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May 4 — The Australian budget's largest commitment to penalize aggressive tax practices mainly targets the digital economy, with a U.K.-style diverted profits tax as the centerpiece of the proposals.
Although the regime would be similar to the U.K. system, Australia would charge a significantly higher tax rate. Large multinationals that attempt to shift their Australian profits offshore to avoid paying tax would be charged a 40 percent penalty tax rate, Morrison said, noting that the levy is higher than the current company tax rate of 30 percent. Meanwhile, the U.K.’s diverted profit tax charges 25 percent—higher than the U.K. 20 percent corporation tax rate .
The proposed regime grants the Australian Taxation Office “greater powers to deal with taxpayers 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,” the consultation document said.
Other measures proposed May 3 by Treasurer Scott Morrison during his annual budget speech included updated transfer pricing rules, a new voluntary tax disclosure code and whistle-blower legislation to protect employees who alert officials to corporate tax cheats .
The diverted profits tax would be charged only when “profits are transferred offshore through related party transactions with insufficient economic substance that reduce the tax paid on the profits generated in Australia by more than 20 percent” and “where it is reasonable to conclude based on the information available at the time to the ATO that the arrangement is designed to secure a tax reduction,” the government said in its consultation document.
The proposal calls for applying the tax to income years beginning on or after July 1, 2017, and “whether or not a relevant transaction (or series of transactions) was entered into before that date.”
The tax would be levied on “significant global entities” that are Australian residents or are foreign residents with Australian permanent establishments, and earn an annual global income of A$1 billion ($749 million) or more. Moreover, the ATO will require up-front payment of any diverted profits tax (DPT) liability, which is adjusted only following a successful review of the assessment. The onus would be on the taxpayer to “provide relevant and timely information on offshore related party transactions to the ATO to prove why the DPT should not apply,” the document said.
Niv Tadmore, tax partner at law firm Clayton Utz in Melbourne, told Bloomberg BNA May 4 that the Australian diverted profits tax “is mainly targeting at digital businesses” because that's “the new economy and that is where the government feels there is a significant amount of base erosion,” he said.
However, Tadmore said the government's decision to leave thin capitalization ratio untouched shows it has been “quite mindful” not to act in a way that would deter overseas companies from other sectors that are interested in investing in Australian infrastructure. The safe harbor ratio remains at 60:40 percent on a debt to total assets basis, but pre-budget speculation suggested the ratio would be reduced to 50:50, which Tadmore said would “make it harder to invest in Australia.” Investment in infrastructure brings more jobs and has a larger multiplier effect than the sale of digital goods and services, he said.
Meanwhile, law firm Baker & McKenzie said in a May 3 client alert that the budget changes constituted another significant package of measures “under the guise of ‘ensuring multinationals are paying their fair share of tax’,” noting that it follows hard on the heels of last year's Multinational Tax Avoidance Act .
Peter Madden, KPMG partner, said in a May 4 budget review that the suite of measures means “aggressive tactics in dealing with the Australian Taxation Office will become a very unattractive path in the future.”
Budget documents include discussion papers on implementing the Organization for Economic Cooperation and Development's project to reduce tax base erosion and profit shifting. The government's BEPS proposals include those for mandatory disclosures of tax information. The consultation on the measure ends July 15.
The government also released a report on a voluntary tax transparency code prepared by its advisory Board of Taxation. The report calls for large companies with of A$100 million or more to publish information. It suggested that data should be published “from the 2016 financial year onwards.“
The government also released a discussion paper on the goods and services tax treatment of digital currency, with comments due by June 3 .
The government has yet to release more details on its budget commitment to introduce legislation to protect individuals who disclose tax avoidance information to the ATO, which would take effect in mid-2018.
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Text of the budget speech is at http://budget.gov.au/2016-17/content/speech/html/speech.htm.
The consultation document on the proposed diverted profits tax is at http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2016/Implementing%20a%20diverted%20profits%20tax/Key%20Documents/PDF/Diverted-profits-tax_discussion-paper.ashx.
The consultation document on the “OECD Proposals for Mandatory Disclosure of Tax Information” is at http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2016/OECD%20Proposals%20for%20Mandatory%20Disclosure%20of%20Tax%20Information/Key%20Documents/PDF/OECD_proposals_mandatory_tax_disclosure.ashx.
The consultation document on GST proposals on digital currencies is at http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2016/GST%20treatment%20of%20digital%20currency/Key%20Documents/PDF/GST_treatment_of_digital_currency.ashx.
The Board of Taxation report on a “Tax Transparency Code” is at http://taxboard.gov.au/files/2016/05/Tax-Transparency-Code.pdf.
Budget Paper No. 2 and other budget documents are at http://www.budget.gov.au.
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