On 18 December 2017, the Australian Taxation Office (ATO) published a guidance on the application of the Diverted Profits Tax (DPT) measure which can potentially apply to any ‘significant global entity’ (SGE, multinational entities with annual global income of A$1 billion or more). The Federal Parliament has now passed legislation to introduce a new penalty regime for SGEs. These measures increase the tax and transfer pricing compliance risk for multinational companies in Australia who are SGEs and engage in cross-border transactions.
Diverted Profits Tax
The DPT came into effect on 1 July 2017, and it aims to ensure that the tax paid by significant global entities (SGEs) properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through related parties’ arrangements. It also encourages SGEs to provide sufficient information to the ATO to allow for the timely resolution of tax disputes.
The DPT allows the ATO to use a ‘pay now, argue later’ approach and impose a punitive 40 per cent tax rate on profits of SGEs found to have been diverted to ‘low taxed’ countries, where the principal purpose of the arrangement was to obtain an Australian tax benefit.
The DPT only applies to SGEs. An entity is an SGE for an income year if it is:
- A global parent entity with an annual global income of A$1 billion or more; or
- A member of a group of entities (consolidated for accounting purposes) where the global parent entity has an annual global income of A$1 billion or more.
The DPT will not apply to a relevant taxpayer who is one of the following types of entities:
- a managed investment trust
- a foreign collection investment vehicle with wide membership
- a foreign entity owned by a foreign government
- a complying superannuation entity
- a foreign pension fund.
Increased penalties apply to all Significant Global Entities
– Administrative penalties for statements
Administrative statement penalties have now doubled for an SGE that:
- does not take reasonable care
- takes a tax position that is not reasonably arguable
- fails to provide documents when required and the Commissioner determines the liability without the document.
– Failure to Lodge penalties
Failure to Lodge (FTL) penalties will be increased for SGEs by at least a factor of 100. It is important for SGEs to be aware that failing to lodge on time after 1 July 2017 will result in significantly higher FTL penalties especially where an entity has a history of late lodgements.
The new FTL penalties will apply in respect of all documents required to be lodged by SGEs in the approved form, including:
- Income tax and fringe benefits tax returns
- Business activity statements
- Country-by-country reports
- General purpose financial statements
- Pay as you go (PAYG) withholding annual report
- Annual goods and services tax (GST) return
- Annual GST information report
- Taxable payment annual report
If you would like any further information on the above, please contact one of our tax accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry.