Peter Madden, Alia Lum and Liam Delahunty discuss the Diverted Profits Tax.
As you may have seen or heard in the recent TV, radio and print ads involving a ball bearing of ‘profit’ being diverted out of Australia through a complex maze, the Diverted Profits Tax (DPT) is now live, having commenced operation from 1 July 2017. It will apply first to those significant global entity (SGE) groups with a year-end of 30 June. The background to the DPT was discussed in our article of 9 February 2017 – New Diverted Profts Tax Bill: 1,600 taxpayers in ATO's sights.
It is important to note that the ATO has still not publicly released its Law Companion Guideline (LCG), setting out additional guidance on the operation of the DPT, although it has undergone limited consultation on a draft. The ATO is also yet to release its Practical Compliance Guidelines (PCG), which is expected to set out key risk indicators and sign off processes. We expect these to be released in the coming weeks/months, but it remains to be seen how extensive the guidance will be in clarifying the scope of the DPT.
The Government has stated that approximately 1,470 taxpayers are in scope of the DPT, with 130 estimated to be in the ‘high risk’ category – these groups may need to consider restructuring existing arrangements so they are not amenable to the application of the DPT. Those who are not high risk may still want to seek advice that the DPT should not apply to their current or proposed arrangements.
To manage their tax risk appropriately, SGEs will first want to identify arrangements that are potentially impacted and calibrate the risk. This could focus on determining whether (1) there is ‘sufficient economic substance’ throughout all entities relevant to their supply chains which impact Australia, and/or (2) whether it is appropriate to conclude that their arrangements do not have a ‘principal purpose’ of obtaining a tax benefit. The next steps could then include ‘self-assessing’ (with appropriate advice) a conclusion that the DPT should not apply, or potentially approaching the ATO in order to seek comfort.
KPMG has unique insights into the DPT, and can help SGEs to navigate the ‘maze’ to assess their DPT risk levels and for both current and future transactions.