The Australian Government continued attacking multinational tax avoidance with its 2016-2017 Federal Budget released on May 3 2016. The announced measures include a 40% diverted profits tax on large multinationals from July 1 2017, akin to the UK diverted profits tax.
Other related measures announced included:
- Anti-hybrid rules to limit the use of hybrid entities or instruments under two or more tax jurisdictions;
- Further alignment of Australia's transfer pricing (TP) rules with international / OECD best practice;
- A new tax avoidance taskforce, with 390 new specialist officers;
- Enhanced protections for whistleblowers who advise the Australian Taxation Office (ATO) of tax misconduct;
- Increased administrative penalties for significant global entities with global revenues of A$1 billion ($728 million) or more.
MAAL and other developments
These measures complement the existing Multinational Anti-Avoidance Law (MAAL) dealing with notional permanent establishment status, and the comprehensive tax transparency and reporting regimes, including the recently enacted country by country reporting requirements.
The corporate tax rate will be progressively reduced for small businesses with annual turnover of less than A$10 million, initially to 27.5% from July 1 2016, and ultimately for all companies by 2023 -2024. A target has also been set to reduce the corporate tax rate to 25% over 10 years.
Importantly, the government will introduce two new types of collective investment vehicles (CIVs): A corporate CIV from July 1 2017 and a limited partnership CIV from July 1 2018. Generally, these CIVs will be flow-through entities for tax purposes provided they are widely held and engage primarily in passive investment.
On GST (VAT), the Government announced:
- The GST Act will be amended to better deal with digital currency (that is, Bitcoin);
- GST will be imposed on low value imported goods (value less than A$1,000) from July 1 2017;
- Compliance costs for entities with a turnover less than A$10 million will be reduced.
The Government also tightened various superannuation concessions.
Diverted profits tax (DPT)
Broadly, the DPT applies to large multinationals where:
- They shift profits offshore through related-party arrangements; and
- As a result, the bill on the profit shifted is less than 80% of the tax that would otherwise have been paid in Australia; and
- It is reasonable to conclude that the arrangement is designed to secure a tax reduction and lacks economic substance.
For income years commencing on or after July 1 2017, the DPT (if applicable) will impose a penalty tax rate of 40% on profits transferred offshore.
Anti-hybrid mismatch rules
Australia will implement the OECD's measures to eliminate hybrid mismatch arrangements. The rules start January 1 2018, or six months after Royal Assent of the enabling legislation.
The measure targets arrangements exploiting differences in the tax treatment of instruments or entities in different countries to achieve double non-taxation and/or long term deferral of taxation. Redeemable preference shares are a common example of a hybrid instrument in Australia.
Tax avoidance taskforce
A new tax avoidance taskforce will focus on compliance with, and enforcement of, the various multinational tax avoidance measures above and the Multinational Anti-Avoidance Law (MAAL). Large multinationals should expect increased ATO audit activities on these measures.
Strengthening TP rules
The Government intends to strengthen Australia's TP rules and to ensure the rules are consistent with international best practice by focusing on substance over form. The Government announced that the OECD paper entitled "Aligning Transfer Pricing Outcomes with Value Creation" issued in October 2015 would be given the same guidance status as the OECD's 2010 guidelines within our TP rules.
Better protection for tax whistleblowers
New arrangements will apply from July 1 2018 to give better legal protection to individuals who disclose information to the ATO on tax avoidance behaviour. No further detail has been released, but the protection will likely apply to employees, former employees and advisers.
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