The Australian Tax Office (ATO) published the final form of the Practical Compliance Guideline (PCG) 2018/5 Diverted Profits Tax (DPT) and Law Companion Ruling (LCR) 2018/6 Diverted profits tax as complements to the administrative guidance ATO provided in Law Administration Practice Statement (PSLA) 2017/2 Diverted profits tax assessments.
The DPT is introduced to make significant global entities (SGEs) pay tax that properly reflects the economic substance of their activities in Australia, preventing tax avoidance by diverting profits offshore through contrived arrangements with related parties. The measure is also intended to encourage taxpayers to provide information to the Commissioner to allow for the more timely resolution of tax disputes.
The DPT applies to DPT tax benefits obtained in income years commencing on or after 1 July 2017, even if the scheme related was entered into or commenced before that time. Where the DPT applies, the Australian Commissioner may make a DPT assessment imposing tax at a rate of 40% on the diverted profit.
Both legal documents have a summary of the issues raised in the feedback received from a previous public consultation process and the responses from ATO. The publication of the PCG aims to provide taxpayers with greater certainty by better understanding ATO’s approach to assessing risk of the tax arrangement and determining the level of engagement based on the assessment of the risk. It mainly introduces the compliance approach, the risk assessment framework, the client engagement framework and relevant documentation.
The LCR contains guidance for specific issues such as principal purpose test, sufficient foreign tax test and sufficient economic substance test. It aims to help affected taxpayers and their advisors understand how the DPT law will apply, and to clarify key concepts introduced by the measure.
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