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There are many stages to our compliance activities, including risk analysis, taxpayer contact, a preliminary review of taxpayer records and an overall assessment of the type and level of risk. Depending on our findings, we may invite taxpayers to correct their tax liability, or we may conduct an audit.
We focus on both boutique arrangements and marketed or networked tax haven arrangements. Our compliance activities focus on promoters and intermediaries, as well as particular taxpayers and groups. In complex private groups, we focus primarily on the taxpayer who is the controller of the group.
We have expanded our ability to investigate taxpayers who use abusive tax haven arrangements by establishing a dedicated offshore compliance program. In some cases - usually where there is a suspicion of significant tax evasion or criminal activities - we collaborate with law enforcement agencies and the tax administrations of other countries on joint investigations.
Offshore compliance program
Our offshore compliance program is targeting taxpayers who seek to conceal assets and income in tax havens. Compliance activities include audits of taxpayers who hold offshore credit and debit cards, those who have high-risk AUSTRAC transactions with tax havens, and other high-risk cases involving tax havens. As well as undertaking complex audits involving tax havens, the program is also involved in the offshore voluntary disclosure initiative, which provides an incentive for taxpayers to come clean before we follow up information already in our possession.
Promoter compliance
When we investigate promoters, we may access their books and records or ask them to supply details of taxpayers who have been involved in tax haven dealings.
We work with other tax administrations when promoters operate across countries. We exchange information under our tax treaties on particular arrangements and on the promoter's general activities. We may also conduct simultaneous audits with other tax administrations to ensure the appropriate tax is paid in each country.
International promoter strategy
The aim of the international promoter strategy is to identify international promoters who are actively operating in Australia and to identify their onshore associates (intermediaries) who are marketing and selling financial services and products. We have now identified over 130 international promoters and their Australian intermediaries.
This strategy examines the drivers of international tax avoidance and evasion, including taxpayer attitudes, the role of promoters and their associates and intermediaries, and high-risk geographical regions from which they operate (for example the Caribbean, the Pacific or Europe).
Our compliance action in relation to international promoters is driven by intelligence. We collect and analyse financial and taxation information and reports provided by other Australian government agencies and other tax administrations.
For each high-risk region we seek to identify key promoters and their associates and clients in Australia. We undertake compliance action in relation to high-risk Australian taxpayers and promoters. At the same time we conduct investigations in Australia and overseas with Project Wickenby partner agencies in relation to some of these high-risk taxpayers and promoters. In some cases, we work in conjunction with other tax administrations.
Based on these investigations we can improve the compliance of Australian taxpayers and the promoters' Australian intermediaries. Importantly, we can also draw together an intelligence scan in relation to tax avoidance and evasion. This intelligence scan will be escalated through other Australian agencies. We may talk with the governments in these high-risk regions about compliance issues and explore reform options.
Tracing the flow of money
Our tax haven taskforce compliance activities uncovered a complex 'round robin' arrangement that involved transactions between Australia and companies in other countries which sought to disguise a tax scheme that operated out of a tax haven.
The arrangement first came to our attention through an analysis of AUSTRAC information. We identified a large number of transactions between Australian taxpayers and certain bank accounts in another country that was not a tax haven. Letters were issued to the Australian taxpayers requiring details of the transactions. The analysis showed that funds were being transferred to and from the bank accounts of companies incorporated in even more countries.
We traced the ownership and control of these companies. To fully understand the flow of funds, we sought information from the tax administration of the country where the bank accounts were located.
This information and our analysis revealed that:
- the international companies involved were all owned or controlled by partners in an accounting firm that was also an offshore service provider and based in a tax haven
- most of the tax haven transactions were through this firm's wholly-owned licensed trust company (but most of the transactions did not involve the movement of funds directly between Australia and the tax haven)
- the arrangements involved many Australian clients of the same tax agent
- the international companies and bank accounts were part of an elaborate arrangement to shift funds offshore and create false tax deductions in Australia, then repatriate the same funds to Australia in a 'tax-free' guise.
The following steps (also shown in Figure 3) were used in the scheme:
- An Australian resident company (Oz Co) receives invoices for consulting work from Service Co, incorporated in country 2.
There is little evidence that any consulting work has actually been carried out. The registered office of Service Co is at the premises of an accounting firm in country 2. It is listed as 'not trading' by the corporate authority of country 2. Service Co is owned by two tax haven entities that are controlled by the partners of the tax haven (country 4) offshore service provider; the partners are also signatories to Service Co's bank account.
- Oz Co transfers funds to Service Co's bank account in country 5 as 'payment of consulting fees'.
