Australian budget includes UK-style diverted profits tax, anti-hybrid rules

The Australian government on May 3 released its 2016–17 budget, announcing several measures to crack down on multinational tax avoidance, including a tough new diverted profits tax (DPT) addressing transfers of profits to offshore related parties, anti-hybrid and transfer pricing rules patterned after OECD/G20 base erosion profit shifting (BEPS) plan agreements, and a new taskforce designed to enhance audits of large corporations and high wealth individuals.

The government also proposed to reduce the corporate tax rate to 25 percent, transitioning over an eleven-year period.

“Everyone has to pay their fair share of tax, especially large corporates and multinationals, on what they earn here in Australia,” said Australia’s Treasurer Scott Morrison, announcing the budget.

The DPT proposal, applicable to tax years beginning after July 1, 2017, would hit companies with annual global turnover of AUD 1 billion (USD 749 million) that have Australian turnover of at least AUD 25 million (USD 18.7 million), according to a consultation document accompanying the budget.

Such companies would be subject to a penalty tax of 40 percent on profits that are transferred offshore through related party transactions that lack economic substance and that result in an “effective tax mismatch.”

An effective tax mismatch occurs when a related party transaction gives rise to a foreign tax liability that is less than 80 percent of the corresponding reduction of the group’s Australian tax liability. So, for example, if a deductible payment to a related party causes a reduction in Australian tax liability of $100, but there is only a $60 corresponding tax increase from the payment in a foreign jurisdiction, the transaction would create an effective tax mismatch.

The government said that Australia’s multinational anti-avoidance law (MAAL), introduced last year, is similar to one prong of the United Kingdom’s DPT, providing rules countering arrangements designed to avoid taxable presence. The new Australian DPT proposal “broadly adopts” the main features of the second prong of the UK’s DPT relating to transfers of profits to offshore related parties, the government said.

The DPT and MAAL are together expected to raise about AUD 650 million (USD 487 million) over four years. The consultation on the DPT proposal will run until June 17.

Hybrid mismatches/transfer pricing

The government also said that it intends to adopt rules to eliminate hybrid mismatches consistent with OECD/G20 BEPS agreements. The hybrid rules will be applicable the later of  January 1, 2018, or six months after the date the law introducing them attains Royal Assent, the government said.

Australia’s transfer pricing rules will be updated to conform to 2015 OECD transfer pricing guidelines, as described in the report Aligning Transfer Pricing Outcomes with Value Creation, the budget papers said.

Tax avoidance taskforce

Further, the Australian Tax Office (ATO) will receive AUD 679 million (USD 509 million) over four years for a new 1300 person taskforce that will target multinationals, large public and private groups, and high net worth individuals. The government said that 390 new specialized officers will be hired and external experts will be appointed.

The group will be led by ATO Commissioner Chris Jordan, who will provide regular progress reports. The changes will result in better audits and higher tax collections, the government said.

The budget also confirmed that, as of July 1, 2017, the GST will be extended to low value physical goods imported by Australian consumers. The new law will be applicable to overseas suppliers that have an Australian turnover of AUD 75,000 (USD 56,287) or more, budget documents said.

Administrative penalties imposed on significant global entities will be increased from July 1, 2017. Penalties relating to filing will be increased tenfold to ensure that multinational companies do not opt out of their reporting obligations.

The government also said it would adopt greater protections for whistleblowers that disclose information to the ATO.  Rules that allow double counting of deductible liabilities under the consolidation regime will also be modified.

Further, a consultation was launched on whether Australia should adopt OECD proposals for mandatory disclosure rules. The proposal would require tax advisers and taxpayers to make early disclosures of aggressive tax arrangements. Feedback on the consultation is due July 15.

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