Following further consultation, final legislation to implement a diverted profits tax (DPT) in Australia has been introduced into parliament.
The legislation is largely consistent with the earlier exposure draft, although certain additions and carve outs (e.g. for sovereign wealth funds and foreign pension funds) have been made to the final legislation.
The key purposes of the DPT (modelled on the second limb of the UK DPT) are to ensure that the Australian tax payable by "significant global entities" (global groups with annual turnover of at least AU$1 billion ($750 million)) properly reflects the economic substance of the activities those entities carry on in Australia, and to prevent those entities from reducing the amount of Australian tax they pay by diverting profits offshore through contrived arrangements between related parties.
If passed in its current form, the DPT will apply to income years starting on or after July 1 2017.
Taxation of hubs
The Australian Taxation Office (ATO) has also released Practical Compliance Guideline PCG 2017/1 in relation to the ATO's approach to the transfer pricing issues arising for the use of offshore centralised operating models or "hubs".
This follows concerns publicly expressed by the ATO about the use by multinationals (especially large Australian mining companies) of sales and marketing hubs based in lower tax jurisdictions (such as Singapore) to shift profits out of Australia. This is achieved through the payment of high fees to offshore associates that provide centralised services to Australian businesses (without substantially altering any goods or commodities).
PCG 2017/1 provides a framework for hub risk assessment to assist taxpayers to manage the compliance risk of their hubs and understand the ATO's compliance approach for hubs. This includes the criteria the ATO consider when categorising the level of risk of a hub. The higher the risk rating, the higher the priority for an ATO review. Risk ratings can be decreased through certain types of "good behaviour", such as preparing appropriate transfer pricing documentation or ensuring the pricing of transactions with hubs is within certain thresholds.
The ATO also outlines what taxpayers can expect by way of ATO compliance activities if their hub is inside or outside the "green" safe zone and provides guidance for preparing transfer pricing analysis. This should be read in the context of the DPT, which could alter how the ATO would in practice pursue a high risk hub (and the penalties involved).
The ATO has released a controversial Taxpayer Alert TA 2017/1: Re-characterisation of income from trading businesses, signalling its intention to review the "stapled structures" commonly used by foreign and Australian investors in a variety of projects. The ATO is concerned by the use of stapled structures to artificially fragment integrated trading businesses in order to re-characterise trading income into more favourably taxed passive income.
This could potentially impact stapled structures used in a number of contexts, including infrastructure projects such as energy, toll roads, telecommunications and ports. Stapled structures are also common in the real estate sector and in privatisations but these are excluded from TA 2017/1.
TA 2017/1 describes the different types of stapled structures that will be targeted. These typically have the following features:
- A flow-through trust (asset trust) that holds "passive" assets, such as land and fixtures, is stapled to another entity (operating entity);
- The operating entity leases the passive assets from the asset trust (for a fee) and operates the business of the stapled group; and
- The asset trust may qualify for a concessional withholding tax rate of 15% on distributions of profit to non-resident investors. The operating entity is taxed at the standard company tax rate of 30% but has minimal profit due to the lease payments.
In such instances, the ATO is considering a number of ways to eliminate the tax benefits of the stapled structure, including denying the flow-through status of the asset trust (so that it is taxed like a company) and applying the general tax anti-avoidance rules.
This opens up practical difficulties and may signal a departure from past practice, as stapled structures have been used for many years and previously accepted by the ATO. Going forward, the ATO's position will be closely scrutinised as it continues to develop its position and provides further guidance.
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