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Australia Consults on Draft Diverted Profits Tax Legislation — Orbitax Tax News & Alerts

On 29 November 2016, the Australian Treasury published draft legislation for consultation on the introduction of a Diverted Profits Tax (DPT) ({News-2016-05-06/P/2- previous coverage}). The DPT is a penalty tax imposed at a rate of 40% on profits that have been artificially diverted from Australia by multinationals. In particular, the DPT would apply to an entity (relevant taxpayer) if:

  • It is reasonable to conclude that a scheme (or any part of a scheme) was carried out for a principal purpose of, or for more than one principal purpose, that includes a purpose of:
    • enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit, or both to obtain a tax benefit and reduce a foreign tax liability; or
    • enabling the relevant taxpayer and another taxpayer (or other taxpayers) to obtain a tax benefit, or both to obtain a tax benefit and reduce a foreign tax liability;
  • The relevant taxpayer is a significant global entity — that is, broadly, a member of a group with a member that is a global parent entity whose annual global income is at least AUD 1 billion; and
  • The relevant taxpayer obtains a tax benefit in connection with a scheme involving a foreign associate.

The DPT will not apply if it is reasonable to conclude that one of the following tests applies to the relevant taxpayer:

  • The AUD 25 million turnover test — this test will apply if, broadly, the sum of the Australian turnover of the relevant taxpayer and the Australian turnover of any other Australian entities that are part of the same significant global group does not exceed AUD 25 million;
  • The sufficient foreign tax test — this test will apply if, broadly, the increase in the foreign tax liabilities of foreign entities resulting from the scheme is 80% or more of the reduction in the Australian tax liability of the relevant taxpayer; or
  • The sufficient economic substance test — this test will apply if, broadly, the income derived, received, or made as a result of the scheme by each entity that entered into or carried out the scheme or any part of the scheme, or that is otherwise connected with the scheme or any part of the scheme, reasonably reflects the economic substance of the entity’s activities in connection with the scheme.

If a DPT assessment is issued, the taxpayer will be required to pay the DPT amount within 21 days. However, the taxpayer may challenge a DPT assessment by providing additional information as to why the amount should be reduced. In general, the review period for additional information is 12 months. If after 12 months the taxpayer still disagrees with the DPT assessment or amended assessment, the taxpayer will have 30 days to make an appeal to the Federal Court of Australia.

Click the following link for the DPT consultation page, which includes the draft legislation and explanatory memorandum. Comments are due by 23 December 2016.