The 'consulting fees' are shown as expenses in the accounts of Oz Co and claimed as tax deductions. This is the primary avoidance of tax - in reality the 'expenses' are not incurred in earning assessable income and are therefore not deductible.
- The funds received by Service Co are transferred to Finance Co, a company registered in country 3, but with a bank account also in country 5.
Finance Co is also controlled by the tax haven offshore service provider and has a loan agreement with Oz Co.
- A few days after the original payment, the funds return to Oz Co in the form of a 'loan draw down' from Finance Co's bank account in country 5.
Oz Co then uses these funds for trading operations and also claims deductions for 'interest' paid offshore on these loans. Where interest is paid, it is also returned to Australia in further 'round robin' arrangements.
A variation of the arrangement has the 'loan' funds returning straight to the directors of Oz Co, without loan contracts being entered into. The directors then use these funds for personal expenditure.
Without this scheme, these funds would be taxable dividends (distributions of profits out of the Australian company) that should be declared by the directors.
Figure 3: The money flow in a round-robin arrangement
What are the possible outcomes for a taxpayer entering into such an arrangement?
Taxpayers who have a tax shortfall because of an intentional disregard of a tax law may be subject to a penalty of 75% of the tax shortfall amount, payable in addition to the tax avoided.
Taxpayers who take steps to prevent or obstruct us from finding out about a tax shortfall may have a further 20% increase in the tax shortfall penalty applied, payable in addition to the tax avoided.
Taxpayers who use dishonest means to avoid paying tax with the intention of defrauding the Commonwealth may be subject to criminal prosecution and up to 10 years' imprisonment if convicted.
Joint investigations with law enforcement agencies
We collaborate with other Commonwealth agencies that have an interest in tax havens. This includes sharing information, as allowed by the law. Our ability to share information with Project Wickenby partner agencies was enhanced when section 3G of the Taxation Administration Act 1953 was enacted.
Where we suspect that tax havens are being used to evade tax liability or to defraud, we may recommend that promoters and investors be investigated. This is often done with other Commonwealth agencies such as the AFP and the ACC. The investigations may include using the Criminal Code search warrant provisions and may lead to the referral of matters to the CDPP for criminal prosecution. During these investigations, we may liaise with other agencies such as the ACC and ASIC.
In addition, law enforcement agencies can use the provisions of the Mutual Assistance in Criminal Matters Act 1987. Under this Act, Australia can request the assistance of other countries in criminal investigations, prosecutions and matters relating to the proceeds of crime.
For example, under Project Wickenby assistance was provided by the Swiss Federal Office of Justice.
Australia can provide similar assistance to other countries. For example, with ministerial approval, Australian law enforcement authorities can obtain search warrants domestically on behalf of other countries.
Project Wickenby
Project Wickenby is a multi-agency taskforce. It was established in 2004 to investigate internationally promoted tax arrangements that allegedly involve tax avoidance or evasion and, in some cases, large-scale money laundering. The project has $305 million in funding over seven years.
The five agencies involved in Project Wickenby are the ATO, ACC, AFP, ASIC and the CDPP. We are the lead agency. This is the first time these five agencies, supported by AUSTRAC, the Attorney-General's Department and the Australian Government Solicitor, have brought their expertise and powers together to deal with tax avoidance and evasion.
Project Wickenby involves both civil and criminal investigations. These cases sometimes include mutual assistance requests whereby Australian law enforcement authorities seek cooperation from their international counterparts to secure evidence located offshore.
In one investigation law enforcement authorities sought access to documents held by an international promoter based in Switzerland for the purpose of criminal investigations.
Through the mutual assistance request process, Australian authorities were able to successfully use their international counterparts, the investigating Swiss Magistrates Office, to issue search warrants and secure the relevant documents. Under the terms of the mutual assistance treaty, the Swiss firm had the right of appeal. On 11 January 2007 the Swiss Supreme Court, the highest court of appeal in Switzerland, adjudicated such an appeal in the matter described as X SA, the complainant v Magistrate of the Canton of Geneva.
The Swiss Supreme Court found that the evidence should be provided to Australian law enforcement authorities to support the criminal investigation. In reaching this conclusion, the court had regard to the following factors:
- the Australian authorities had established a prima facie case that the alleged offence was equally an offence in Switzerland
- the alleged offence involved falsification of loan transactions
- the false loans related to unnamed people and/or entities linked directly or indirectly to various Australians.
The decision was a breakthrough in the evidence-gathering strategies employed in Project Wickenby and enhances our capability in respect of international investigations involving criminality.
Sections within How we deal with tax haven arrangements
Last Modified: Tuesday, 18 October 2011