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Speech by Commissioner of Taxation Michael D'Ascenzo
to the Australia Israel Chamber of Commerce,
Melbourne, 5 July, 2012
Globalisation and dynamic changes in digital communications are making the world a smaller place.
Similarly, cooperative and collaborative relationships between taxpayers and tax administrators are adapting to global trends. So too are tax administrators who are working together in a more coordinated and cooperative way to address global tax risks. This is making the net tighter knit for those seeking to evade tax as well as exposing cross-country avoidance schemes to the transparency of greater scrutiny.
In this paper I would like to share with you some of the work the ATO has been doing to cooperate with tax administrations around the world and our contribution to international tax organisations, as well as promoting Australia as a good place in which to do business.
Starting from the proposition that Australia is a small but dynamic open economy, one can see the importance of fostering a global environment where administrative processes within Australia are clearly understood by businesses and their investors or would-be investors. Similarly, the costs of doing business in a global environment are reduced where there is a degree of similarity in administrative practices amongst Australia's trading partners.
It is, of course, not the ATO's role to advise on tax competition policy, but the ATO does have the international standing amongst fellow tax administrations to influence the modernisation of administrative practices globally.
For example, the ATO contributes to OECD deliberations on tax administration through forums such as the OECD's Forum on Tax Administration (FTA)1 and the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes2 (the Global Forum).
The ATO is also a founding member of the Joint International Tax Shelter Information Centre3 (JITSIC) and we contribute to the Study Group on Asian Tax Administration and Research (SGATAR) and the Commonwealth Association of Tax Administrators.
At the FTA, the ATO has contributed to major reports including the FTA's 'Study into the Role of Tax Intermediaries'4, which encouraged programs aimed at establishing an 'Enhanced Relationship' with large corporate taxpayers. The FTA's Large Business Network, which includes the ATO, is currently undertaking a study of FTA country experiences of the Enhanced Relationship concept five years on from the original report5.
The FTA study 'Addressing Tax Risks Involving Bank Losses'6 provides an overview of the tax treatment of banks' tax losses losses in 17 OECD countries, associated tax risks and their drivers and how revenue authorities can respond to mitigate the risks. In the context of the economic and financial crises of recent years, this collaborative work provides revenue authorities and other regulators with valuable support and the opportunity to share best practice. The strength of institutions such as banks and their regulators has been a key contributor to resilience of countries to weather such crises.
A recent FTA study report, 'Dealing Effectively with the Challenges of Transfer Pricing', focused on better ways for tax administrations to manage transfer pricing related compliance activities. It examines the practical steps tax administrations need to take to correctly identify transfer pricing cases that merit audit or enquiry and then to progress those cases to as early a conclusion as possible7.
The FTA has also looked at ways to streamline Mutual Assistance Procedures (MAP) so as to speed up relief from double taxation8. In relation to MAP, in recent years the ATO has worked actively with other jurisdictions and taxpayers in about 30 cases to resolve double taxation issues collaboratively.
The ATO has also played a leading role in developing the FTA's Small and Medium Enterprises Compliance Sub-Group Information Paper 'Right from the Start', which emphasises the need to create an environment that supports compliant behaviour upfront (such as education and assistance), while limiting opportunities for non-compliant behaviour9 (e.g. the use of withholding taxes).
The ATO, along with others, has also been influential in recommending to corporate boards the inclusion of material tax risks in their corporate governance and risk management frameworks. This has culminated in the OECD's 'Guidelines for Multilateral Enterprises' providing as a better practice guide that:
"Enterprises should treat tax governance and tax compliance as important elements of their oversight and broader risk management systems"10
Information sharing is a major function of tax administrations cooperating with each other and essential to creating a smaller and more connected world. Australia has an extensive network of double tax treaties and information agreements encompassing a total of 77 partner jurisdictions.11
For a long time now, the ATO has been recognised as active in exchanging information under our treaties. For example, recently, an outgoing exchange from Australia to South Africa resulted in an amended assessment with tax and penalties of $25 million. Recently, the ATO was presented with a series of "meritorious achievement" awards by some of our key exchange partners such as the US, the UK and Japan.
This goodwill (and adherence to DTA obligations) is reciprocated by our Treaty partners. For example, a series of Exchange of Information requests were used by the ATO to confirm residency in a case that involved transactions across multiple jurisdictions (including UK, Netherlands and New Zealand) in relation to $26.5 million in undeclared income.
