Large Business Stewardship Group key messages 24 September 2020

ATO Compliance risks and emerging issues

Taxpayer Alert TA 2020/04

Multiple entry consolidate groups avoiding capital gains tax through the transfer of assets to an eligible tier-1 company prior to divestment issued 24 August 2020. The primary concern is that some arrangements to restructure Australian assets in anticipation of a divestment of assets in a way which reduces or avoids capital gains tax (CGT) may be unnecessarily complex or involve commercially unnecessary steps.

For arrangements of concern that have been identified the ATO anticipates seeking further information about the arrangement and its design, including the commercial rationale for the steps in the arrangement.

Country by Country (CbC) and International Dealings Schedule (IDS) reporting

The ATO uses IDS and the CbC local file data to assess the significance and prevalence of international tax risks and more efficiently target resources. The current focus areas include data and reporting integrity.

The Business Bulletin issued 16 September 2020 outlined the need to meet disclosure requirements in Question 49 of the IDS on arrangements that have effectively replaced arrangements which would have been subject to the hybrid mismatch rules.

Advice and guidance

There should no longer be delays in private rulings as staff have returned to business as usual work. The delays were the result of staff providing support to advice and guidance required for COVID-19 measures.

JobKeeper compliance

The ATO has been working closely with many large businesses to assure their eligibility for JobKeeper and have found that most large businesses are doing the right thing.

The compliance program aims to detect and deal with large businesses that have inappropriately accessed JobKeeper by manipulating their projections or financial positions to calculate turnover. There have been around 475 public and multinational businesses selected for these compliance checks that consider the application of the decline in turnover test and the reasonableness of the assumptions used.

Some issues identified in large public and multinational businesses are:

• significant global entity (SGE) groups incorrectly calculating their aggregated turnover (applying a 30% decline in turnover instead of the 50% decline in turnover)
• projecting GST turnover at the economic group level rather than entity level
• incorrectly calculating GST turnover, with common errors including excluding irregular GST turnover amounts or using general sales rather than GST turnover.

There have been instances where public and multinational businesses have kept inadequate records to support their JobKeeper enrolment. The ATO encourages all large businesses to review the published guidance on best practice governance for JobKeeper payments and improve their records where necessary.

Reportable Tax Position (RTP) Schedule Findings Report

The ATO thanked members for their feedback on the draft report. The feedback resulted in some key changes to the final report, including:

• inclusion of the number of disclosures – these are a point in time and will change as further lodgments are received. The ATO is following up the approximately 20% of taxpayers who have an obligation but failed to lodge their 2019 RTP schedule.
• removal of the population segment focus.

While some of the feedback suggested the information on disclosures skewed the view of risk in the population, it should be noted the RTP schedule asks taxpayers to disclose their self-assessed risk rating under practical compliance guidelines (PCG). The criteria for the risk rating are in the PCGs themselves.

2021 Reportable tax position schedule

The ATO is reviewing the RTP schedule ahead of Tax Time 2021. The review includes consideration of the criteria for lodging the schedule.

The underlying aim in the review is to ensure the data collected from the schedule supports the management of risk and allows appropriate tailoring of the ATO’s engagement with taxpayers. Consultation on proposed changes is expected in October with the planned publication of the instructions in December.

Members noted:

• JobKeeper – a clear understanding of the records the ATO is expecting to see and the standard questions the ATO will ask would be beneficial to taxpayers and advisers. The ATO noted the good governance guide should assist however members should advise if there is additional information that would be useful.
• JobKeeper – what is the issue with SGEs and aggregated turnover? The ATO noted that SGEs had not considered that aggregated turnover calculation is different for SGEs, with others not considering foreign entities they are connected or affiliated with.
• RTP schedule – is an RTP schedule still necessary where the taxpayer is undertaking a justified trust review? ATO noted that the RTP plays a large part in assessing a taxpayer’s level of assurance. The ATO approach would need to undertake a full analysis of transactions subject to PCGs if reporting of those are not incorporated into the RTP.

COVID-19 and transfer pricing

Guidance relating to COVID-19 economic impacts on transfer pricing arrangements was published on the ATO website in June 2020.

To assess the economic impacts on transfer pricing arrangements the ATO will:

• assess the function, asset and risk profile of the Australian entity before and after COVID-19
• the economic circumstances and actual economic impacts of COVID-19 on the Australian operations
• any amendments to or termination of contractual arrangements between the Australian entity and its related parties
• the impact of COVID-19 on product and service offerings of the Australian entity
• any changes in business strategies as a result of COVID-19.

