.jpg)
10 May, 2017
On 9 February 2017, the Australian Government introduced into Parliament the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 (the Bill) as part of its continuing attack on large multinational taxpayers that are considered to be avoiding their Australian taxation obligations.
The Bill includes the following two measures which apply to SGEs (being entities which, together with any related entities, have an annual global income of A$1bn or more):
- DPT measure: introduces a new Australian DPT with effect from 1 July 2017 (with no "grandfathering" of schemes entered into before 1 July 2017); and
- Penalties measure: significantly increases penalties for non-compliance with certain tax obligations, also with effect from 1 July 2017.
The Bill also updates, with effect from 1 July 2016, Australia's domestic transfer pricing rules to incorporate the Organisation of Economic Co-operation and Development (OECD) amendments to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as set out in the OECD's Aligning Transfer Pricing Outcomes with Value Creation, Actions 8–10 2015 Final Reports (OECD TP Guidelines).
We discuss the DPT and penalties measures in further detail below.
DPT measure
Broadly, the DPT arms the ATO with very wide powers to assess DPT on taxpayers which the ATO has reason to conclude have significantly reduced Australian tax by "diverting their profits" offshore to low-tax related entities that lack economic substance (e.g. some offshore marketing hubs). If applied, the ATO may assess the taxpayer on the amount of the diverted profits at a penal tax rate of 40 per cent, compared with the Australian corporate tax rate of 30 per cent.
When does the DPT apply?
Broadly, the DPT applies to a scheme if the following conditions are met:
- the taxpayer has obtained a tax benefit (i.e. a reduction in Australian tax) in connection with a scheme;
- if, having regard to certain criteria (including certain objective factors like the nature and manner of the scheme), it would be concluded that the taxpayer, or one of the persons who carried out the scheme, did so for the principal purpose (or for more than one principal purpose which includes a purpose) of enabling the taxpayer to obtain either a tax benefit, or both a tax benefit and a reduction in foreign tax;
- the taxpayer has an associated foreign entity which entered into, carried out or is otherwise connected with the scheme (an associated foreign entity);
- the taxpayer is not a specified kind of collective investment vehicle (such as a managed investment trust); and
- it is reasonable to conclude that none of the following exceptions apply:
- A$25m de minimis exception: the Australian income of the taxpayer and its related entities is A$25m or less;
- Sufficient foreign tax exception: the increase in the foreign tax liability of an associated foreign entity as a result of the scheme is at least 80 per cent of the reduction in Australian tax from the scheme (i.e. the amount of foreign tax paid on the diverted profits is at least 80 per cent of the Australian tax that would otherwise have been paid if the scheme had not been carried out); or
- Sufficient economic substance exception: having regard to certain factors, the profit made by an associated foreign entity as a result of the scheme, whose role in the scheme is more than minor or ancillary, "reasonably reflects" the economic substance of the entity's activities in connection with the scheme. These factors include those taken into account in a transfer pricing analysis of a transaction: the functions, risks and assets of the entity, the OECD TP Guidelines, and, interestingly, "any other relevant matters".
Machinery provisions if DPT applies
Overall, the machinery provisions are reasonably onerous for taxpayers and represent a large stick with which the ATO can force disclosure of information on their multinational operations. Essentially the purpose behind the DPT is to force taxpayers that the ATO feels are delaying, or not fully co-operating in, providing information about their cross-border arrangements to provide such information on time.
The Commissioner may issue a DPT assessment to a taxpayer for an income year within seven years of the lodgement date of the income tax return for that income year. The taxpayer then has 21 days to pay the amount set out in the assessment.
Following the issue of a DPT assessment, there will normally be a 12-month period of review during which the taxpayer may provide further information to the Commissioner to justify why the DPT assessment should be reduced.
Only once the period of review ends may the taxpayer formally challenge the DPT assessment, by appealing against the assessment to the Federal Court within 60 days of the end of the period of review. Notably, if proceedings are commenced in the Federal Court, the taxpayer will be precluded from admitting into evidence any information that was not provided to the Commissioner during the period of review (except in limited circumstances, e.g. with the consent of the Commissioner). This will effectively force taxpayers to disclose information to the Commissioner during the review period if they wish to rely on that information to challenge the DPT assessment.
Observations: Comparison with UK DPT
The Australian DPT has been largely modelled on the UK DPT. Ironically, due to the UK corporate tax rate being less than 24 per cent (i.e. 80 per cent of the Australian corporate tax rate), the "sufficient foreign tax exception" test may be automatically failed by an Australian taxpayer that "diverts profits" to an associated UK entity.
However, there are various differences between the two versions of the DPT that, overall, means the Australian DPT is arguably the tougher version. These include:
- UK DPT rules apply only to companies, while the Australian DPT applies to a wider range of entities, including trusts and partnerships;
- certain types of loan transactions are excepted from the UK DPT rules but not from the Australian rules;
- the seven-year time limit for the Commissioner to make an Australian DPT assessment is significantly longer than the maximum four-year time limit under the UK DPT rules for HM Revenue & Customs (HMRC) to issue the taxpayer with a notice of UK DPT assessment (the time limit is two years if, within three months after the end of the relevant income year, the taxpayer notifies HMRC that the UK DPT rules may apply to it); and
- lastly, a small difference is that the period of review under the Australian DPT starts from the day that the taxpayer is given the DPT assessment by the Commissioner, while under the UK DPT, the 12-month review period starts 30 days later, effectively giving UK taxpayers an extra month to provide information to HMRC.
Penalties measure
The Australian administrative penalties for such things as late lodgement of returns are currently unlikely to provide a financial incentive for large taxpayers to meet such obligations on time. The penalties measure therefore significantly increases certain administrative penalties for non-compliance by SGEs in connection with their tax obligations. A brief comparison of the current and proposed penalties regimes is set out below.
Penalties for failing to lodge documents on time
The penalty amount for failing to lodge a return, notice, statement or other document with the Commissioner on time in the approved form will, after 1 July 2017, be multiplied by 100 for SGEs, as set out in the following table (an exception may apply in certain circumstances where the failure is caused by a registered tax agent engaged on behalf of the entity):
^ These amounts are applicable to large entities and are expected to increase from 1 July 2017 to A$1,050 and A$5,250, respectively.
Importantly, for this purpose a "document" is not limited to a tax return or other documents (such as Business Activity Statements) that are required to be lodged periodically with the ATO, and includes a range of other documents such as:
- notifications to the ATO of the formation of, and entities joining or leaving, a tax consolidated group or multiple entry consolidated group; and
- reports required to be given to the ATO by financial institutions under the FATCA rules.
Penalties for statements and positions made by the taxpayer
The base penalty amount for the following actions is doubled under the penalties measure, as summarised below (note that the base penalty amount is subject to reduction or increase in certain circumstances, depending on factors such as the level of culpability of the taxpayer):
Routine tax filing obligations can sometimes be overlooked by large multinational organisations due to their size and complexity. From 1 July 2017, such oversights could trigger material financial penalties and SGEs may therefore wish to review their internal systems and procedures to gain comfort that they are adequate for meeting Australian filing obligations on time.
For further information, please contact:
Lisa Simmons, Partner, Ashurst
lisa.simmons@ashurst.com