At the Global Forum, Australia has been a strong advocate for global tax transparency. Australia has now signed 33 Tax Information Exchange Agreements (TIEAs) - many with former tax secrecy jurisdictions - 30 of which are currently in force.
To date, we have made 53 exchange of information requests to 13 different TIEA jurisdictions12. In many of these cases, the information we have received is being used in ongoing investigations. For example, Australia recently received some 2,500 pages of information from Singapore in response to an exchange of information request.
We are already seeing cases where this information has led to substantial adjustments, for example information provided by the Cayman Islands resulted in an adjustment to an assessment in the 2010-11 year of $36.3 million. Also in the 2010-11 financial year, we used information provided by the British Virgin Islands to issue an amendment worth $6.6 million (in relation to company ownership/control and banking issues).
We also participate in the FTA's Offshore Compliance Network. This is complementary to our focus on the abusive use of tax secrecy jurisdictions, including Project Wickenby13. For example, we are working closely with AUSTRAC, banks and overseas tax administrations to improve our ability to trace fund flows around the world and to identify Australians with income and assets hidden offshore.
AUSTRAC figures show that flows to prominent tax haven destinations have decreased significantly and flows of funds back into Australia have increased since 2007-08. As of the 2010-11 financial year, funds leaving Australia to those jurisdictions have decreased since 2007-08 by 22%.
Last year, the then Assistant Treasurer highlighted the improving level of international cooperation between tax agencies when he stated that
"Fortunately, we are seeing a deepening level of cooperation among tax administrations around the world, as well as a growing recognition that we can't work in isolation in order to respond effectively to the increasingly global nature of tax crime and evasion"14.
Australia currently chairs the OECD's Tax Crime Forum and our Targeting Tax Crime15 magazine has been highly commended by the OECD.
Some of this work has been conducted in tandem with overseas tax administrations either bilaterally or through our representatives at JITSIC.
JITSIC was established to support international co-operation for the identification, understanding and mitigation of risk arising from those who promote or take part in abusive tax schemes. While it is common to find the use of tax secrecy jurisdictions in such schemes, JITSIC's focus is not limited to schemes involving those jurisdictions or to facilitating exchange of information. It also extends to:
- obtaining and providing intelligence to support broader communication strategies aimed at increasing the community's awareness of the potential risks of promoting and investing in tax schemes;
- sharing practices and ideas on how to identify and address schemes;
- enhancing capability to use technology for the early identification of promoters and investors involved in schemes;
- identifying emerging trends and patterns to anticipate new abusive tax schemes; and
- improving knowledge of techniques used to promote cross-border abusive tax schemes.
In the 2010-11 year, the ATO worked with Canadian authorities via JITSIC to investigate a compliance issue with superannuation funds, uncovering $23.4 million in omitted tax.
The ATO also has ongoing involvement in a pilot project involving two joint audits with the USA. This has also resulted in the development of process documentation that can be used to support future joint and/or multilateral audits.
JITSIC also establishes and facilitates bilateral discussions between experts on matters of mutual interest either generically on a technical or procedural matter or specifically with respect to case technical matters. The latter has led to timely and important exchanges to support the development of stronger case positions and the sharing of better practices.
What I think will grow in importance as underpinning further co-operation and collaboration amongst tax jurisdictions is the 'Multilateral Convention on Mutual Administrative Assistance in Tax Matters' (the Multilateral Convention). In November 2011, Australia signed the Multilateral Convention. This convention provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. This co-operation ranges from exchange of information, including automatic exchanges, to the recovery of foreign tax claims.16
Whilst to date we have been very active in the international arena, in the year ahead we aim to:
- improve our ability to influence administrative and tax policy at a global level17
- better identify and mitigate global tax risks
- champion international transparency
- enhance Australia's commitment to supporting regional development; and
- develop strong partnerships with key trading partners and emerging countries.
For example at SGATAR we have built a strong relationship with jurisdictions in the Asian region. This includes our near neighbours18 as well as trading partners such as China, Japan and Korea.
The aim of SGATAR is to improve administrative practices of our respective tax administrations and to share expertise and experiences. Modern, fair and professional tax administration in the Asian region promotes regional development, trade and investment.
Australia does not have a Double Tax Treaty with Israel, nor is Israel currently a member of the OECD's FTA. However, one could assume that Israel would be mindful of global developments in tax administration. In this regard, it is noted that Israel has expressed an interest in signing the Multilateral Convention.
