The only good news for multinationals was that the rumoured changes to the thin capitalisation measures did not eventuate. This can only be seen as positive for Australia’s global competitiveness given that we already have some of the strictest thin capitalisation rules in the world.
In a less welcome surprise for large multinationals, the government announced the introduction of a Diverted Profits Tax (DPT) from 1 July 2017. The DPT concept originated in the United Kingdom, which introduced such a regime in 2015.
Australia’s DPT imposes a penalty tax of 40% on profits that are diverted offshore through related party transactions, where the increased tax liability of the related party is less than 80% of the corresponding reduction in Australian tax liability and there is ‘insufficient economic substance’.
This test seems sure to create considerable uncertainty. Happily this measure will only apply to groups with $1bn or more in global turnover, although they too will have an exemption where their operations have Australian turnover of less than $25m and they have not artificially booked profits offshore.
Companies with global turnover of $1b or more will, from 1 July 2017, also be subject to increased penalties for breaches in reporting obligations. Maximum penalties relating to the lodgement of tax documents will be increased from $4,500 to $450k while penalties relating to the making of tax statements will be doubled.
It seems likely that this is to encourage large multinationals to satisfy their country by country (CbC) reporting obligations by ensuring that the penalty for non-compliance outweighs the compliance cost associated with preparing the report. However the rules will not be limited to this context and can apply in a broad range of circumstances.
The balance of the international measures do not have any de minimis rules and will apply to taxpayers of all sizes.
As expected, the government has announced a measure to prevent tax advantages arising from the use of hybrid instruments and hybrid entities. This is consistent with recommendations already made by the OECD as part of their base erosion and profit shifting (BEPS) agenda.
The policy objective is to prevent the use of such instruments and entities to achieve a tax deduction in two jurisdictions, or a tax deduction in one country without an assessable amount in the other jurisdiction. A Board of Taxation discussion paper has been released with 15 recommendations including no grandfathering and a start date of 1 January 2018.
Groups with hybrid arrangements should consider restructuring before these rules come into effect.
Australia’s transfer pricing rules will also be amended to ensure that they incorporate updates to the 2010 OECD guidance, covering aspects of intellectual property and hard-to-value-intangibles. This seems likely to have little practical impact for taxpayers given the way the ATO is already administering the rules.
A new Tax Avoidance Taskforce, led by the Commissioner of Taxation, will be established with a focus on international tax risks, high-wealth individuals, trusts and tax scheme promoters. A panel of external experts comprised of former judges will be appointed to oversee settlement arrangements between taxpayers and the ATO with the aim of ensuring that they are concluded in a fair and appropriate manner.
We expect that the government’s focus on multinationals will be a continuing theme in future Budgets in light of continued work by the OECD and the G20 on BEPS issues and the evolving global political landscape.