On 26 September 2018, the Australian Taxation Office (ATO) issued, in relation to the Diverted Profits Tax (DPT), a final law companion ruling (LCR 2018/6) and practical compliance guideline (PCG 2018/5). The DPT is relevant for significant global entities (SGEs).

The LCR and PCG follow public consultations on earlier drafts in February and March 2018. Both the LCR and PCG have additional content and refinements which improve the transparency of the DPT laws and engagement of taxpayers with ATO but there is no fundamental change since the earlier drafts. For a detailed analysis of the draft PCG, see EY Global Tax Alert, Australian Taxation Office releases draft practical compliance guide on Diverted Profits Tax, dated 7 February 2018.

The LCR introduction outlines the criteria for the DPT to apply, including the principal purpose test. Submissions sought a clearer statement that the DPT is a measure of last resort and the LCR goes some way in stating that "while the DPT provisions are not provisions of last resort, consistent with the operation of Part IVA generally, it is expected that the DPT will be applied in limited circumstances."

The PCG assists SGEs with their engagement with the ATO in relation to the DPT risk management by setting out:

• The ATO approach to assessing risk
• The level of engagement taxpayers can expect from the ATO based on the ATO risk assessment
• The level of engagement the ATO expects from taxpayers based on their own risk assessment
• High and low risk scenarios for the sufficient economic substance test (SES) including two new scenarios

The PCG contains some useful new and revised content including:

• The interaction of advance pricing arrangements (APAs) and the DPT, including how to seek coverage of the DPT in APAs
• Framing questions for the principal purpose test and expanded transaction-specific framing questions
• An SES scenario covering a marketing hub which is low risk (a high-function foreign hub company with significant staffing and responsibilities)
• An SES scenario of a financing arrangement which is high risk (involving a swap with a related low-taxed company which has low functional, staffing and financial capacity)

The PCG and LCR are important for all SGEs including members of large groups headed by private companies, trusts or investment entities, which may not be SGEs under the existing definition but would be categorized as an SGE under the broader definition introduced in Parliament in September 2018.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Sydney

• Sean Monahan
  sean.monahan@au.ey.com
• Anthony Seve
  anthony.seve@au.ey.com
• Paul Balkus
  paul.balkus@au.ey.com

Ernst & Young (Australia), Perth

• Andrew Nelson
  andrew.nelson@au.ey.com

Ernst & Young LLP, Australian Tax Desk, New York

• David Burns
  david.burns1@ey.com

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ATTACHMENT

PDF version of this Tax Alert