Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

General outline and financial impact

Diverted profits tax

Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936), the Taxation Administration Act 1953 (TAA 1953) and associated Acts to introduce a new diverted profits tax (DPT). If the DPT applies, the Diverted Profits Tax Act 2017 will impose tax on the amount of the diverted profit at a rate of 40 per cent.

The DPT aims to ensure that the tax paid by significant global entities properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through contrived arrangements. It will also encourage significant global entities to provide sufficient information to the Commissioner of Taxation (Commissioner) to allow for the timely resolution of tax disputes.

Date of effect: This measure will apply in relation to tax benefits for an income year that starts on or after 1 July 2017 (whether or not the tax benefits arise in connection with a scheme that was entered into, or was commenced to be carried out, before 1 July 2017).

Proposal announced: The measure was announced on 3 May 2016 as part of the 2016-17 Budget.

Financial impact: This measure has these revenue implications:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - paragraphs 1.218 to 1.222.

Compliance cost impact: This measure has a compliance cost impact of $16.4 million per year for 10 years. This cost has been fully offset within the portfolio.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure has a compliance cost impact of $16.4 million per year for 10 years. This cost has been fully offset within the portfolio. The Regulation Impact Statement is in Chapter 4.

Main points:

•

Multinational tax avoidance undermines the integrity of international and domestic tax systems.

•

The DPT will complement Australia's transfer pricing and anti-avoidance rules by:

-

ensuring the tax paid by significant global entities properly reflects the economic substance of their activities in Australia;

-

preventing the diversion of profits offshore through contrived arrangements; and

-

encouraging significant global entities to provide sufficient information to the Commissioner to allow for the timely resolution of tax disputes.

•

The DPT will impose a penalty rate of tax and require that tax to be paid irrespective of whether the assessment is the subject of an unresolved dispute. This will place the onus on taxpayers to provide relevant information on related party transactions to the Australian Taxation Office (ATO), making it easier for the ATO to apply current transfer pricing and anti-avoidance rules.

•

The combination of the upfront payment and the greater disclosure is expected to both expedite the resolution of disputes and the consequential tax payment, and to capture taxable income that would otherwise have been diverted.

•

While the DPT is expected to apply in only very limited circumstances, there are approximately 1,600 taxpayers with income that is sufficiently large that they potentially fall within the scope of the new law and who are likely to seek legal and tax advice on whether the new law impacts existing and future transactions.

Increasing penalties for significant global entities

Schedule 2 to this Bill increases the administrative penalties that can be applied by the Commissioner of Taxation to significant global entities to encourage them to better comply with their taxation obligations, including lodging tax documents on time and taking reasonable care when making statements.

Date of effect: The amendments in this Schedule generally apply from 1 July 2017.

Proposal announced: This measure was announced on 3 May 2016 in the 2016-17 Budget.

Financial impact: This measure is estimated to have an unquantifiable gain to revenue over the forward estimates period.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights -, paragraphs 2.49 to 2.52.

Compliance cost impact: Negligible.

Transfer pricing guidelines

Schedule 3 to this Bill amends the Income Act Assessment Act 1997 (ITAA 1997) to update the reference to Organisation for Economic Cooperation and Development (OECD) transfer pricing guidelines in Australia's transfer pricing rules in Division 815 to include the 2016 OECD amendments to the guidelines.

Date of effect: The amendments in this schedule apply to income years commencing on or after 1 July 2016.

Proposal announced: This measure was announced on 3 May 2016 in the 2016-17 Budget.

Financial impact: These amendments will produce an unquantifiable gain to revenue over the forward estimates period.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights -paragraphs 3.21 to 3.24.

Compliance cost impact: These changes are largely consistent with the current application of Division 815, and additional compliance costs are anticipated to be a minimal one off compliance cost with no ongoing costs.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure has a compliance cost impact of $0.8 million. This cost has been fully offset within the portfolio. The Regulation Impact Statement is in Chapter 4.

Main points:

•

Multinational tax avoidance undermines the integrity of international and domestic tax systems.

•

The update of OECD Guidelines should be adopted to ensure that Australia continues to have best practice transfer pricing rules.

•

The OECD amended Guidelines are largely reflective of the approach that currently underlies Australia's transfer pricing rules, that is, to price the economic substance of the transaction. If not updated, the reference to the 2010 OECD Guidelines would create uncertainty about the Commissioner's application of Division 815 of the ITAA 1997.

Changes to the transfer pricing regime are estimated to affect approximately 4,400 businesses that have potential cross border dealings with related parties. However, the changes are largely consistent with the current application of Division 815. Therefore, subject to some small transitional costs, additional compliance costs are anticipated to be minimal.