclusion of financing transactions (which are exempt from UK DPT), but also because of the high threshold imposed on taxpayers to prove that a transaction respectively set-up is legitimate and does not give rise to a DPT liability. For example, the Australian DPT sufficient economic substance carve-out requires a multi-sided functional analysis and quantitative comparison of the profit of every entity, Australian and foreign, involved in the global value chain relevant to Australia. A further example is the sufficient foreign tax test which makes no allowance for tax losses.
The design of the DPT means that taxpayers will be required to provide to the Australian Taxation Office (ATO) information regarding their Australian specific earnings, taxes and activities throughout their global value chains. This is a level of detail which is much more specific than required by country-by-country reporting.
Given the broadness of the law, it is difficult to succinctly describe all arrangements which pose the highest risk. However, the Government’s decision not to exclude financing (unlike the UK) is significant, given there are a number of very large current Australian cross-border financing disputes ongoing with the ATO. I also know that the ATO is very concerned with historic transfers of IP outside of Australia, and may seek to use the DPT as a mechanism to re-address those arrangements. This is because DPT can apply for income years commencing on or after 1 July 2017, irrespective of whether the particular arrangements were entered into before that time.
Finally, transfer pricing arrangements where Australian profits are low or limited relative to residual profits which are taxed in a central entity are likely to be of high interest to the ATO. This is particularly the case because of the new information advantages which it has gained under DPT from the law requiring a taxpayer to demonstrate – if challenged by the ATO – why the DPT should not apply to it. I have attached a further overview published by my Australian colleagues. Please read it HERE.
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