Australian Tax Office finalises guidance on diverted profits tax
The Australian Government introduced a diverted profits tax (DPT) which came into effect on 1 July 2017 and imposes a 40% tax if applicable.
The DPT is aimed at ensuring that the tax paid by significant global entities (SGEs) properly reflects the economic substance of their activities in Australia and prevents the diversion of profits through offshore arrangements involving related parties.
Law companion ruling (LCR) 2018/6 Diverted profits tax and Practical Compliance Guideline (PCG) 2018/5 Diverted profits tax have now been published in their final form. These were previously published in Draft PCG 2018/D2 and Draft LCR 2017/D7 (as outlined in BDO World Wide Tax News Issue 47).
The new guidance - Details
LCR 2018/6 aims to help affected taxpayers and their advisers understand how the DPT law will apply and clarify key concepts introduced by the measure. The ruling broadens the initial criteria originally outlined in the draft guidance with an emphasis on the principal purpose test being the central provision around which the DPT operates.
PCG 2018/5 serves as a tool for taxpayers to self-assess their DPT risk by providing a risk assessment framework and compliance activities in the event that the taxpayer concludes that there is a potential area of concern. The finalised framing questions and examples assist taxpayers in considering the relative risk of certain arrangements in the context of the DPT measure.
The PCG examples are extended to include a low risk marketing hub in relation to the oil and gas industry and a high risk financing transaction. However, there is some concern that many taxpayer’s specific profiles will not fit into the illustrated examples, proving difficult for taxpayers to assess their DPT risk. Regardless of this, the Australian Tax Office (ATO) expects taxpayers to engage with the ATO if there is an identified DPT risk.
Definition of Significant Global Entity
We note that the Treasury has released revised draft legislation which expands the definition of an SGE.
An SGE is an entity that has annual global income of AUD 1 billion or more, or one that is a member of a group of entities that are consolidated for accounting purposes as a single group and the global parent entity of the group has annual global income of AUD 1 billion or more.
If enacted, the proposed legislation will include an expanded definition, introducing the concept of a notional listed company group. In effect, a notional listed company group would be required to consolidate for accounting purposes as a single group under the applicable accounting rules if any member of the group was a listed company, and exceptions to requirements about when a group of entities would be required to consolidate, including materiality rules, were disregarded.