The introduction of a so-called “Google tax” on large multinationals that are suspected of shifting profits to low-tax jurisdictions is a “wake-up call” to all potentially affected companies, according to one tax expert.
The federal government on Tuesday released draft legislation for its diverted profits tax, which was among the tax measures included in the May budget.
Under the proposed arrangements, the Australian Tax Office will be handed increased powers to impose a tax penalty on large multinationals that are found to have shifted Australian profits offshore to avoid paying tax.
The penalty will apply to large companies with global revenues of at least $1 billion, which are found to have arrangements that reduce their tax liabilities in Australia without a corresponding increase in tax liabilities in other countries.
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These companies will be hit with a 40% corporate tax rate, instead of the 30% rate, if the tax they pay overseas is less than 80% of the reduction in their Australian liabilities.
Many Australian companies will be exempt from the tax as companies with Australian revenue of less than $25 million are not covered by the changes.
The government plans to come into effect on July 1, 2017, following a public consultation period that will run until December 23.
Treasurer Scott Morrison said on Tuesday the scheme is expected to raise $200 million over the budget forward estimates, while also working to “encourage greater openness with the ATO and allow for speedier resolution of disputes”.
Mark Molesworth, tax partner at BDO, described the increased ATO powers as “a figurative gun-to-the-head” for Australian subsidiaries of multinationals or global entities that are based in Australia.
“The new ATO powers effectively mean that a company can be forced to participate in a review and they cannot challenge the ATO findings based on new evidence not shared with the ATO,” he said.
“Companies will be limited to what they disclose during the review period. Therefore affected companies should be prepared for an open books review.”
However, CPA Australia has warned that countries opting to address base erosion and profit shifting in a unilateral manner could have unintended consequences.
“Internationally, the G20 and OECD are driving the Base Erosion Profit Shifting agenda, which is focussed on addressing double non-taxation,” Paul Drum, head of policy at CPA Australia, told SmartCompany.
“We have concerns that if countries such as Australia act unilaterally, then it could actually exacerbate problems associated with the current mismatches between different countries’ tax rules.
“Legislators need to take care when working to protect their tax bases that they don’t create situations where businesses ultimately face double, triple or even quadruple taxation on the same income.”
The diverted profits tax was one of a number of measures announced in the May budget to tackle tax avoidance by multinationals, private companies and high-wealth individuals.
Also announced in May was a $679 million Tax Avoidance Taskforce within the ATO and an increase in penalties for large global companies that breach tax reporting obligations, from $4,500 to $450,000.