The Government has announced it will strengthen the anti-avoidance measures for multinationals recently legislated and previously announced in the 2015/16 Federal Budget by introducing the following additional measures:
- a 40% diverted profits tax (DPT), dubbed a "Google tax" when it was introduced in the UK in 2015;
- implementation of the OECD hybrid mismatch arrangement rules;
- strengthening of Australia’s transfer pricing rules to align with the latest international arrangements; and
- a new Tax Avoidance Taskforce that will strengthen the ATO’s audit and compliance activities targeting corporates and high wealth individuals; and
- increasing administrative penalties for significant global entities.
However, despite speculation before the Budget, the Government did not announce any changes to Australia's thin capitalisation rules. The "safe harbour" ratio remains 1.5:1 (on a debt:equity basis) and 60% / 40% (on a debt to total assets basis).
Diverted profits tax
The Government has announced it will introduce a diverted profits tax (DPT) of 40% on the profits of multinational corporations that are “artificially” diverted from Australia. The DPT will apply to income years commencing on or after 1 July 2017.
The DPT will target companies that shift profits offshore through arrangements involving related parties:
- that result in an amount of tax being paid overseas that is less than 80% of the amount of tax that would otherwise have been paid in Australia;
- where it is reasonable to conclude that the arrangement is designed to secure a tax reduction; and
- that do not have sufficient economic substance.
Following the introduction of the UK's DPT (effective for accounting periods beginning on or after 1 April 2015), Australia introduced the Multinational Anti-Avoidance Law (MAAL) which broadly replicated the first limb of the UK's DPT. The MAAL is designed to counter the erosion of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid a taxable presence in Australia.
In this regard, the ATO warned last week that companies were already gaming the system to avoid the MAAL and on 26 April 2016, the ATO issued Taxpayer Alert TA 2016/2 which set out their concerns in regard to certain taxpayer interim arrangements in response to the enacted MAAL.
The DPT will be based on the second limb of the UK's DPT and will help ensure that large multinational corporations pay an appropriate amount of tax on profits made in Australia.
In the Budget, the Government released a paper for consultation about implementing a DPT. The purpose of the paper is to outline how the DPT would apply in the Australian context. Comments are due by 17 June 2016.
Example: Operation of the effective tax mismatch requirement
Company A has a $100 reduction to its Australian tax liability as a result of a deductible payment, but due to the lower tax rate in Company B's jurisdiction, Company B only has a $60 increase in its tax liability from the corresponding receipt.
As the tax liability for Company B in its home jurisdiction is less than $80, the DPT rules will prima facie apply.
To help provide certainty for lower risk entities, companies with Australian revenue of less than $25 million will be exempt from the DPT, unless they are artificially booking their revenue offshore. This threshold is similar to the thresholds applying for small taxpayers applying simplified transfer pricing record-keeping requirements and the threshold exempting small proprietary companies from certain financial reporting obligations under Corporations Act 2001.
It is anticipated the focus of the DPT provisions will be on those multinational groups who flow profits through low-tax jurisdictions such as Singapore and Ireland.
Unlike income tax, the DPT will not be a self-assessed tax - a DPT liability will only arise when the ATO issues a DPT assessment. The ATO will notify taxpayers if it considers that they may be subject to the DPT.
Multinational groups operating in Australia will need to consider the application of the DPT provisions to their Australian operations. Undoubtedly Australian Treasury officials will consult with their UK counterparts (and the ATO with the HRMC) in the design of Australia’s version of the DPT.
Implementing the OECD hybrid mismatch arrangement rules
The most simple example of a hybrid mismatch is where an entity resident of country A makes a payment to an entity resident of country B. Country A might treat the payment as interest, and hence deductible. Country B might treat the payment as a dividend and tax exempt. The result being double non-taxation.
Neutralising hybrid mismatches was Action 2 of the OECD’s wider, 15 point Base Erosion and Profit Shifting (BEPS) Action Plan. In terms of the example above, neutralising the hybrid mismatch would involve Country A denying a deduction for the interest payment.
