Australia’s capacity to capture the next wave of mining investment and to secure future export revenues depends critically on ensuring policy frameworks – not least our taxation system – are internationally competitive. Policy settings, particularly the taxation system, are crucial to attracting the investment needed to develop Australia’s minerals resources.
Australia’s company tax rate has been frozen for 15 years while competitor countries have progressively lowered their rates. Australia's company tax rate is now 5 percentage points above the developed country average and 8 points higher than the Asian average.
Mining tax ratios are at or near longer term highs, while official company tax data shows mining to be among the highest taxed industries in Australia. The minerals industry faced an effective tax rate of 54.3 per cent in 2014-15, the highest burden for nearly a decade, according to new analysis undertaken by Deloitte Access Economics for the Minerals Council of Australia (MCA).
The proposed DPT is a unilateral action that significantly departs from the international tax framework and Australia’s commitment to a global co-ordinated response to Base Erosion and Profit Shifting (BEPS). Introducing new tax rules that are ambiguous, complex and poorly targeted, creates significant uncertainty, significantly increases compliance burden and potentially impacts Australia’s international trade and investment.
Interaction of the DPT with Australia’s transfer pricing rules
The Organisation for Economic Co‑operation and Development (OECD) Transfer Pricing Guidelines (TPG), which provide guidance on the application of the ‘arm's length principle’, must remain the authoritative method to effectively and efficiently allocate the income of multinationals among taxing jurisdictions. The arm’s length principle reflects the international consensus on the appropriate allocation of profits between cross-border transactions.
There is concern that the DPT can be used to adopt non-standard transfer pricing positions where the ATO may not necessarily like the outcome of the arm’s length principle. Furthermore, if as expected Australia excludes Part IVA from mandatory arbitration (under the OECD Multilateral Instrument, BEPS Action 14), the ATO could use the DPT to both ignore both the arm’s length principle and circumvent the possibility of access to mandatory arbitration as a means of resolving a genuine cross border dispute with another tax authority.
This has the potential to result in significant uncertainty, double taxation and adversely impact Australia’s international trade and investment.
The DPT must be applied as a measure of last resort to target artificial and contrived arrangements that divert profits from Australia. Where the ATO has sufficient information to pursue matters under Australia’s existing tax laws, the DPT should not be able to be applied.
Penal anti-avoidance provisions should not be applied to bona fide commercial transactions. It is vitally important that the economic substance test is relevant and useful to ensure commercial transactions are excluded from the DPT. Restructuring legitimate business transactions is a wholly arbitrary exercise which will result in double-taxation.
‘Economic substance’ is a subjective concept, and whether an arrangement has economic substance will differ from one person to the next. Therefore, clear objective tests should be included having regard to whether there is sufficient economic substance, including:
- Where a cross-border transaction between two related parties is comparable to uncontrolled transactions, the arrangement will be taken to have sufficient economic substance.
- Where the non-tax financial benefits of the arrangement exceed the financial benefit of the tax reduction, the arrangement will be taken to have sufficient economic substance.
- The legislation should make direct reference to the OECD Transfer Pricing Guidelines as an expressed requirement for consideration of economic substance.
The MCA has included a number of recommendations and discussed these and other issues in further detail in the submission.