On 2 October 2014 the Australian Senate referred the matter of corporate tax avoidance and aggressive minimisation to the Economics References Committee for inquiry and report by the first sitting day of June 2015 and, after repeated extensions, on 2 May 2016 the Senate granted the committee a further extension to report by 30 September 2016.
The committee’s interim reports clearly indicated that the Australian taxation system was being gamed by foreign-based multinationals using aggressive tax practices such as avoidance of permanent establishment, excessive debt loading, aggressive transfer pricing, and the use of tax havens.
On 11 December 2015 the C’wealth Multinational Anti-Avoidance Law (MAAL) came into effect and, its provisions applied from 1 January 2016 to corporations with global annual incomes of AU$1 billion and over and consolidated groups with a parent entity having a global annual income of AU$1 billion and over.
MAAL was designed to counter the erosion of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid a taxable presence in Australia, adding to anti-tax avoidance measures already found in the Income Tax Assessment Act 1997.
However, less than three months later on 26 April 2016, the Australian Taxation Office (ATO) discovered that some taxpayers are entering into artificial and contrived arrangements to avoid the application of the MAAL.
On 3 May 2016 the Turnbull Government released a consultation paper on its proposed Diverted Profits Tax (DPT).
The DPT will impose a 40 per cent tax rate on corporations and consolidated groups with global annual incomes in excess of AU$1 billion that reduce the tax paid on the profits generated in Australia by more than 20 per cent by diverting those profits to low tax jurisdictions. The government hopes to have this new law in place by 1 July 2017.
According to the consultation paper both the Multinational Anti-Avoidance Law and the Diverted Profits Tax are based on Britain’s diverted profits tax introduced on 1 April 2015.
One can only hope that both these laws will be more effective than the U.K. law on which they are based. Because less than eight months after that law was introduced it was found to be ineffective in stopping large multinationals from diverting profits to low tax jurisdictions. As an example, Google with its U.K. advertising revenue held in low taxing Ireland had not had to make payments under the new diverted profits tax.
There is no way that multinationals operating in Australia will not mount legal challenges if the ATO attempts to impose penalties under provisions in MAAL and DPT.
To some extent the loser will always be federal government revenue because, successful or otherwise, the corporate millions spent in legal fees fighting the tax man are apparently tax deductible.
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