Key Points:

The inquiry raises some larger and perhaps more challenging questions about Australia’s corporate tax system and what is acceptable and unacceptable tax minimisation.

On 18 August 2015, the Senate inquiry into corporate tax avoidance tabled a long-awaited interim report, with the subtitle "You cannot tax what you cannot see". The eagerly anticipated interim report was leaked to the media prior to its release, with early suggestions that its contents would propose radical changes to address the scourge of corporate tax avoidance and aggressive minimisation.

The tabled interim report, by comparison, makes a number of tamer recommendations with an uncertain future in the current political environment.

Background to the Senate inquiry

On 2 October 2014, the Senate referred the inquiry into corporate tax avoidance to the Economics Committee. Submissions to the inquiry closed on 2 February 2015.

In April 2015, the first hearings were held in Sydney, Canberra and Melbourne. Further hearings were held in July 2015.

The Senate has granted a number of extensions to the Committee to report. It is anticipated that the final report will be tabled by 30 November 2015.

The interim report

The interim report makes 17 recommendations in four broad areas:

  • evidence of tax avoidance and aggressive minimisation;
  • multilateral efforts to combat tax avoidance and aggressive minimisation;
  • potential areas of unilateral action to protect Australia's revenue base; and
  • the capacity of Australia Government agencies to collect corporate taxes.

Many issues, in particular any proposed amendments to Australia's tax laws, are still being considered by the Committee and will be addressed in the final report.

The Senate inquiry has been led by the Australian Greens and Labor party. The interim report contains a dissenting report by the Federal Government senators.

Australia to go it alone: Multilateral or unilateral action?

The interim report supports Australia's continuing leadership role and involvement in the OECD’s BEPS Action Plan. The Committee acknowledges that the biggest risk to corporate tax in Australia is base erosion and profit shifting, in particular transfer pricing, debt funding and complex financing arrangements, international restructuring and digital business structures.

The Committee concludes that while the BEPS Action Plan is a significant step to addressing double non-taxation, it should not prevent Australia taking unilateral action to protect its corporate tax base where it would not conflict with the aims of the project or where it does not align with the risks to Australia’s tax base.

As such, the interim report leaves open the possibility of further tax reform and the strengthening of Australia's tax laws. It is likely that these issues will be addressed in the final report and may play a role in the Tax White Paper process, which intends to identify areas of reform to Australia's tax system, addressing challenges such as the digital economy and global tax competition. The Tax White Paper process began in March this year with the discussion paper. An options paper is due to be published in late 2015 addressing the community's submissions to the Discussion Paper.

Making transparent what you cannot see

The interim report has a strong focus on improving the transparency of the tax affairs of public and private companies operating in Australia, reflecting the increasing pressure, at a domestic and international level, on companies to ensure their tax practices are transparent.

The Inquiry considers that very little is known about the size and scope of corporate tax minimisation and avoidance, making it difficult for the government to address the problem. It concludes that transparency measures are one valuable mechanism to address the Government’s absence of information.

Some recommendations of the interim report reflect disagreements on the adequacy existing and proposed transparency measures. The Inquiry recommends that both public and private companies with a turnover of greater than $100million should have their tax information published by the ATO, rejecting the proposed amendments by the Government to limit the publication of tax information to public companies. Further, the Inquiry recommends a mandatory, rather than the voluntary tax transparency code as proposed by the Federal Government in the 2015-2016 Budget.

The interim report also recommends the establishment of a register of tax avoidance settlements, the publication of a joint report by the ATO and Australian Treasury and other Government agencies on aggressive tax minimisation activities employed by companies and the publication of country-by-country reports.

While the focus on transparency by governments and revenue authorities is unlikely to change, any transparency measures introduced must provide the right information for governments and revenue authorities to combat aggressive tax practices and protect their corporate base. As the debate surrounding the use of effective tax rates has revealed, information without adequate explanation can be misleading and create substantial difficulties for the Government, companies and the public.

Administration and the collection of corporate tax

The Inquiry also explored the capabilities of the Australian Taxation Office (ATO) and other government agencies to address corporate tax avoidance. The Commissioner of Taxation, Chris Jordan, and senior officials from the ATO made a number of submissions during the hearings on its staffing and resources following the budget cuts. The Commissioner and senior ATO officials paint a picture of business as usual.

Despite these submissions, the interim report doubts the capacity and resourcing of the ATO to appropriately respond to tax avoidance and aggressive tax minimisation by corporates. The Interim Report recommends an independent audit of the resourcing, funding and staffing of the ATO to ensure it can effectively address tax avoidance.

The interim report further emphasises the importance of adequately funding of the ATO to ensure it litigates corporate tax avoidance cases and does not settle due to an absence of resources. The Inquiry also supports the exchange of information at a government agency and internationally with other revenue authorities and the ongoing involvement of the ATO in the Forum of Tax Administrators to improve the collaboration and exchange of information. The inquiry also recommends adopting all legislative amendments proposed by ASIC.

Tackling the bigger issues

The inquiry raises some larger and perhaps more challenging questions about Australia’s corporate tax system. In particular, the interim report poses the question of what is acceptable and unacceptable tax minimisation and how this should be addressed by the legislature.

These questions, and those addressed in the final report, are likely to present the biggest challenges and changes to Australia's corporate tax regime, feeding into the Tax White Paper process and ongoing discussions on the tax affairs of multinational enterprises.