Tax Insights
from International Tax Services
Transfer Pricing
Australian Federal Budget:
Proposals to impact foreign MNCs
June 8, 2016
In brief
The Australian 2016-17 Federal Budget (the Budget) released on May 3, 2016 proposes new measures
relevant to multinational corporations (MNCs). In this Insight, we summarize the proposed Diverted
Profits Tax (DPT) and anti-hybrid rules, which are expected to have a significant impact on many MNCs.
In addition, we highlight the key features of the proposal to adopt revised OECD transfer pricing
guidance and transparency measures, as well as the Australian Taxation Office (ATO) tax taskforce
focused on MNCs. The rumored further tightening of thin capitalization rules was not announced.
Further detail in relation to these proposals is not expected before the Federal election to be held on July
2, 2016. However, we anticipate that these measures will be legislated regardless of the outcome of the
Federal election.
In detail
Tax paid by MNCs continues to
be a highly emotive and
politically charged issue in
Australia. Over the past few
years, the debate surrounding
this issue triggered an inquiry
by the Senate Economics
Committee into ‘corporate tax
avoidance.’ The committee
issued its most recent report on
April 22, 2016 after 20 months
of work (including 127
submissions and seven days of
public hearings), with more
likely to come. The tax measures
announced by the Government
as part of the Budget continue
the trend of recent years, both
locally and globally, to target
perceived ‘base erosion and
profit shifting’ (BEPS) by MNCs.
Diverted profits tax
The Government announced in
the Budget the introduction of a
DPT to apply to income years
commencing on or after July 1,
2017 (i.e., from January 1, 2018
for most US MNCs), whether or
not the relevant transactions
were entered into before that
date. This measure is intended
to ensure that MNCs pay ‘an
appropriate amount of tax on
profits made in Australia.’ It
also increases the ATO’s ability
to enforce compliance for
taxpayers ‘who do not cooperate with the ATO,’
particularly where the taxpayer
does not share information
about its offshore affiliates. The
Australian DPT is based on the
‘insufficient economic
substance’ aspect of the UK DPT
legislation, which has been
effective since April 1, 2015.
It follows the introduction of the
Multinational Anti-Avoidance
Legislation (MAAL), which took
effect in Australia on January 1,
2016. The MAAL was largely
modelled on the ‘avoided
permanent establishment (PE)’
aspect of the UK DPT
legislation.
The Government has released a
20-page DPT consultation paper
seeking comments by June 17,
2016. The DPT is expected to
have a gain to revenue of AUD
100 million per annum.
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Key features
In summary, the Australian DPT:
 applies only to significant global
entities (i.e., those groups with
global income of AUD 1 billion or
more). The Budget provides an
exclusion for circumstances where
the Australian operations are
relatively small (i.e., Australian
turnover of less than AUD 25
million);
 is intended to be a further
extension of Australia’s antiavoidance provisions;
 imposes a penalty rate of tax (40%
plus interest for late payment) on
profits transferred offshore
through related-party
transactions with ‘insufficient
economic substance’ that reduce
the global tax paid on the profit by
20% or more (i.e., less than 24%
tax rate);
 applies where it is ‘reasonable to
conclude,’ based on information
available to the ATO, that the
arrangement is ‘designed to
secure’ a tax reduction (tax
benefit);
 provides the ATO with wider
powers to reconstruct an
alternative arrangement on which
to assess the diverted profits
where the related-party
transaction is determined to be
artificial or contrived;
 where a deduction exceeds the
arm’s-length amount, the diverted
profits would be 30% of the
deduction. For all other cases, the
diverted profits would be based on
the best estimate of the profits
that can reasonably be made by
the ATO at the time;
 requires upfront payment of any
DPT liability, which can only be
adjusted following a successful
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
review of the initial assessment;
and
places the onus on taxpayers to
provide relevant and timely
information to the ATO on
offshore related-party
transactions to establish why the
DPT should not apply.