It is also noted that in the May 2012 OECD Global Forum Progress Report on the process of negotiating and concluding Tax Information Exchange Agreements, Israel was among "jurisdictions that have substantially implemented the internationally agreed tax standard"19
It is within this context that we have seen a steady increase in trade between Australia and Israel which in 2010-11 totalled approximately $830m20.
According to the Australian Bureau of Statistics (ABS), Australia's investment in Israel, mostly in the form of equity securities, doubled between 2006 and 2009. The increase was related to Israel's economic and stock market performance21. On the other side of the equation Israel's investment in Australia has increased over the last three years but the inflow is smaller in aggregate terms.
Chart 1: Australia's Investment in Israel 22
Chart 2: Israel's investment in Australia 23
Mutual transparency and certainty are two essential elements in mitigating tax and in building an open and genuine engagement between the tax administration and business.
Businesses in Australia, whether large or small, benefit from a tax administration that is recognised as being both professional and of high integrity24. Moreover, there are structural features of the Australian tax landscape that give businesses access to legal certainty. These are complemented by administrative approaches that provide large businesses with a high degree of practical certainty.
For example, a private ruling is legally binding on the Commissioner (but not the taxpayer) and is also reviewable by the courts if the taxpayer wants to challenge the ATO's views.
A private ruling sets out the ATO's opinion about the way a tax law applies, or would apply, to a taxpayer in relation to a specified scheme or circumstance. We encourage taxpayers, particularly those with complex and potentially contentious arrangements where there are significant tax risks, to seek this advice to better manage that risk. We know it is important to business to get this advice quickly so they can make business decisions, so we have streamlined our processes to minimised delays, particularly where the taxpayer is able to provide us with a full exposition of the proposed arrangement as soon as possible25.
Public rulings provide our interpretation of the tax law on issues of wide application. The Public Rulings Sub-Committee of the National Tax Liaison Group helps us determine the topics to be included in the ATO's Public Rulings Program26.
We also offer assistance and support to businesses across all market segments. For example, we have a dedicated small business assistance program to assist businesses to understand their responsibilities and entitlements. 27
We also provide a range of online tools to assist taxpayers determine their tax requirements with a range of self help calculators. We now have over 50 online calculators and self help tools that taxpayers can use to help them understand and meet their tax and super obligations so as to get it right the first time.
In addition, our website provides a wealth of information on our administration including the legal database we use to assist us in making technical decisions in relation to the application of the tax and superannuation laws that we administer.
For large businesses we offer Annual Compliance Arrangements (ACAs) which set a mutual tone from the top based on transparency and real time mitigation of risks. ACAs involve a sharing of views as to the company's potential tax risks and are capable of providing the taxpayer with a degree of practical certainty.
Internationally, other countries have similar arrangements. The Internal Revenue Service of the US has implemented their Compliance Assurance Plan, the Tax and Customs Administration of the Netherlands have a horizontal monitoring and tax control framework.
In Australia, ACAs are available for income tax, GST, excise, and fringe benefit tax or any combination of these taxes and are tailored to suit the individual requirements of the taxpayer. An ACA works in real time, and saves time and resources for both parties which might otherwise have been spent on after the event audits.
Some taxpayers choose to work with us in a transparent way through Annual Compliance Arrangements and/or by approaching us for rulings on major proposed arrangements or simply by talking to us about proposed transactions.
Others choose not to do this, but, for those taxpayers, the scope to choose the timing of disclosure is becoming smaller. We are bringing in approaches that will mean closer to real time disclosure across the large market. For example our Pre-lodgment compliance reviews and our Reportable tax positions schedule are bringing forward the time when businesses are disclosing material tax risks to the ATO.
As well as legal and practical certainty, consistent expectations of administrative approaches and an understanding of potential tax risks are also desirable for businesses operating in any jurisdiction.
Annually, the ATO publishes its Compliance Program which outlines areas of compliance focus for the ATO across the various market segments. We welcome input and comment on the risks we have identified and on our proposed strategies for mitigating those risks. For example, tax risks associated with international transactions and activity include the following:
- Profit shifting risks can arise from the failure to price dealings between related parties in accordance with the arm's length principle. We actively profile all businesses with significant levels of international dealings, including by type of transactions.
- Cross border dealings between related parties have grown in significance in the economy, and typically account for around 40-50% of Australia's international trade. Over the past decade there has been a significant increase in cross border intercompany transactions involving services, intellectual property, and financing.
- Our profiling and compliance activities are targeted to address these issues of significance, starting with an assessment of whether or not tax performance of the business reflects their economic performance; and whether economic performance is consistent with that of similar companies in the wider economy.
