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  • Diverted profits tax

    In the 2016−17 Budget, the government announced that it would introduce a diverted profits tax (DPT). The DPT came into effect on 1 July 2017 and imposes a 40% tax.

    The DPT aims to ensure that the tax paid by significant global entities (SGEs) properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through arrangements involving related parties. It also encourages SGEs to provide sufficient information to the ATO to allow for the timely resolution of tax disputes.

    The DPT:

    • complements the application of the existing anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936  
    • encourages greater compliance by large multinational enterprises with their tax obligations in Australia, including Australia's transfer pricing rules contained in Division 815 of the Income Tax Assessment Act 1997
    • encourages greater openness with the ATO, addresses information asymmetries and allows for quicker resolution of disputes.

    What schemes does the DPT apply to?

    The DPT applies to income years that start on or after 1 July 2017. The DPT can apply to schemes entered into before 1 July 2017.

    Broadly, the new law applies if under the scheme, or in connection with the scheme:

    • a taxpayer ('the relevant taxpayer') has obtained a tax benefit in connection with the scheme in an income year
    • a foreign entity, that is an associate of the relevant taxpayer, entered into or carried out the scheme or is otherwise connected with the scheme
    • the principal purpose, or one of the principal purposes of a person who entered into or carried out the scheme, is to enable the relevant taxpayer to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit

    None of the following exceptions apply:    

    • the $25 million income test
    • the sufficient foreign tax test
    • the sufficient economic substance test.

    The DPT will not apply to a relevant taxpayer who is one of the following types of entities:

    • a managed investment trust
    • a foreign collection investment vehicle with wide membership
    • a foreign entity owned by a foreign government
    • a complying superannuation entity
    • a foreign pension fund.

    Who does the DPT apply to?

    The DPT only applies to SGEs. An entity is an SGE for an income year if it is either:

    • a global parent entity with an annual global income of A$1 billion or more
    • a member of a group of entities (consolidated for accounting purposes) where the global parent entity has an annual global income of A$1 billion or more.

    For the purposes of the DPT, this definition includes both:

    • Australian-headquartered entities with foreign operations
    • the local operations of foreign headquartered multinationals.

    If global financial statements have not been prepared for the global parent entity, the Commissioner may make a determination that based on information available to him, the annual global income of the entity would be A$1 billion or more for the period.

    Legislation and supporting material

    The DPT legislation received Royal Assent on 4 April 2017, with Schedule 1 to the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017External Link implementing the DPT and the Diverted Profits Tax Act 2017External Link setting the 40% tax on profits.

    Law companion ruling

    Law companion ruling (LCR) 2018/6 Diverted profits tax has been published in its final form.

    The LCR aims to:

    • help affected taxpayers and their advisors understand how the DPT law will apply
    • clarify key concepts introduced by the measure.

    We released the LCR in draft form (LCR 2017/D7) for public consultation on 18 December 2017. We received a number of submissions through the public consultation process and have made revisions.

    A summary of the issues raised during this process, and our corresponding responses, can be found in the Compendium.

    Practical compliance guideline

    Practical compliance guideline (PCG) 2018/5 Diverted profits tax has been published in its final form. The PCG aims to assist those taxpayers who may be affected by the DPT by:

    • setting out the ATO’s client engagement framework for the DPT
    • outlining the ATO’s approach to risk assessment and compliance activity when the DPT is identified as a potential area of concern.

    The PCG provides framing questions and scenarios to assist in considering the relative risk of certain types of arrangements in the context of the DPT measure.

    This PCG is intended to provide affected taxpayers with additional certainty and will allow us to direct our compliance resources to the higher risk areas of the law.

    We released the PCG in draft form (PCG 2018/D2) for public consultation on 7 February 2018. We received a number of submissions through the public consultation process and have made revisions.

    A summary of the issues raised during this process, and our corresponding responses, can be found in the Compendium.

    Law administration practice statement

    We have also published a law administration practice statement (PSLA) 2017/2 Diverted profits tax assessments which provides:

    • specific direction to our staff on our internal administrative oversight framework for the DPT
    • the processes leading to the issuance of a DPT assessment which will provide assurance to taxpayers that the new rules will be applied with the appropriate levels of internal review.

    The administrative framework introduces several levels of oversight and additional safeguards to provide assurance around the DPT process. This process ensures that the DPT will only be applied in appropriate circumstances to ensure that SGEs do not reduce the amount of Australian tax they pay by diverting profits offshore through arrangements with related parties.

    See also:

      Last modified: 26 Sep 2018QC 51208