Unlike other Australian taxes, the
DPT will not operate on a selfassessment basis; a DPT liability only
arises when the ATO issues a DPT
assessment to the taxpayer (no later
than seven years after filing the tax
return).
A complex set of rules are proposed to
deal with the timing of ATO and
taxpayer procedures relating to the
issue of DPT assessments.
Observations: The DPT essentially is
an anti-avoidance provision which
seems intended to provide the ATO
with broad powers to reconstruct
arrangements and estimate the
associated transfer pricing
adjustments. The DPT takes a ‘pay
now and argue later’ approach
designed to accelerate disputes.
In many cases, MNCs that have
restructured their Australian
operations to comply with the MAAL
will need to consider the DPT.
There is no mention made of the
interaction between DPT and
Advanced Pricing Agreements (APA).
However, we have no reason to believe
that the prospect of a DPT should
affect the APA programme.
The UK DPT contains a number of
specific exemptions from the ‘effective
tax mismatch’ requirement for
transactions with charities, pension
plans, sovereign wealth funds, and
certain widely held funds. The
consultation paper does not mention
the proposed treatment of such
transactions.
Further, unlike the UK DPT, there is
no exclusion for loan relationships.
However, where debt levels fall within
the thin capitalization safe harbour,
only the pricing of the debt and not
the amount of the debt will be taken
into account in determining any DPT
liability. This seems to suggest that
the DPT will have minimal practical
impact on related-party financing and
that pricing of related-party debt will
remain critical.
We anticipate that the proposed DPT
will be of particular interest to many
US MNCs, especially with regard to
the digital and technology industry,
marketing and procurement activities,
captive insurers, and leasing.
Implementation of anti-hybrid
legislation
The Government announced in the
Budget that it will implement the
OECD-developed anti-hybrid rules
(refer to the PwC Tax Policy Bulletin
for an overview), with some minor
modifications as recommended by the
Board of Taxation (the Board) in its
report to the Government, which was
released publicly as part of the Federal
Budget announcements.
The Australian anti-hybrid rules are
intended to apply to payments made
on or after the later of January 1, 2018
or a date that is six months after the
relevant law is enacted. As a general
rule, pre-existing arrangements will
not be grandfathered, nor will
transitional rules be introduced.
 Observation: This prospective start
date is welcome news given the
inherent complexity of the antihybrid rules and the substantial
change in law we expect will be
required. Importantly, this should
give MNCs time to analyze the
proposals and restructure where
necessary.
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Tax Insights
Imported mismatch rule
The Board has recommended that the
Government proceed with the
imported mismatch rule (IMR)
despite the enormous complexity. In
essence, the IMR is designed to
prevent taxpayers from indirectly
shifting to Australia tax advantages
arising from a hybrid mismatch in
another jurisdiction that has not
adopted anti-hybrid rules. The
proposed IMR will impact a number
of US MNCs with Australian
investments.
The IMR would have broad
ramifications as it extends to both
financing and non-financing
deductible payments. For example,
deductions could be disallowed in
Australia for a broad range of
payments, including interest,
royalties, rents, and payments for
services and goods (including trading
stock).
 Observation: We anticipate that
the Government will face
significant difficulties in drafting
this legislation and ensuring that it
appropriately targets the intended
arrangements without
inadvertently extending its scope
beyond the policy objective.
No change to thin capitalization
limits
Despite strong pre-Budget
speculation, the Budget did not
include any changes to Australia’s thin
capitalization rules.
However, we expect that this is an
area that the Government will
continue to monitor, particularly
given the guidance provided by the
OECD on this topic.
Adoption of new OECD transfer
pricing guidance
The Government has proposed
adopting revised transfer pricing
guidance issued by the OECD in 2015
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(i.e., the OECD’s final report on
Actions 8 to 10 of the BEPS Action
Plan). This change means that
taxpayers will need to consider the
new OECD transfer pricing guidance
when they self-assess whether they
have complied with the Australian
transfer pricing rules. The Budget
proposes that the new guidance will
be incorporated into Australian law
for years beginning on or after July 1,
2016.