- Intra-group financing remains an area of focus for the ATO given the exponential growth in the volume and complexity of financing products in world markets and between related parties. In the Australian context, issues arise from the interaction between a number of areas of our tax code (including transfer pricing; thin capitalisation; the taxation of financial arrangements rules; and the foreign source income rules).
As between taxpayers in the large market sector, our Risk Differentiation Framework (RDF) allows us to make more informed choices about the attention given to particular taxpayers. We are also extending the RDF to the top end of our Small and Medium Enterprises segment. The RDF takes into account not just the likelihood that a taxpayer will adopt a particular approach to compliance but also the impact or consequence of any potential non-compliance.
This year we informed most large businesses in a single letter about our view of their relative risk and consequence of non compliance for income tax, GST and excise. We wrote to taxpayers to explain our thinking; outline any concerns we may have; and provide a degree of practical certainty regarding the likelihood of contact from us and how we would be seeking to interact with them.
Boards and CEOs of many of the largest corporate groups are showing a greater level of interest in these letters, and in this way we are bringing material tax issues within their governance frameworks. Many large businesses welcomed the opportunity to talk openly with us at senior levels about ways to reduce their level of risk and improve our working relationship. They are actively seeking to understand what they can do to retain their risk categorisation, or move it to a lower classification where we have advised them they are in a higher risk category. Many recognise that because of their size and/or position in their industry the relationship is likely to be quite intense, but the collaborative nature of the interaction is nevertheless within their control depending on their willingness to engage in early and open dialogue with us.
We will continue to reassess risk categories each year and are always seeking to refine and improve our implementation of the RDF. We welcome feedback from businesses on their experiences and will continue to consult with large businesses and their representative bodies.28
Another feature of our approach with large business is the continued co-design of the Large business and tax compliance booklet. This publication is co-designed with the Corporate Tax Association and our Large Business Advisory Group. It makes clear our administrative processes and sets out mutual expectations as to how we would like to work together. This allows large businesses in Australia to know what to expect from the ATO and what the ATO expects from them.
We have also worked with taxpayers and advisers to develop a similar publication for the SME market which we plan to launch early in the current financial year.
This year we have arranged for representatives from the Business Industry Advisory Committee, the OECD's business consultative group, to review our approaches to ensure that they produce a transparent, supportive, timely and productive relationship with business.
Both Israel and Australia find themselves in a smaller, more connected world. One where both countries have opened themselves to trade and innovation. In this environment, high levels of certainty (legal, practical and in terms of administrative approach) promote growth and build the reputation and capacity of both countries for above the line and economically productive activities.
The way the ATO approaches these business activities is to encourage a more transparent and enhanced relationship that has the potential to foster economic growth within the laws of the land.
1 The FTA is arguably the world's premier tax administration forum. The current member jurisdictions are: Australia, Austria, Argentina, Belgium, Brazil, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong China, Hungary, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the People's Republic of China, Poland, Portugal, Russian Federation, Singapore, the Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Commissioner D'Ascenzo is currently Vice Chair of the FTA; and former Commissioner Carmody was a past Chair of the FTA
2 Australia is the current Chair of the Global Forum.
3 There are currently 9 member countries of JITSIC: Australia, Canada, Japan, United Kingdom, United States, South Korea, China, France and Germany
4 OECD http://www.oecd.org/document/23/0,3746,en_2649_33749_40252183_1_1_1_1,00.html
5 This report is scheduled to be tabled for discussion at the FTA's meeting in Moscow in 2013.
6 OECD (September 2010) http://www.oecd.org/document/48/0,3343,en_2649_33749_45944752_1_1_1_1,00.html
7 OECD (January 2012) http://www.oecd-ilibrary.org/taxation/dealing-effectively-with-the-challenges-of-transfer-pricing_9789264169463-en
8 OECD (2007) Manual on Effective Mutual Agreement Procedures http://www.oecd.org/document/26/0,3746,en_2649_33753_36197402_1_1_1_1,00.html
9 OECD (September 2011) 'Right from the Start: Influencing the Compliance Environment' http://www.oecd.org/document/25/0,3746,en_2649_33749_49681497_1_1_1_1,00.html
10 OECD Guidelines for Multinational Enterprises http://www.oecd.org/dataoecd/43/29/48004323.pdf
11 Australia currently has 44 double tax treaties with other jurisdictions, details of which can be viewed at Australian Tax Treaties: http://archive.treasury.gov.au/contentitem.asp?NavId=052&ContentID=625
12 Presently our major TIEA partners are: British Virgin Islands (16 requests); Bermuda (11 requests); Isle of Man (7); and Jersey (6). We have also received information from Bermuda that assisted us in confirming the commercial associations in a high profile Controlled Foreign Company case. In other cases, we received information from the Cayman Islands and Bermuda that aided our compliance work considerably. In the majority of cases our TIEA partners have shown a high level of co-operation including providing additional information relevant to the request and in processing requests promptly.