Given analyses of comparable company data may not be reliable in the short term, the ATO will seek to understand the financial outcomes an entity would have achieved ‘but for’ the impact of COVID-19. This may include:

• a detailed profit and loss analysis explaining changes in revenue and expenses resulting from COVID-19
• details of profitability adjusted to where outcomes would have been if COVID-19 had not occurred
• the rationale and evidence for any increased allocation of costs or changes in operating margins to the Australian entity
• evidence of any government assistance received or affecting the Australian operations.

Where taxpayers have current advance pricing arrangements that may breach a critical assumption due to COVID-19 negatively affecting their business, they should engage with the ATO as soon as they are aware a breach has occurred or is likely.

Members noted:

• the ATO and taxpayers have considered the issues in some detail, but the approach may be dependent on the position taken in another country and it is difficult where those countries are yet to finalise their position. The ATO is aware of taxpayers who are impacted and will engage with other revenue authorities as appropriate.
• the Corporate Tax Association (CTA) has a Transfer Pricing working group. Michelle de Niese will engage with the ATO to share the issues identified by their working group. The outcomes will be shared with members of the Large Business Stewardship Group (LBSG).

Justified Trust

The ATO is finalising the monitoring and maintenance report following consultation internally and with external stakeholders including the LBSG and the CTA and their members. The final version will be distributed to members of the LBSG.

ATO officer handover process

The ATO has conducted some internal analysis of the staff turnover on Top 100 cases. The ATO has drafted a tip sheet for staff outlining a handover process. As requested, we have incorporated a taxpayer meeting to:

• explain the changes and introduce the new staff member, or team structure where multiple changes are occurring
• discuss any questions the taxpayer may have such as identifying the main areas of knowledge the taxpayer believes must be retained or maintained
• reach agreement on how the changes which are occurring will be managed.

GST Justified Trust reviews

The Top 1000 Tax Performance Program will finish in December this year. There have been some delays due to COVID-19 but by the end of December the ATO will have reviewed over 900 taxpayers.

The new Top 1000 combined assurance review (CAR) program which has just commenced aims to review 900 taxpayers over the next three years. This program has an income tax and a GST component.

The CAR will be tailored to the taxpayer with the approach dependent on ratings from any prior assurance reviews and how they have addressed any next actions set out in their tax assurance report. This is expected to substantially reduce the time and effort required by the review.

A key element will be the provision of an early notification letter that requests the taxpayer provides the required top-up information for the review (this will be published on ato.gov.au later in the year) and confirm the steps they have taken to address the next actions required from the last review.

For GST, it is heavily focused around the taxpayer’s GST system governance and controls as this has been identified as the major issue in the large market.

GST Analytical Tool (GAT)

The GAT is a reconciliation between accounting and BAS outcomes which the ATO will use to provide top down assistance. A pilot of 16 taxpayers was conducted and it highlighted areas where the ATO made need to ask questions in addition to our existing data and analytics. It does not detect misclassification or coding errors.

Detailed discussions explaining the tool are being undertaken in several forums. There will be a deep dive session on Monday 28 September with the GST Stewardship group.

All taxpayers with predominantly non-input tax supplies are encouraged to apply the GAT. The ATO will assess outcomes of the GAT in Top 100 assurance reviews and Top 1000 cases selected for further review following a CAR. It is expected that there will be 20 cases conducted for the Top 100 during the year and 80 cases for the Top 1000. The GAT review will cover the income tax year ended within the GST assurance review period and will cover a 12-month period. There are four steps to work through which are outlined in detail in the paper provided to members prior to the meeting. Objective evidence will be required and link to the adjustments identified.

The material adjustments will be assessed based on the level of the ATO’s understanding and objective evidence provided. For the Top 100 a rating will be given for each adjustment. For the Top 1000 a single overall rating will be provided.

Michelle will work with the members to collate any questions and have further discussions offline with Judy and Belinda after this has been presented to the GST Stewardship group.

Modernising Business Registers

The ATO is leading the program to revise and modernise the Government’s multiple business registers which was announced last year. The ATO is working with five key partner agencies to deliver the program. It is expected that the program will take approximately four years to deliver the various elements.

The new registry service will consolidate the Australian Securities and Investment Commission and the Australian Business Register registries along with almost 30 other registers. In addition, a Director identification Number (Director ID) will be required by all directors.

A challenge for the Director ID program is foreign based directors as the authentication of directors will be via MyGovID which uses Australian identification documents.

A key outcome will be the availability of public information and a search facility. The ATO is working with consumers of data to understand how the data is used, what is valued, what is expected to be used in the future, and what data they are prepared to pay for. Members of the LBSG are welcome to be involved.

