On 16 February 2017, the Government introduced the Diverted Profits Tax (DPT). It was introduced as a necessary addition to combat multinational tax avoidance.
The DPT will apply a 40% tax rate on the diverted profits of multinationals. The penalty tax aims to ensure that tax paid by significant global entities properly reflects the economic substance of their activities in Australia, and seeks to prevent the diversion of profits offshore through contrived arrangements.
An entity is a significant global entity for an income year if it has annual global income of $1billion or more, or it is a member of a consolidated group and the global parent has annual global income of $1billion or more.
The DPT will have effect from 1 July 2017, but may also apply to schemes that were entered into before that date.
When the DPT will apply
The DPT will apply to a scheme, in relation to a tax benefit (the DPT tax benefit), if:
- a taxpayer (the “relevant taxpayer”) has obtained, or would but for s177F of the ITAA 1936 obtain, the DPT tax benefit in connection with the scheme in an income year;
- it would be concluded (having regard to the matters in s 177J(2) of the ITAA 1936) that the person(s) who entered into or carried out the scheme or any part of the scheme did so for the principal purpose of, or for more than one principal purpose that includes a purpose of:
- enabling the relevant taxpayer to obtain a tax benefit, or both to obtain a tax benefit and reduce a foreign tax liability; or
- enabling relevant taxpayer and another taxpayer(s) 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 for the income year;
- a foreign entity that is an associate of the taxpayer is one of the persons who entered into or carried out the scheme or part thereof, or is otherwise connected with the scheme; and
- it is reasonable to conclude that none of the following tests applies in relation to the relevant taxpayer, in relation to the DPT tax benefit:
- the $25m income test;
- the sufficient foreign tax test; or
- the sufficient economic substance test.
DPT assessment process
If the DPT applies to a scheme, the Commissioner may issue a DPT assessment to the relevant taxpayer. Tax at a rate of 40% is payable on the diverted profit, with interest charges.
The Commissioner can reach a conclusion as to the application of the DPT in the absence of any necessary information from the taxpayer. The Commissioner can issue a DPT assessment without first taking reasonable steps to obtain information from the relevant taxpayer.
The Commissioner may make a DPT assessment at any time within seven years of first serving a notice of assessment on the taxpayer for an income year.
The ATO will ensure a rigorous framework for introducing the DPT that encompasses several levels of oversight, senior executive sign-off and additional safeguards. Further, the Commissioner will establish a Panel relating to the DPT that will include at least one external member. Except in very limited circumstances, the Commissioner will seek endorsement from the Panel to make a DPT assessment.
DPT is payable upfront
The DPT is due and payable at the end of 21 days after the notice of assessment is issued. Accordingly, the DPT must be paid irrespective of whether the assessment is the subject of an unresolved dispute.
As with the current transfer pricing regime, the DPT due and payable will not be reduced by the amount of foreign tax paid on the diverted profits. Further, an income tax deduction is not allowed for the DPT paid.
Period of review
A 12 month period of review will commence from the date the Commissioner gives the entity a notice of a DPT assessment.
The period of review can be shortened if the taxpayer specifies a shorter period by written notice to the Commissioner. The period of review will end on the date specified in the notice, unless the Commissioner applies to the Federal Court for additional time. The taxpayer can give notice for a shorter period of review where the taxpayer considers the Commissioner has been furnished with all relevant information and documents relating to the DPT assessment.
Further, the period of review can be extended by application to the Federal Court by either party, or by the taxpayer consenting to a request by the Commissioner for an extension. This may be necessary where the Commissioner has not completed an examination of the taxpayer’s affairs and cannot practically complete the examination within the shorter review period because of any action, or failure to take action, by the taxpayer.
As a result of receiving additional information, the Commissioner may amend the DPT assessment to either reduce or increase the DPT liability, or make no change to the DPT assessment. The Commissioner may also agree to an outcome with an entity that involves both an amendment to reduce a DPT assessment, and an amendment to increase an income tax assessment.
Federal Court appeal
The taxpayer may appeal to the Federal Court against a DPT assessment within 60 days of the end of the period of review (as opposed to 30 days under the exposure draft legislation).
“Restricted DPT evidence” is not admissible in any appeal proceedings. Such evidence constitutes any information or documents that the taxpayer does not provide to the Commissioner during the period of review, or that the Commissioner did not already have prior to the period of review.
However, such evidence will be admissible if:
- the Commissioner consents to its admission;
- the Court considers its admission is in the interests of justice; or
- the restricted evidence is expert evidence that comes into existence after the period of review and is based on evidence that the Commissioner has in his/her custody or control during the period of review.
The new era of the assessment process and tax disputes seems to further emphasise the Commissioner’s power to recover assessed tax before the facts have been tested. The assessment procedure under DPT enables the Commissioner to:
- issue an assessment;
- require payment within 21 days of the issued assessments;
- wait for 12 months before undertaking a review of the facts; and
- then restrict the evidence the taxpayer can rely on to challenge the assessment.
The pay now, wait 12 months and then deal with the facts approach has some significant benefits to the Commissioner. So will this assessment process be something the Commissioner seeks to implement for all tax disputes in the future?