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Transfer Pricing:  Diverted Profits Tax regime

The Australian Government has demonstrated its commitment to discouraging artificial transfer pricing with the introduction of the Diverted Profits Tax (“DPT”) legislation.  The measures were announced in the 2016 budget and are currently with a parliamentary committee.

The DPT regime is targeted specifically at large multinationals with income of $1bn or more. It focuses on international related party dealings where the transfer pricing does not reflect the commercial reality of the situation.  In addition to increasing the scope of transfer pricing legislation greater penalties have been introduced.

The maximum penalty that can be applied to significant global entities has been increased to $450,000.

Furthermore, the penalties on large multinationals can be doubled where they have provided false or misleading information to the ATO.

An Aggressive Plan – The ‘Diverted Profits Tax’

The DPT is controversial as it marks a significant departure from the Government’s previous indications that it will continue to follow the recommendations of the OECD Base Erosion and Profit Shifting (BEPS) project. The DPT imposes a 40% penalty rate on large multinationals who artificially avoid their taxation obligations through transfer pricing, and implements the second limb of the test used in the UK version of the DPT.

The DPT has attracted strong criticism in its drafting, due to an excessively wide scope of capture and an appeals process that disadvantages the taxpayer. As it is proposed currently, any amended assessment by the ATO must be paid upfront, while opportunities for appeal and adjustment are limited and come at a much later stage, with the onus placed upon the taxpayer to prove that the DPT should not apply.

As such, while in some ways the government has indicated that it will continue to follow the recommendations of the OECD, the DPT and aspects of the Multinational Anti-avoidance law go well beyond any of the recommendations in aggressive attempts to limit profit shifting within Australia.

As a significant objective of the BEPS project is to ensure and promote consistency between international tax regimes, a unilateral measure such as the DPT will undoubtedly be considered to reduce the consistency of international taxation law.

Advance Pricing Arrangement (APA)

Any large corporate body concerned that they fall within the scope of these new laws should strongly consider making an application to the ATO for an Advance Pricing Arrangement (APA). An APA provides a binding agreement between them and the taxpayer over what the appropriate transfer pricing methodology will be for the transaction.

The APA essentially provides certainty to a compliant taxpayer that the ATO will not impose additional taxation on pricing worked out under the agreement, and reduces the risk of any double taxation being imposed.

Message:

Contact us now so that we can ensure you stay within the transfer pricing tax laws and don’t get caught by the massive penalties.

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