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Australian Parliament Passes Legislation for Diverted Profits Tax, Increased Penalties for SGEs, and Latest OECD Transfer Pricing Guidance — Orbitax Tax News & Alerts

On 27 March 2017, the Australian Senate passed two pieces of BEPS-related legislation after being passed in the House of Representatives:

Most of the measures are included in the TLA Bill, while the specific rate of the Diverted Profits Tax is included in the DPT Bill.

Diverted Profits Tax

The Diverted Profits Tax (DPT) is introduced at a rate of 40% that will be imposed on profits that have been artificially diverted from Australia by multinationals with global revenue of AUD 1 billion or more (Significant Global Entities - SGEs). In general, the DPT will apply 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 an SGE; and
  • The scheme is entered into or carried out with a foreign associate entity, or the foreign associate is otherwise connected with the scheme.

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 income test — this test will generally apply if the sum of the following does not exceed AUD 25 million:
    • The assessable income, exempt income and non-assessable non-exempt income of the relevant taxpayer;
    • The assessable income of another entity that is an associate of the relevant taxpayer, if both are members of same SGE group; and
    • The amount of the DPT tax benefit, if the DPT tax benefit relates to an amount not included in assessable income.
  • The sufficient foreign tax test — this test will generally apply if 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.
  • The sufficient economic substance test — this test will generally apply if the profit made as a result of the scheme by the relevant taxpayer and by associate entities involved in the scheme, reasonably reflects the economic substance of the entity’s activities in connection with the scheme.

The DPT will also not apply for certain entity types, including:

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

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 60 days to make an appeal to the Federal Court of Australia.

The DPT applies for income years beginning on or after 1 July 2017 (whether or not the tax benefits arise in connection with a scheme that was entered into, or was commenced to be carried out, before 1 July 2017).

Increased Penalties for SGEs

The failure to lodge penalty is increased by a factor of 100 for SGEs, which results in a maximum penalty of AUD 450,000 (AUD 525,000 with increase in the penalty unit to AUD 210 from 1 July 2017). In addition, the administrative penalties for statements for SGEs are doubled.

Click the following link for {News-2017-03-17/A/2- details} of the SGE penalty increases, which generally apply from 1 July 2017.

Latest OECD Transfer Pricing Guidance

The references to the OECD transfer pricing guidelines in Australia’s transfer pricing rules in Division 815 are updated to include the 2016 amendments to the guidelines resulting from the BEPS project, including in relation to three key areas:

  • Transfer pricing issues relating to transactions involving intangibles;
  • Contractual arrangements including the contractual allocation of risks and corresponding profits, which are not supported by activities actually carried out and the resulting allocation of profits to those risks; and
  • The level of returns to funding provided by a multinational enterprise group member, where those returns do not correspond to the level of activity undertaken by the funding company.

The updated guideline references apply for income years beginning on or after 1 July 2016.