Diverted Profits Tax (DPT): 40% Penalty Rate on Significant Global Entities
Australia's DPT under Part IVA and Division 145 of TAA 1953 imposes a 40% tax on profits diverted offshore by significant global entities with A$1 billion+ global revenue, applying since 1 July 2017.
Scope and rate
The Diverted Profits Tax (DPT) imposes a 40% penalty rate of tax. This rate is higher than the standard 30% corporate tax rate and the 25% base-rate-entity rate. The DPT regime is imposed by Part IVA ITAA 1936 general anti-avoidance operating with new Division 145 in Schedule 1 to TAA 1953.
The DPT applies to significant global entities (SGEs). An SGE is a group with annual global income of A$1 billion or more.
The DPT regime applies to income years starting on or after 1 July 2017. Tax is payable upfront within 21 days of a DPT assessment, irrespective of any dispute.
Trigger tests
The Diverted Profits Tax (DPT) applies when certain trigger tests are met. The principal-purpose test is a key consideration; if a scheme’s main aim is to gain an Australian tax benefit, it may be subject to the DPT. A further trigger is the 80% tax mismatch test, which deems a DPT benefit exists when the foreign tax liability is less than 80% of the corresponding Australian tax.
Arrangements can be excluded from the DPT if they satisfy the sufficient economic substance test. This test considers whether foreign profits accurately reflect the economic activities of the entities involved. Similarly, the sufficient foreign tax test provides an exclusion where the increase in foreign tax is equal to or greater than 80% of the reduction in Australian tax. Thin capitalisation 2024 reform: earnings-based test may also be relevant in certain circumstances.
Finally, turnover thresholds apply. Generally, Australian turnover must exceed A$25 million for the DPT to apply, although a de minimis exception may be available.
Assessment and review
The Commissioner of Taxation has an extended amendment period of seven years for making Diverted Profits Tax (DPT) assessments. This is significantly longer than the standard amendment periods applicable to other income tax assessments. Corporate tax residency reform status
Following a DPT assessment, a 12-month review period applies. During this time, taxpayers can provide further information to dispute the assessment. If the Commissioner accepts this information, the DPT assessment may be reduced or replaced with an income tax assessment.
Standard objection and appeal rights are restricted in relation to DPT assessments. Court review is limited to the information considered during the 12-month review period. Once this review period concludes, the DPT assessment becomes final and binding.
Interaction with other regimes
The Diverted Profits Tax (DPT) operates in conjunction with the Multinational Anti-Avoidance Law (MAAL), which targets avoided permanent establishments. The DPT is not a ‘last resort’ provision; the Commissioner can issue a DPT assessment without first applying ordinary Part IVA. Public country-by-country reporting under Subdivision 815-E assists the ATO in gaining visibility of global profit allocation.
Transfer pricing adjustments under Subdivision 815-B may apply to the same arrangement as a DPT assessment. To prevent double taxation, DPT credits any increased Australian tax resulting from transfer pricing adjustments.
ATO guidance regarding the DPT is available in PCG 2018/5 (compliance approach) and LCR 2018/6 (technical interpretation).
Frequently asked
What is the DPT rate and how does it differ from the corporate rate?
The DPT rate is 40%, 10 percentage points above the 30% corporate tax rate and 15 points above the 25% base-rate-entity rate. It functions as a penalty rate to discourage profit shifting by SGEs.
Does DPT only apply to multinationals based outside Australia?
No. DPT applies to any significant global entity with A$1 billion+ global revenue including Australian-headquartered groups, where a scheme diverts profits to a related foreign entity that pays less than 80% of the equivalent Australian tax.