Diverted Profits Tax Act 2017

Overview

The Diverted Profits Tax Act 2017 was enacted by the Parliament of Australia to address the issue of multinational tax avoidance, specifically targeting companies that make large profits in Australia but pay little or no tax due to transfer pricing arrangements. This Act was designed to ensure that such companies contribute a fair share of tax to the Australian economy, thus supporting public revenue and infrastructure. The Act imposes a diverted profits tax at a rate of 40% on profits deemed to be diverted out of Australia, as specified under section 177P of the Income Tax Assessment Act 1936. The policy objective is to combat aggressive tax avoidance practices by multinational entities and to maintain a level playing field for all businesses operating within Australia.

Scope and Application

The Diverted Profits Tax Act 2017 applies to entities, particularly multinational companies, that are subject to the provisions outlined in the Income Tax Assessment Act 1936. The Act imposes a diverted profits tax on certain profits of multinational entities that are characterised as unfranked and not subject to substantive participation by the entity. It aims to address tax avoidance by multinational companies that have high levels of undistributed profits in Australia but pay low levels of Australian tax. The Act's jurisdictional reach is national, applying across Australia, as it is an Act of the Commonwealth of Australia. The commencement date of the Act is 1 July 2017, contingent upon the commencement of item 13 of Schedule 1 to the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017. The Act does not specify any exclusions, exemptions, or thresholds within the primary text, though it may be subject to further interpretation and regulation through subordinate instruments. These instruments could provide further detail on the entities subject to the tax, the calculation of the tax, and other relevant matters to ensure the effective implementation of the Act.

Key Provisions

The Diverted Profits Tax Act 2017 (Cth) introduces a new tax aimed at multinational entities that have large profits in Australia but pay little or no tax here due to complex arrangements. Under section 3, this Act imposes a tax on the profits of multinational entities that are diverted from Australia, with the rate set at 40% as stated in section 4. This tax is payable in accordance with section 177P of the Income Tax Assessment Act 1936, which is the mechanism by which the tax is calculated and collected. The Act imposes several obligations on the entities it governs. These obligations include ensuring that the multinational entities identify and report their "diverted profits" – essentially, profits that would have been taxed in Australia if not for certain tax planning arrangements. Multinational entities must comply with detailed reporting requirements, which include providing information about their global income, expenditure, and assets. This ensures that the Australian Taxation Office (ATO) can accurately assess the profits that are liable to the diverted profits tax. Failure to comply with the requirements of the Diverted Profits Tax Act 2017 can result in significant penalties. The Act does not explicitly outline specific offences or penalties within its text, but penalties for non-compliance with the Income Tax Assessment Act 1936, under which the diverted profits tax is imposed, can include substantial fines. For example, section 284 of the Income Tax Assessment Act 1936 allows for penalties of up to $22,200 for serious non-compliance, and in more severe cases, penalties can be much higher, particularly if the non-compliance is deemed to be intentional or due to serious neglect. Additionally, ongoing non-compliance can lead to prosecution, with potential criminal penalties including fines and imprisonment.