In addition to transfer pricing and anti-avoidance rules, Australia imposes a diverted profits tax applying to certain structuring arrangements. This tax aims to ensure that multinational entities do not minimise the taxation they pay on economic activities in Australia. Under the diverted profits tax, entities that have significant global operations must disclose transactions which aim to divert Australian profits offshore. If they do so, they must pay an additional 40% tax on the profits from these arrangements.
These rules contain provisions so Australia can act on limited information to address information asymmetries and encourage taxpayer transparency and cooperation. Some arrangements where the diverted profits tax may arise include offshore procurement hubs, the transfer of intellectual property, restructures that transfer functions offshore to a centralized regional entity, and financing arrangements through interposed entities in treaty partner countries.
The OECD guidelines are the specified guidance material in applying this economic substance test. The OECD’s process of selecting a transfer pricing method, undertaking a functional analysis and search for comparables, and so on are used to assist in showing that the profits reflect the substance of the relevant activities. The ATO also considers whether or not the diverted profits tax applies to an APA application or not.