(upbeat music)
-: Aus Co borrows $100 million from a foreign associate,
Beta Co, at an interest rate of 12%.
Beta Co sourced the funds
from a $100 million loan from its parent, Alpha Co
paying an arm's length rate of 5%.
Beta Co and Alpha Co are residents
of countries with significantly lower corporate tax rates.
Beta Co performs no other role in relation
to the loan arrangements
and there is no commercial reason why Aus Co
couldn't borrow directly from Alpha Co.
The alternative postulate
would be that Aus Co would have borrowed the $100 million
directly from Alpha Co.
The tax benefit is the 7% differential in interest rates
between the deduction claimed under the scheme
and the deduction that would have been available
under the reasonable alternative postulate.
Diverted profits tax
is imposed at a penalty rate of 40%
on the $7 million DPT tax benefit
resulting in a DPT liability of $2.8 million.
Part IVA of the ITAA36 contains two sets
of provisions aimed at limiting multinational tax avoidance.
The multinational Anti-Avoidance Law applies
to multinational organisations that attempt
to reduce or avoid Australian tax liabilities
through artificial arrangements.
The MAAL provisions firstly require a scheme
where a foreign entity makes a supply
to an Australian customer
with relevant activities
undertaken in Australia
and by an associated Australian entity.
With the foreign entity deriving income
from the supply but not attributing that income
to an Australian permanent establishment.
The next element is whether the foreign entity
carried out the scheme
with a principle purpose
of obtaining a tax benefit
and/or reducing a foreign tax liability.
This principle purpose test replaces
the dominant purpose test
that generally applies to the Part IVA provisions.
It establishes a lower threshold
and refers to the main purpose
or one of the main purposes to the scheme.
The final element is whether the foreign entity
was a significant global entity
being large multinationals
having annual global income
of at least $1 billion
and would have obtained a tax benefit
or reduced a foreign tax liability under the scheme.
If the MAAL provisions are satisfied,
the Commissioner would likely argue
that if not for the scheme,
the supplies to Australian customers
would have been through
an Australian permanent establishment of the foreign entity.
The tax benefit from the scheme
would likely be cancelled
and an arm's length amount of Australian assessable income
would be attributed to the entity leading
to an Australian tax liability.
Further, a withholding tax liability may be imposed
with a foreign entity's permanent establishment
would otherwise pay interest
or royalties to a foreign resident.
The diverted profit tax applies
to multinational organisations
that divert profits away from Australia
to low-tax jurisdictions
through artificial arrangements.
The DPT provisions firstly relate to tax benefits.
Where the taxpayer obtained a tax benefit
in connection with a scheme
and it did so with the principle purpose
of obtaining a tax benefit
and/or reducing a foreign tax liability.
The next elements relate to the taxpayer.
The taxpayer must be a significant global entity.
The taxpayer must have an associated foreign entity
that is connected with the scheme
and the taxpayer must not be a specified type
of widely held investment entity.
The final elements relate to certain exclusions
to the DPT
where the taxpayer's income and any DPT tax benefits
is up to $25 million,
where foreign tax liabilities are deemed
to be sufficient being at least 80%
of the reduction in the Australian tax liability,
and whether profits reasonably reflect
the economic substance and commercial reality
of the activities undertaken.
However, if the DPT provisions are satisfied,
a DPT assessment will be made to the taxpayer
imposing a 40% penalty tax on profits
that have been artificially diverted from Australia.
The taxpayer has an opportunity
to provide further disclosure
to the Commissioner to attempt
to reduce the DPT assessment.
The taxpayer can also amend their income tax return
to reflect more appropriate outcomes
which can potentially reduce the DPT to nil.
Although penalties and interest may still apply
to their income tax return lodgment.
To recap, Part IVA of the ITAA36 contains two sets
of provisions aimed at limiting multinational tax avoidance.
The MAAL provisions capture artificial arrangements
that avoid profit attribution
to Australian permanent establishments.
Any tax benefits may be cancelled
with Australian assessable income increasing
to reflect the alternative postulate.
The DPT provisions capture artificial arrangements
that divert or shift profits from Australia
to a low-tax foreign jurisdiction.
A tax penalty of 40% may be applied
to the tax benefit
although the taxpayer does have options
to reduce the DPT through information disclosure
and/or amended tax return lodgments.