The Australian Taxation Office (ATO) published updated guidance on the Diverted profits tax dated 13 July 2022.
Diverted profits tax
The diverted profits tax (DPT) achieves the following outcomes:
- aims to ensure that the tax paid by significant global entities (SGEs) properly reflects the economic substance of their activities in Australia
- aims to prevent the diversion of profits offshore through arrangements involving related parties
- encourages SGEs to provide sufficient information to the ATO to allow for the timely resolution of tax disputes.
Entities to which the DPT can apply
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 of Taxation may make a determination. This determines that based on the information available, it is reasonably believed that the annual global income of the entity would be A$1 billion or more for the period, and therefore the entity is an SGE.
Schemes where the DPT applies
The DPT applies to income years that start on or after 1 July 2017. Importantly, it can apply to schemes entered into before 1 July 2017.
Broadly, the DPT applies if, under the scheme or in connection with the scheme:
- a taxpayer ('the relevant taxpayer') has obtained a tax benefit
- the principal purpose, or one of the principal purposes, of a person who entered into or carried out the scheme, was to enable the relevant taxpayer to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit
- a foreign associate of the relevant taxpayer is involved in entering into or carrying out the scheme or is otherwise connected with the scheme
- none of the exceptions as set out below apply.
Taxpayers are not eligible for a 50/50 arrangement if the dispute relates to a DPT assessment.
When the DPT will not apply
The DPT will not apply where the taxpayer satisfies any of the following exceptions:
- the $25 million income test
- the sufficient foreign tax test
- the sufficient economic substance test.
The DPT will also not apply where the relevant taxpayer 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.
Our engagement with you
We have published a number of documents that set out how we will apply and administer the DPT.
Law companion ruling LCR 2018/6
LCR 2018/6 Diverted profits tax aims to:
- help affected taxpayers and their advisors understand how the DPT law will apply
- clarify key concepts introduced by the measure.
Practical compliance guideline PCG 2018/5
PCG 2018/5 Diverted profits tax aims to assist those taxpayers who may be affected by the DPT by:
- setting out our client engagement framework for the DPT
- outlining our approach to risk assessment and compliance activity when the DPT is identified as a potential area of concern
- providing example scenarios that would be considered higher risk and likely to attract our attention.
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.
Law administration practice statement 2017/2
PS LA 2017/2 Diverted profits tax assessment 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.