The Government has announced it will implement the OECD rules to eliminate hybrid mismatch arrangements, taking into account the recommendations made by the Board of Taxation in its report on the Australian implementation of the OECD hybrid mismatch rules (pursuant to a request of the then Treasurer as part of the 2015/16 Federal Budget). The Government has asked the Board of Taxation to undertake further work on how best to implement these rules in relation to regulatory capital as part of this measure.
This measure is aimed at multinational corporations that exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. This measure targets instances where tax is either deferred or not paid at all. It will apply broadly to related parties, members of a control group and structured arrangements.
This measure will apply from the later of 1 January 2018 or 6 months following the date of Royal Assent of the enabling legislation.
Again, in designing the legislation, Australia will no doubt consult with the UK who announced measures to address hybrid mismatches in their 2016 Budget.
Strengthening transfer pricing rules
The Government has announced it will be amending Australia’s transfer pricing law to give effect to the 2015 OECD’s transfer pricing recommendations. The strengthening of transfer pricing rules is covered by Actions 8 to 10 of the OECD’s BEPS Action Plan.
The amendment will apply from 1 July 2016.
Australia’s transfer pricing legislation currently specifies that it is to be interpreted so as to best achieve consistency with the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as last updated in 2010. On 5 October 2015, the OECD released the report Aligning Transfer Pricing Outcomes with Value Creation to update the Guidelines.
The changes to the 2010 OECD Guidelines enhance guidance on intellectual property and hard-to-value-intangibles, and ensure that transfer pricing analysis reflects the economic substance of the transaction. Applying these changes to Australia’s transfer pricing rules will keep them in line with international best practice so that profits made in Australia are properly taxed in Australia.
Compliance with Australia’s transfer pricing rules is expensive and time consuming. The ATO has however developed some simplified transfer pricing record keeping options so that certain eligible businesses can opt to minimise some of their record-keeping and compliance costs. Australian SMEs subject to the transfer pricing rules should review their eligibility for one or more of these options.
Tax Avoidance Taskforce
The Government has announced it will provide $678.9 million to the ATO over the forward estimates period to establish a new Tax Avoidance Taskforce. This will enable the ATO to undertake enhanced compliance activities targeting multinationals, large public and private groups and high wealth individuals.
The Taskforce will also directly target compliance cases against those exposed by the Panama Papers.
The Taskforce will have a critical role in delivering on the OECD recommendations in relation to all 15 BEPS Action items published in October 2015.
Increasing administrative penalties for significant global entities
The Government has announced it will increase administrative penalties imposed on companies with global revenue of $1 billion or more who fail to adhere to tax disclosure obligations.
Penalties relating to the lodgement of tax documents to the ATO will be increased by a factor of 100. This will raise the maximum penalty from $4,500 to $450,000, which will help to ensure that multinational companies do not opt out of their reporting obligations.
Penalties relating to making false and misleading statements to the ATO will be doubled, to increase the penalties imposed on multinational companies that are being reckless or careless in their tax affairs.
In this regard, country-by-country reporting (CbCR) obligations now in force require these companies to lodge the following 3 reports:
- The master file (global group overview);
- The local country file (Australian operations only); and
- The Country-by-Country Report (global summary of key metrics).
Large multinational organisations that structure their affairs to minimise tax in Australia.
GST on Low Value Imports
The GST will be extended to low value goods imported by consumers from 1 July 2017.
The intent of this measure is that low value goods imported by consumers will face the same tax regime as goods that are sourced domestically.
Overseas suppliers that have an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for low value goods supplied to consumers in Australia, using a vendor registration model.
This follows the in-principle agreement made on 21 August 2015 by the Council on Federal Financial Relations Tax Reform Workshop.
Australian consumers who buy goods on-line from overseas suppliers.
Overseas suppliers that have an Australian turnover of $75,000 or more.
An Australian consumer purchases clothes on-line from an overseas supplier for $100 on 25 June 2016 and no GST is charged on these goods as they enter Australia.
The same transaction occurs on 1 July 2017. Assuming the overseas supplier’s Australian turnover is over $75,000, they will be required to register for, collect and remit GST for low value goods supplied to consumers in Australia. The cost of these clothes to the Australian consumer will be $110.