On 2 February 2015 the ATO released its submission to the Senate inquiry into corporate tax avoidance. The ATO states that while the risk appetite amongst many multinational corporations has declined over the past decade, several key risk areas remain in relation to base erosion and profit shifting (BEPS). This supports current ATO activity that sees many Australian subsidiaries of multinational groups being put under the microscope of ATO audit activity on BEPS issues. The ATO submission also reveals detail on many other aspects of ATO efforts to crackdown on international tax avoidance.
Why was the Senate Inquiry into corporate tax avoidance and minimisation called?
Pressure from public interest groups around whether multi-nationals that generate profits in Australia pay their ‘fair share’ of corporate tax, coupled with growing international efforts to combat tax avoidance, allowed a motion by the Greens to launch an Inquiry into corporate tax evasion to be passed. On 2 October 2014 Parliament announced the Senate Economics Reference Committee would undertake an inquiry in respect of the perceived problem with corporate tax avoidance and aggressive tax minimisation.
The Inquiry is undertaken in the broader international context of the OECD’s review into base erosion and profit shifting (BEPS) across borders, which has been supported by the G20.
The Inquiry invited submissions from selected Australian and multinational corporations operating in Australia in respect of their tax arrangements, including their effective tax rates and strategies used to minimise tax. Advisors, special interest groups, individuals and the ATO were also invited to make submissions. Submissions were requested to respond to the specific terms of reference into the adequacy of Australia’s current laws, opportunities to deter tax avoidance and the capability and performance of the ATO to investigate and combat tax-avoidance behaviour.
What stage is the Senate Inquiry at?
Submissions to the Inquiry were lodged in early February 2015. The Inquiry will next hold hearings to question selected parties on issues raised in their submissions. Based on Parliamentary sitting dates, we anticipate the hearings will take place late March or sometime in April (it will need to occur before the May budget). The Inquiry is due to report to Parliament in June.
Submission from the ATO
The ATO submission provides information about tax office focus areas that are relevant to the Inquiry. The ATO submission states the ATO view that most taxpayers comply with the law voluntarily, while identifying that the greatest risk to the corporate revenue system is the growing BEPS behaviour exhibited by some multinationals. The submission states that ATO profit shifting models are run across public, private and foreign-owned taxpayer populations to detect potential risk areas. The ATO submits that resources will continue to be focused on those taxpayers perceived to be higher risk.
The ATO submission identities five key primary risk areas that will be targeted:
- Transfer mis-pricing. Non-arm’s length pricing of related party dealings is a recurring theme of ATO focus. Transfer pricing is a complex area that can lead to differing views, particularly about valuations and benchmarking involving comparability.
- Thin capitalisation. Use of valuations and complex mechanisms to fund Australian operations using excessive debt is another area earmarked for further scrutiny. The ATO believes additional tax deductions for interest payments are a significant contributing factor to eroding the Australian corporate tax base.
- International restructures of multinational enterprises. International restructures, such as adopting global supply chains, locating IP in low tax jurisdictions and establishing marketing hubs, are identified to be an issue with profit shifting consequences to warrant additional ATO focus.
- Complex financing arrangements. The use of hybrid structures and instruments is still seen as impacting Australia’s revenue base as a result of ‘stateless’ or untaxed income.
- Digital business platforms. Online groups that are perceived to have a large economic presence in a jurisdiction relative to their tax contributions are also singled out as a key target segment.
What might the result of the Inquiry be?
The Inquiry is likely to attract a large amount of media and public attention, as we have seen when similar parliamentary inquiries have been conducted in other countries. Whether any recommendations that would alter Australian domestic or treaty law in any meaningful way will be acted upon remains to be seen, but it is likely that the ATO will be subject to questioning about whether it has done enough to manage the risks in the international arena. It is also likely that the issue of tax morality will be raised with a number of multinational corporate groups. However it is not expected that any large scale incidence of tax avoidance will be found.
Overall the ATO submission reveals the tax office’s determination surrounding identification of risks and subsequent compliance approaches to tax avoidance issues. What is implicit from the concerns that the ATO has focused on is the likelihood of continuing scrutiny into Australian subsidiaries of foreign multinationals. The focus of the ATO will also likely move to more detailed reviews of Australian multinationals that have offshore related-party arrangements. It is now the time for multinationals to revisit their international structures that involve cross-border transfer prices and explore options to demonstrate the business and commercial objectives that is behind these positions. The presentation of evidence and documentation that soundly supports structures and pricing is key to the successful resolution of tax reviews and audits in this area.