Govt introduces new “Google tax” laws

Australian Treasurer, Scott Morrison, has introduced the government’s so-called “Google tax” legislation, aimed at preventing large multinational companies from diverting profits generated in Australia to lower-tax regions, into parliament.

Morrison introduced the Diverted Profit Tax Bill 2017 into the House of Representatives on 9 February, along with the associated Treasury Law Amendment (Combating Multinational Tax Avoidance) Bill 2017.

In the words of the Bill's explanatory memorandum, the proposed legislation “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,” it stated.

The new legislation, popularly known as a “Google tax”, follows on from several government initiatives and public inquiries concerning tax avoidance, along with policy development work by the Organisation for Economic Cooperation and Development (OECD).

A series of parliamentary inquiry hearings carried out in 2015 saw representatives from some of the largest technology companies operating in Australia, including Apple, Microsoft, and Google, grilled by a Senate committee panel about their tax practices in Australia.

During the hearings, Google Australia’s then managing director, Maile Carnegie, revealed that the company generated $58 million in revenue during 2013, with profits exceeding $46 million, yet paid $7.1 million tax for that year – well below Australia’s 30 per cent corporate tax rate.

Separately, Apple has received criticism in the past for employing the so-called "double Irish Dutch sandwich" technique to funnel money through other countries to lower its payable tax rate.

In 2013, Labor MP, Ed Husic, singled out Apple over its tax practices, questioning how the company's local operation could accrue $5.5 billion in costs.

"How? They don't manufacture here, there are no factories here. I don't know what their R&D effort is here," he said at the time, according to a report by ZDNet. "They've got a growing number of retail outlets, which I'm happy about — they're creating jobs locally — but surely those outlets don't cost AU$5.5 billion to maintain?"

The government released draft legislation for the implementation of the Diverted Profits Tax in November last year, calling for industry feedback. At the time, the proposed legislation was expected to raise $200 million in revenue over the government's budgetary forward estimates.

The new laws, if passed, will apply to large technology companies operating in Australia, where a large international corporation shifts profits offshore through arrangements with associated parties in jurisdictions with lower corporate tax rates than apply in Australia.

The new measures, which were first proposed on 3 May 2016 as part of the 2016-17 Budget will apply in relation to tax benefits for an income year that starts on or after 1 July 2017, if they pass both houses of parliament.

In its current form, the legislation will apply to multinational corporations that have global income of more than $1 billion and Australian income of more than $25 million.

Under the Bill's provisions, if the diverted profit tax applies to such an arrangement, the Australian Commissioner of Taxation may issue a diverted profit tax assessment to the relevant company, and the Diverted Profits Tax Act 2017 will impose tax on the amount of the diverted profit at a penalty tax rate of 40 per cent.

Where the Commissioner makes a diverted profit tax assessment, the company in question will have 21 days to pay the amount set out in the diverted profit tax assessment.

Following the issue of a notice of a diverted profit tax assessment, the company will be allowed to provide the Commissioner with further information disclosing reasons why the tax assessment should be reduced during a period of review.

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If, at the end of that period of review, the company in question is dissatisfied with the tax assessment, or the amended assessment, the organisation will have 60 days to challenge the assessment by making an appeal to the Federal Court.

“The DPT [diverted profit tax] 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,” the Bill’s explanatory memorandum stated. “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.”

According to the government, the proposed changes to the transfer pricing regime are estimated to affect approximately 4,400 businesses that have potential cross border dealings with related parties.

Additionally, there are approximately 1600 companies that are likely meet the significant global entity definition outlined in the legislation, and have Australian turnover of more than $25 million. These companies could need to consider if their practices would be within the scope of the new tax, according to the government.

Of these 1600 companies, it is estimated that approximately 130 organisations may need to engage with the ATO to either obtain certainty on the application of the diverted profit tax including amending their tax return or settling their tax liability.

Meanwhile, a small proportion of the higher risk companies - around 8 per cent - are assumed to require a restructure and would need to take steps to implement a new business model in accordance with the preferred restructure option.

For these higher risk companies, the total external costs of the proposed scheme are estimated to be approximately $1,000,000 per entity, and the total internal costs are estimated to be around $75,000 per entity – inclusive of the costs of the initial advice and assessment activities, as well as the evaluation, planning and documentation activities.

It is expected that the legislation, if passed, will result in at least $100 million in revenue during the 2018-19 and 2019-20 financial years, according to the explanatory memorandum. The new measures have a compliance cost impact of $16.4 million per year for 10 years.

Meanwhile, the Combating Multinational Tax Avoidance Bill 2017 includes further measures to ensure that multinationals pay the "right" amount of Australian tax in Australia.

The new legislation increases the maximum penalty for large multinationals by a factor of 100 in cases where they fail to lodge tax documents on time. The government is also doubling the penalties for large multinationals when they make false or misleading statements to the ATO.

The failure to lodge penalty for a significant global entity is $90,000, which would apply where a document is lodged up to 4 weeks late. The maximum penalty, where a document is late by more than 16 weeks, is $450,000.

For large entities, this means that failure to lodge penalties increase by a factor of 100, compared to the original maximum penalty of $4,500

Under the new legislation, the maximum administrative penalty for significant global entities that fail to comply with their tax reporting obligations will increase to $525,000.