13 Since Project Wickenby commenced in 2006, over $1.25bn in liabilities has been raised and over $600m collected. This includes a $307.6m compliance dividend representing improved compliance behaviour of taxpayers and their close associates. To the end of April 2012, Project Wickenby has resulted in 23 convictions for indictable offences, with a further 69 people convicted for summary offences and one extradition.
14 Targeting tax crime: A whole-of-government approach - September 2011, p 4.
15 Australian Taxation Office Targeting Tax Crime: current and past editions can be found at http://www.ato.gov.au/corporate/pathway.aspx?pc=001/001/008/011
16 Convention on Mutual Administrative Assistance in Tax Matters: http://www.oecd.org/document/57/0,3746,en_2649_33767_2489998_1_1_1_1,00.html
17 The ATO has recently made an agreement with the OECD Centre for Tax Policy and Administration for Deputy Commissioner Large Business & International Jim Killaly to be made available to assist the OECD on a range of key projects: http://www.ato.gov.au/content/00325283.htm
18 For example the ATO provides assistance to the PNG Internal Revenue Commission through the AusAID funded 'Strongim Gavman' Program and the PNG-ATO Twinning Scheme. Our partnership with Indonesia is through the 'Government Partnership Fund II - DGT Modernisation and Training Partnership Program.
19 OECD Progress Report On The Jurisdictions Surveyed By The OECD Global Forum In Implementing The Internationally Agreed Tax Standard May 2012: http://www.oecd.org/dataoecd/50/0/43606256.pdf
20 Composition of trade Australia pg 220 http://www.dfat.gov.au/publications/stats-pubs/cot-fy-2010-11.pdf
21 Israel Safest as Investors Discount War Threat (21 Feb 2012)Bloomberg website: http://www.bloomberg.com/news/2012-02-19/israel-safest-as-stock-investors-discount-threat-of-war.html. Despite the uncertain global economic environment, Israel's economy has grown steadily between 2006 and 2011, averaging 4.2% a year.
22 Source: Australian Bureau of Statistics cat.no. 5352.0 Table 5
23 Source: Australian Bureau of Statistics cat.no. 5352.0 Table 2
24 We regularly publish the results of our Professionalism Survey which assists us in understanding how taxpayers and intermediaries see us: http://www.ato.gov.au/content/00098722.htm
25 Streamlining our processes and a focus on early engagement has resulted in significant improvements in the average time taken to complete large market rulings with positive feedback from taxpayers and their advisors. For example in 2010-11 we further reduced the mean number of days to complete these complex rulings from 121 to 90 days and the median number of days from 89 to 77. Australian Taxation Office Annual Report 2010-11 p. 78 http://annualreport.ato.gov.au/
26 Australian Taxation Office National Tax Liaison Group minutes: http://www.ato.gov.au/taxprofessionals/pathway.aspx?sid=42&pc=001/005/073&mfp=001&mnu=43140#001_005_073
27 Small Business Support - Overview: http://www.ato.gov.au/content/00221703.htm. Businesses can also access specific assistance visits http://www.ato.gov.au/businesses/content.aspx?doc=/content/77828.htm and join our online forum for small business http://www.ato.gov.au/businesses/content.aspx?doc=/content/00197658.htm&pc=001/003/064/002/001&mnu=48824&mfp=001/003&st=&cy=
28 The ATO has quarterly meetings of its Large Business Advisory Group and the Corporate Tax Association is a member of a number of the ATO's consultative bodies such as the NTLG. The ATO also has a range of other consultative forums through which it engages with larger businesses including industry specific forums. These include the Australian Bankers Association/ATO GST Committee; the Superannuation Consultative Committee and the Superannuation Funds Working Group; topic specific Sub-committees of the NTLG (Resources Rent Tax; Consolidation; CGT & Losses; Taxation of Financial Arrangements; International; ); excise forums for Fuel Tax, Alcohol and Tobacco; and the Film Industry Partnership.
Last Modified: Thursday, 5 July 2012