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Australia co currently receives a 5 margin on product

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Australia Co currently receives a 5% margin on product sales (being $5 million per year).Based on the information available, the Commissioner is of the view the principal purpose of therestructure is to obtain a tax beneft — namely, understatement of Australian income. The Commissionerhas concerns whether the subsidiary has economic substance. As Australia Co does not provide theCommissioner with any further information or documents supporting its transfer pricing position:• the Commissioner concludes, on the basis of limited information available, that the income attributedto Australia Co would have been $30 million if the Australia Co had purchased the goods directly fromSoft Co• the DPT tax beneft is therefore $25 million (i.e. $30 million – $5 million income)• the DPT is imposed at a penalty rate of 40% on the $25 million DPT tax beneft — this results in a DPTliability of $10 million (i.e. $25 million×40%) which Australia Co must pay within 21 days.Over the review period, Soft Co provides more information to the Commissioner that supports that theincome of Australia Co should be $20 million (rather than $30 million) and the DPT tax beneft is revisedto $15 million (i.e. $20 million – $5 million income). Accordingly, the DPT assessment would be amendedto $6 million ($15 million×40%).Australia Co could self amend its Australian income tax assessment to recognise the $15 millionadditional income and pay income tax at the 30% rate (being $4.5 million additional tax plus penaltiesand interest). Australia Co’s DPT liability would then be reduced to nil.Source:Explanatory Memorandum, Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017(Cwlth) and Diverted Profits Tax Bill 2017 (Cwlth), para. 1.183, accessed February 2020, parlInfo/download/legislation/ems/r5805_ems_4d1cc543-7e2e-4372-9893-16edcab88f9e/upload_pdf/618592.pdf.QUESTION 10.4NedlCo is a global group based in the Netherlands, with a subsidiary in China, NedlCn, which man-ufactures products that are then shipped to the retail outlets of an Australian subsidiary, NedlAu.Prior to the products being dispatched by NedlCn, they are sold to another group entity, NedlLT,in a low-tax jurisdiction, which then on-sells the products to NedlAu and arranges for shipping.Substantial profts are accumulated by NedlLT.Consider the Commissioner’s likely response to such an arrangement with the enactment ofthe DPT.What strategy would you recommend that NedlCo adopt upon the issue of a DPT assessment?Although the Part IVA measures directed at international tax avoidance activities are extensive, theATO nevertheless is burdened with the responsibility to identify where such activities result in an avoidanceof tax in Australia. The next part of this module explores the ATO’s investigative powers in the internationalcontext and, especially, the opportunity presented by tax information exchange agreements.

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