Diverted profits tax
Australia will follow the UK and introduce its own diverted profits tax (DPT), from 1 July 2017. The type of arrangements to which the DPT will apply are arrangements between related parties:
- where the result of the arrangement is that tax paid overseas is less than 80 per cent of the tax that would have otherwise been paid in Australia;
- where it is reasonable to conclude that the arrangement is designed to secure a tax deduction; and
- that do not have economic substance.
Such arrangements will attract a 40 per cent tax on diverted profits. The tax is not intended to be deductible or creditable for income tax purposes (although franking credits may be allowed). The measure applies to large companies with global revenue of $1 billion or more, although companies with Australian revenue of less than $25 million will be exempt (unless the arrangements are artificial).
In its simplest form, a hybrid mismatch is a financial instrument which is treated as debt for purposes of the tax rules in one jurisdiction but equity in another, with the result that the payments under the instrument are tax deductible for the payer but tax exempt for the payee.
As part of its “Base Erosion and Profit Shifting Project” (commonly known as “BEPS”), the OECD has developed a set of recommended hybrid mismatch rules for domestic implementation, to combat use of these arrangements. The Board of Taxation has recently consulted on the OECD’s hybrid mismatch rules, and the Government has asked the Board to undertake further work in this area. The Government will implement the OECD’s rules to eliminate hybrid mismatches, taking into consideration the Board’s recommended changes to those rules, from the later of 1 January 2018 or 6 months following the date of Royal Assent of the legislation. The OECD’s rules in this area are extremely complicated. Although there is currently not much detail on how Australia will implement the OECD’s reforms, it is likely that any changes will be significant.
Following the ATO’s loss in Commissioner of Taxation v SNF (Australia) Pty Ltd  FCAFC 74, the Government hard wired the OECD’s 2010 Transfer Pricing Guidelines into Australian legislation. The OECD has recently updated its Guidelines. Under this Budget, the OECD’s most recent Guidelines will apply to Australia’s transfer pricing rules from 1 July 2016.
Changes to the administration of the tax system
The Government will introduce five new measures to improve the administration of the tax system:
- whistleblowers who disclose information to the ATO will be better protected;
- a tax avoidance taskforce will be established to undertake enhanced compliance activities targeting multinationals, large public groups and high wealth individuals;
- penalties will be imposed on significant global entities who fail to adhere to tax disclosure obligations, including a failure to lodge tax returns on time;
- a Tax Transparency Code will be introduced and multinational businesses with an annual turnover of $100 million or more will be encouraged to adopt the Code to allow greater public scrutiny; and
- the Federal Government will consult on new rules requiring tax and financial advisors to report potentially aggressive tax planning schemes.