The Australia Federal Budget introduced fundamental tax measures that reinforce the Government commitment to tax transparency. Since the released in October 2015 of the final reports from the OECD BEPS Action Plan, Australia has taken significant steps to address the issue of tax avoidance including

1. Updated transfer pricing rules;
2. Reinforcing the thin capitalisation rules; 
3. Implementing the Multinational Anti-Avoidance Law (MAAL) in December 2015:
4. Implementing the Country-By-Country Reporting

The team at Transfer Pricing Solutions have summarized our take on the budget measures and the impact on companies. To keep it simple, we are going to break each point down to WHAT (what is the measure) and HOW (How does this affect you).

1. New diverted profits tax

WHAT: Proposed Diverted Profit Tax (DPT) at 40% on profits moved offshore, via related party transactions lacking economic substance, with the aim of reducing the tax due on profits generated in Australia. The DPT apply in cases where it is reasonable for the ATO to conclude that such an arrangement is deliberately intended to achieve a tax reduction. A penalty will also be imposed in those cases where the ATO deems the DPT applies.

The DPT is intended to raise additional revenue of around $100 million per year from 2018-19; the Government has made available a Consultation Paper, which is open for submissions up to 17 June 2016.

HOW: The DPT will impact large multinationals (turnover of AU$1 billion or more) and will take effect on 1 July 2017. Taxpayers will have to provide relevant information on offshore related party transactions to prove to the ATO as to why the DPT do not apply.

If the DPT is implemented, it will become critical for Multinationals to prepare transfer pricing documentation to support the international related party dealings and address the economic substance of the transactions. The documentation can be use as protection against the application of the DPT by the ATO.

2. BEPS and the new anti-hybrid rules

WHAT: Implementation of BEPS Action Plan  2 ‘Neutralise the effects of hybrid mismatch arrangements’. With this announcement, Australia is the first country to propose the implementation of anti-hybrid rules that will apply from 1 January 2018 or once the relevant legislation is passed.

HOW: Taxpayers should monitor the changes in legislation in the countries of operations to understand the interaction of the proposed anti-hybrid rules with foreign legislation. The proposed anti-hybrid rules are expected to affect the tax outcomes of financing structures commonly used in Australia. Taxpayers should examine how the rules will potentially apply to their (1) financing structures and associated tax (2) Financial reporting (3) Legal and/or treasury issues potentially faced including the possibility of having to refinance existing structures.

3. Transfer pricing: new OECD guidelines

WHAT: Modification of tax legislation to ensure consistency between Australia’s transfer pricing rules and the new OECD Guidelines resulted from the BEPS Action Plan. The Government announced the new rules will provide guidance on how to price intellectual property and other intangibles and will clarify that the economic substance prevails over the contractual form when taxing the transaction (s).

HOW: Taxpayers should keep monitoring the legislation developments. The proposed changes will affect international related party dealings involving intangibles; it will be critical to address the economic substance of the transaction when preparing transfer pricing documentation.

4. A new Tax Avoidance Taskforce

WHAT: New Tax Avoidance Taskforce with a team of approximately 1,300 people including 390 new specialized officers. For this purpose, the ATO will receive additional funding of approximately AU$679 million over four years. The Taskforce will be led by the Commissioner of Taxation and it is expected to provide progress reports to the Government.

HOW: The Taskforce will lead the implementation of the BEPS Action Plan and will also provide international leadership on multinational tax avoidance. The Taskforce will target multinationals and high wealth individuals, potentially raising more than $3.7 billion between now (2016) and 2020.

5. A new regime for disclosure

WHAT: New rules requiring tax and financial advisors and/or taxpayers to report potentially aggressive tax planning schemes. A discussion paper titled OECD proposals for mandatory disclosure of tax information’ has been released and it is open for submissions up to 15 July 2016.

HOW: Advisors and taxpayers should keep monitoring the implementation of the new reporting disclosures.

6. Increased penalties

WHAT: Increased on maximum penalties currently applied to taxpayers that fail to file timeously on time tax returns, business activity statements, country-by-country reports and similar tax documentation. Also increased penalties for taxpayers that provide false and misleading statements to the ATO.

HOW: The increased penalties will apply to Entities that are part of a Group with global turnover of AU$1million and will take effect on 1 July 2017.

Have questions about how the new budget might impact your company? Please contact Transfer Pricing Solutions on