Australia’s Google Tax Explained

24 April 2017

Australia-based reports that the Australian Taxation Office issued a combined AUD$2.9 billion in tax bills this month to seven multinationals, including Apple, Google and Microsoft. The article explains that the ATO’s efforts are part of “an unprecedented crackdown on offshore entities” that includes an audit of 59 multinationals. The audits are being carried out in part by the ATO’s recently formed Tax Avoidance Taskforce.

The timing of ATO’s actions may come as a surprise. We are after all still about three months shy of July 1, which is the effective date of Australia’s widely heralded diverted profits tax (DPT). As we explained last May, the DPT — informally known as the Google tax — was announced as part of Australia’s 2016-2017 federal budget. It’s similar to the UK legislation of the same name and aims to combat tax avoidance by large multinationals. The DPT was passed into law late last month, and given its significance and fast-approaching effective date, we’re publishing a summary of it here.

What is Australia’s diverted profits tax?

The Australian Treasury issued a press release last month explaining that the new diverted profits tax “will prevent multinationals shifting profits made in Australia offshore to avoid paying tax … and is expected to raise $100 million in revenue a year from 2018-19.” As mentioned, the law will go into effect on July 1, 2017.

The DPT complements existing anti-avoidance measures such as Australia’s multinational anti-avoidance law (MAAL) and recent ATO transfer pricing guidance. The DPT will impose a 40 percent rate of tax (payable immediately) on diverted profits. (This is considerably higher than the UK DPT’s 25 percent rate.)

What companies will be affected by the DPT?

Australia’s DPT will only apply to “significant global entities.” This is defined as multinationals with a global income exceeding AUD$1 billion and an Australian income exceeding AUD$25 million. This includes members of accounting consolidated groups when the parent entity’s global income exceeds AUD$1 billion.

The DPT will not apply to certain entity types that the ATO deems “low risk from an integrity perspective,” including managed investment trusts and foreign pension funds. In a possible reassuring nod to nervous foreign investors, the ATO website stresses that it is “developing a robust internal DPT administrative oversight framework” to ensure that the “DPT will only be applied in appropriate circumstances and is focused on tax avoidance arrangements by related parties to divert profits offshore.”

An Australia Treasury report released last month estimates that as few as “130 taxpayers may need to engage with the ATO on the application of the DPT.” Of course, those taxpayers — including the three mentioned at the beginning of this post — are sure to attract press attention, raising awareness among all multinationals operating in Australia.

Why did Australia pass the DPT?

Officially, the Treasury website page indicates that the DPT will not only prevent profit diversion, but “also encourage significant global entities to provide sufficient information to the ATO to allow for the timely resolution of tax disputes.” Treasury adds that the DPT will “encourage greater compliance” with all tax obligations, including transfer pricing rules, and will “encourage greater openness with the ATO.”

The DPT may also have been put in place to reduce public anger over Australia’s plan to lower corporate tax rates from 30 percent to 25 percent over the next decade. As The Financial Times notes, “tax avoidance has become a major political issue in Australia, where the economy has slowed over recent years due to the end of a decade-long mining investment boom and a fall in commodity prices.” An article in The Australian reports that “shadow assistant treasurer Andrew Leigh told parliament the move to impose [the DPT] … was an attempt to distract from the government’s $50 billion corporate tax cut plan.”

Could there be downsides to the DPT?

The DPT will of course diminish the profits of some massive multinational corporations. The Sydney Morning Herald notes that the DPT “has already had a big impact on the behavior of multinationals,” and that “a number of companies including tech giant Google restructured their tax affairs in anticipation of the laws passing and others have been negotiating with Tax Commissioner Chris Jordan.”

Few outside select corporate boardrooms will lament that trend, but there are other concerns. The Financial Times article I mentioned says that the DPT and related ATO efforts have “angered business leaders, particularly from US companies who say they are being unfairly targeted in the crackdown.” A representative from the American Chamber of Commerce in Australia (AmCham) is quoted in the article as saying, “Australia has long been a very attractive destination for foreign investment, especially from the US. So AmCham is alert to any regulatory or tax changes that could kill the goose that has laid so many golden eggs for so many investors.”

Other corporate tax groups, according to the Herald, feel the DPT will likely have unforeseen negative consequences for all Australian businesses, due in part to “limited appeal rights.” And the Times wonders if unilateral efforts like Australia’s and the UK’s respective Google taxes could impede OECD efforts to achieve a single global solution that would eliminate profit shifting.