The new diverted profits tax (DPT) would be charged at a rate of 40% on profits that have been artificially shifted to jurisdictions with the result that less than 80% tax is paid than would otherwise have been paid in Australia, according to the Australian Treasury's consultation on the proposed design of the tax. It would apply to multinationals with AUS$1 billion ($736 million) global revenue or more, with exceptions for those that only carry out a small amount of business in Australia, according to the consultation.
In a statement, the Treasury said that the new tax would give the Australian Tax Office (ATO) "greater powers to deal with multinationals who transfer profits, assets or risks to offshore related parties using artificial or contrived arrangements to avoid Australian tax and who do not cooperate with the ATO".
"By imposing a penalty rate of tax, requiring the DPT to be paid on assessment and broadening the ATO reconstruction powers, the DPT will encourage greater openness with the ATO, address information asymmetries and allow for speedier resolution of disputes including under our transfer pricing rules," it said.
The Treasury's consultation on its proposed framework for the new tax closes on 17 June 2016.
The DPT forms part of a 'tax integrity package' set out by the Australian government in its 2016 Budget, which also includes setting up a new 'tax avoidance taskforce' within the ATO and the introduction of new and better protections for 'whistleblowers' that provide the ATO with "information ... on tax avoidance behaviour and other tax issues".
The UK was the first country to introduce a tax on the diverted profits of large international businesses, which came into force on 1 April 2015. The UK's DPT is charged at 25% where a foreign company "exploits the permanent establishment rules", or where a UK company with a UK taxable presence creates a tax advantage by using transactions or entities that "lack economic substance".
Australia's corporate tax rate is currently 30%, which effectively means that large businesses to which the new rules are applicable that transfer profits to jurisdictions with a tax rate of less than 24% would be caught by the penalty charge. However, the Australian government has also announced its intention to reduce gradually the headline corporate tax rate, which under current plans will fall to 25% by financial year 2026/27.
The 40% tax rate would apply to transfers to low-tax jurisdictions where "it is reasonable to conclude that the arrangement is designed to secure a tax reduction and lacks economic substance", according to the consultation. It would not apply to companies that otherwise meet the revenue test if their annual turnover in Australia is less than AUS$25m ($18.4m), unless the company is "artificially booking [its] revenue offshore", according to the consultation.
UK-based corporate tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that it was "too early to judge" whether the UK's tax on diverted profits had been a success.
"The likely response of a company at risk of a challenge under DPT will be to allocate more profit to the UK and pay 'standard' corporation tax at a rate 5% less than DPT," she said. "DPT is more of a threat intended to change behaviour, rather than a revenue-raiser in its own right."
"Many UK companies are currently preparing for their first filing deadline on 30 June 2016. We are aware that HMRC has identified a number of 'high risk' businesses and is beginning its investigations into those – but it is likely to take some time before those investigations are concluded and there is unlikely to be any public data on the amounts collected unless a case goes to the tribunal, which typically takes at least five years," she said.