The TTC designed by the Board is a
set of principles and ‘minimum
standards’ to guide voluntary
disclosure of tax information by
businesses. Further details are
available here.
 Observation: The new transfer
pricing guidance will apply to all
MNCs. Once the new guidance is
incorporated into Australian law,
we expect MNCs will need to
confirm whether their transfer
pricing documentation addresses
this guidance in order to satisfy the
documentation standard required
for transfer pricing penalty
protection.
Substantial increase in penalties
Proposed transparency measures
Mandatory disclosure of ‘aggressive’
tax arrangements
The Government has issued a
Discussion Paper on the OECD’s
proposals for Mandatory Disclosure
Rules. These require tax advisers
and/or taxpayers to make early
disclosures of aggressive tax
arrangements (often before income
tax returns are filed), in order to
provide the ATO with timely
information on arrangements that
may be deemed to potentially
undermine the integrity of the income
tax system.
Voluntary tax disclosure code
In February 2016, the Board provided
a Report to Government on a
voluntary tax transparency code
(TTC). The Government embraced
the Report in the Budget as one of the
key elements of a stronger tax
compliance regime, encouraging all
companies to adopt the TTC from the
2016 financial year onward.
 Observation: The TTC is voluntary.
However, we anticipate that many
Australian and foreign MNCs will
choose to publish a tax
transparency report.
The Budget proposes a significant
increase in the maximum penalties
that can apply for failing to disclose
information to the ATO. This would
apply to ‘significant global entities’
(i.e., entities that are part of a group
with global turnover of AUD 1 billion
or more). The new maximum penalty
would be AUD 450,000 (up from the
current AUD 4,500) for failing to meet
disclosure obligations. For example,
this would include entities that fail to
meet their reporting requirements
under the country-by-country
reporting legislation that was enacted
in 2015.
ATO tax avoidance task force
The Government plans to provide the
ATO with increased funding (AUD
679 million over the next four years)
to form a ‘tax avoidance taskforce.’
The taskforce will include around
1,300 ATO officers, including more
than 390 new specialized officers. The
taskforce will conduct compliance
activities focused on MNCs, large
public and private groups, and highwealth individuals. This is expected to
raise AUD 3.7 billion (over the next
four years). MNCs should continue to
be prepared for a high degree of
scrutiny over their Australian taxation
arrangements.
FIRB tax conditions
In February 2016, the Government
announced that tax conditions would
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be formally applied to the clearance by
the Foreign Investment Review Board
(FIRB) of foreign investment
proposals which are seen to present a
risk to Australia’s revenue base. In the
Budget, the Treasurer released further
details based on feedback from the
business community. Further
information is available here.
 Observation: FIRB approval may
be required in relation to internal
re-organisations as well as M&A
transactions. Our experience is that
tax conditions are being regularly
imposed by FIRB and therefore tax
input is required in relation to the
FIRB application as well as
compliance with the tax conditions.
The takeaway
MNCs with activities or investments
in Australia should consider how
these measures could affect their tax
positions, if enacted.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
International Tax Services (Australia Tax Desk – United States)
Neil Fuller, Vancouver
+1 778 987 3449
[email protected]
Jessica W. Wong, New York
+1 646 471 7713
[email protected]
Cherie R. Mulyono, New York
+1 646 471 9899
[email protected]
Peter Collins
+61 3 8603 6247
[email protected]
Robert Hines
+61 2 8266 0281
[email protected]
Michael Taylor
+61 3 8603 4091
[email protected]
Nick Houseman
+6 12 8266 4647
[email protected]
Greg Weickhardt
+61 3 8603 2547
[email protected]
Sarah M. Stevens
+61 2 8266 1148
[email protected]
Global Tax (Australia)
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