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Large business - what we are seeing
Proper governance should ensure that large public companies do not use tax havens for concealment purposes but, of course, that depends on the robustness of their governance framework. We are in fact seeing dealings by large business that may involve related companies in tax havens and we will be reviewing such arrangements.
We are also seeing businesses restructuring and, increasingly, transferring functions such as marketing to specialist hubs in low-tax jurisdictions. Transfer pricing may be an issue in these situations. Also, the use of tax havens in some large private equity deals may require monitoring of the payments made to general partners of the equity investing vehicles to determine, among other things, whether some part of the profit is properly attributable to Australian enterprises. In addition, we are looking at whether Australian resident taxpayers who control these offshore entities are correctly applying the foreign income attribution rules.
Large business - what we are doing
To improve compliance as well as our understanding of the use of tax havens and the impact on the Australian tax system, we are examining:
- significant payments that involve entities in tax havens (reported by AUSTRAC)
- transactions that involve related parties in tax havens (as reported in returns and schedules)
- restructures that involve tax haven entities.
We will review business restructurings that move corporate group functions, assets and risks to offshore related parties (for example, offshore marketing hubs), particularly if the offshore party is in a low-tax jurisdiction. We will ensure compliance with the law, including Australia's transfer pricing rules, and will check large payments such as guarantee fees paid to related offshore parties.
We are reviewing cross-jurisdictional restructures that reduce exposure to withholding taxes, such as deferred subscription arrangements. We are also reviewing large private equity arrangements, in particular those that involve tax havens and low-tax jurisdictions.
We are scrutinising foreign exchange transactions to ensure that the rules for gains and losses have been complied with, the quantum of the gain or loss is appropriate and that Australian entities have not incurred foreign exchange losses that should have been incurred by offshore related parties.
We are investigating any tax arrangements that we believe may be designed to distort capital gains tax outcomes, including those involving complex and changing offshore structures and synthetic or stapled securities or financial arrangements.
We also continue to examine transfers of important intangible assets offshore to low-tax jurisdictions. This includes the capital gains outcomes of the transfer, the pricing of any new related party dealings resulting from the transfer, and significant financing arrangements entered into around the time of transfer.
Small to medium enterprises - what we are seeing
Some small to medium enterprises (SMEs) are involved in offshore dealings similar to those that large businesses are involved with. Most SMEs disclose dealings involving related parties in tax havens but there are indications that in some cases ownership or control of the tax haven entity is being concealed.
In addition, fabricating deductions presents a risk in some of the smaller SMEs. A significant number of SMEs also make errors when they report complex, unusual or infrequent transactions and/or fail to properly report international transactions.
Small to medium enterprises - what we are doing
We are working to improve compliance by educating and helping SMEs understand and comply with their Australian tax obligations in relation to their international business dealings. We are also checking that businesses are properly declaring foreign-source income, accurately reporting international transactions by lodging appropriate schedules with their tax returns and claiming only legitimate expenses relating to overseas transactions.
We are focusing on businesses that have questionable transactions with tax havens and those involved in international tax schemes. We will also focus on profit-shifting arrangements, including more sophisticated transfer pricing issues related to royalty payments, patents, trademarks, rights and management fees.
In particular, we are focusing on arrangements that suggest aggressive tax planning, including transactions conducted or property held offshore in low-tax jurisdictions.
Highly wealthy individuals - what we are seeing
Most highly wealthy individuals (that is, taxpayers with net assets exceeding $30 million) have international transactions and offshore structures. In this area, we are seeing situations where some of these individuals have not disclosed relevant offshore interests, income and dealings. This can be with or without their advisers' knowledge.
In some other cases, taxpayers have set up complex offshore structures involving discretionary trusts and offshore companies and then denied that they had control over these entities. In one case, a tax haven entity was used to channel proceeds from the sale of an offshore business back to the individual. Offshore discretionary trusts were set up to receive payments from the sale, and these payments were progressively paid back to the individual and his wife in Australia in an attempt to circumvent the application of the transferor trust provisions.
There is one case where the arrangement is considered a sham and is being examined in Project Wickenby.
Highly wealthy individuals - what we are doing
We are investigating transactions and arrangements involving tax havens and other low-tax jurisdictions. Issues under examination include:
- offshore concealment of income and capital gains derived from both onshore and offshore sources
- non-transparent offshore structures and dealings
- arrangements seeking to circumvent the controlled foreign company, foreign investment fund and transferor trust regimes, and deemed present entitlement rules.
We are using information from AUSTRAC, overseas tax administrations and, where authorised, other government departments and law enforcement bodies to examine offshore transactions. In some cases, we make use of notices under section 264 of ITAA 1936 and examine, under oath, relevant players in suspect arrangements.
Case study: Concealed assets and income
Several highly wealthy individuals (HWIs) anonymously traded in Australian and offshore assets and failed to declare the profits in their income tax returns. Evidence we gathered indicated that they were using bank accounts in tax havens to conceal assets and income. We issued amended tax assessments involving significant additional tax, and imposed significant penalties.
Micro enterprises - what we are seeing
Technology and banking changes are making it easier for micro enterprises to transact offshore, including with tax havens. We are identifying some micro enterprises that have used tax haven structures to conceal ownership or control by Australian taxpayers and have used false documentation and invoicing to support false deductions.
Micro enterprises - what we are doing
To improve compliance we are focusing on businesses with dealings with tax havens, businesses identified as high-risk through Project Wickenby and similar projects, and promoters of tax schemes.
To address micro enterprises misusing tax havens, we are using information about international flows of funds to identify businesses outside the tax system. We may demand lodgment of returns, monitor transactions and review arrangements involving tax havens.
We are encouraging micro business taxpayers to make voluntary disclosures under the offshore voluntary disclosure initiative in relation to any undisclosed dealings with tax havens.
We will undertake reviews and audits of cases involving tax haven dealings.
Individuals - what we are seeing
Some migrants and visitors are not fulfilling their tax obligations. This may be inadvertent, through a lack of awareness, or may be the result of calculation mistakes or failing to seek appropriate assistance.
We are concerned that some individuals who transact with tax havens and promoters of tax schemes do not lodge returns and forms (or lodge them late).
We see some taxpayers not considering themselves to be residents - either deliberately or because they don't understand the law - and some taxpayers who don't understand how the Australian tax law applies to structures and offshore investments that were in place before they migrated to Australia.
We also see some individuals using international transactions with tax havens to avoid or evade tax.
Individuals - what we are doing
We're improving our activities to educate individuals about their tax obligations in relation to international dealings.
To improve compliance we are focusing on individuals who have dealings with tax havens (through the offshore compliance program) and those identified as high-risk (through Project Wickenby and other similar projects).
We're also demanding lodgment of outstanding returns and forms and we're reviewing and auditing the returns of individuals who use offshore credit and debit cards and who have higher risk transactions with tax havens.
We are encouraging individual taxpayers to make voluntary disclosures under the offshore voluntary disclosure initiative in relation to any undisclosed dealings with tax havens.
Sections within Tax havens in context
Last Modified: Tuesday, 18 October 2011