Members noted that the ABN lookup tool is very valuable, and the addition of the deductible gift recipient indicator would be useful.

The Government is yet to announce a position on whether Director ID will be publicly available. Consultation is underway on this issue. The ATO encourages large corporates to be early adopters and we will continue to consult on the progress of this program in the coming months.

Voluntary Tax Transparency Code

The ATO encourages large corporate groups to adopt the Voluntary Tax Transparency Code (the Code). This includes entities treated as companies for Australian tax purposes and foreign multinationals with operations in Australia.

It is important that corporates remember to notify the ATO when they publish their reports so that they can be included on the register. The ATO noted that we have seen a significant increase in reports lodged over the last few months as a consequence of taxpayers bringing their ATO notifications up to date. Prior to this, the data was showing a decrease in reporting.

The ATO noted that 75% of the signatories are Australian public listed entities and that there is further scope to increase the uptake by foreign and private entities. There continues to be a high level of interest in the performance of large companies but there has been a low take-up of the Code and asked members for their thoughts on the possible reasons and how this can be improved.

The Board of Taxation noted that there are 187 signatories of which 179 have published reports. The number of reports is declining and notably 75% of the signatories are Australian companies.

Members noted the following:

• The UK has introduced a compulsory code with the EU working towards a similar approach.
• The Code does require a lot of work in the first year, but it is easier in later years.
• Links to published tax transparency information published are managed by the ATO but there are a lot of broken links as companies remove information or rearrange their websites.
• The discussion is maturing globally with investor groups, for example pension and superannuation funds considering what information they can use.
• Foreign companies are debating the issue as there may be flow on effects if they sign up for the Code as this sets a precedent for other countries that bring in similar requirements. Members recommended that the ATO raise the matter with the American Chamber of Commerce, for US based companies operating in Australia, who could advocate and provide insights into where the concerns lie.
• The ATO should consider suggesting to the Big 4 Firms to incorporate the Code in discussions with foreign companies looking to commence business in Australia.
• The ATO has a role to play in sharing information to identify if the system is working properly, if the right amount of tax is being paid and is governance appropriate and correct. The ATO noted that it already publishes a lot of information such as the corporate tax transparency information, and tax gaps.

Treasury update

Treasury noted that the 2020–21 Australian Federal Budget will be announced on 6 October 2020. There has been a significant monetary injection into the economy through a variety of measures. Treasury are finalising processes for the government to reach final decisions on any new measures to be considered for the budget.

OECD Pillar 1 and Pillar 2 Blueprints were released recently.

• Pillar 1 includes a partial reallocation of taxing rights from countries producing the products/services to countries (market countries) where the products/services are consumed.
• Pillar 2 is considering the establishment of a global effective minimal tax rate.

Board of Taxation update

The Board of Taxation noted that the current focus of work is CGT rollovers with stage one of consultation complete. This consultation was to identify some reform options. The consultation identified numerous issues, some of which were outside the core focus of the review. The aim is to deliver a principles-based statement that outlines the function of rollovers. An options paper is planned to be released later this year.

Members noted that the government is yet to release the Board of Taxation reports on FBT compliance costs and the Board of Taxation’s review of corporate residency.

LBSG Stewardship Charter

The proposed Charter was included with the meeting papers and members were asked to consider if the scope was appropriate for the group.

A member raised a concern with the use of the word ‘develop’ in the sentence, 'The group provides an opportunity for strategic discussion to develop and improve the administration and operation of the taxation and superannuation system into the future'. The member did not feel this was appropriate.

Members endorsed the Charter subject to a discussion between the co-chairs of the concern raised.

It was noted that the LBSG is due for a membership refresh.

CTA benchmarking survey

The Corporate Tax Association conducted a 2020 tax team benchmark survey of its members to provide some indication of patterns and trends of the level of resourcing and what those resources are devoted towards. Eighty-five responses were received which represents 70% of their membership.

The information provided is taken from the preliminary report which compares 2018, 2019 and 2020 results. On average:

• about 82% of corporate tax team activity is tax compliance – this is an increase from 74% in 2018 and 80% in 2019
• teams are spending 18% of their time on income tax and GST advice – this is a reduction from 26% in 2018 and 20% in 2019
• On average there is a reduction in time spent on managing Justified Trust (JT) and ATO reviews and ATO disputes outside of JT reviews in 2020 (19% in 2019 compared to 16% in 2020). In 2018 only 10% of time was spent on managing such matters, which seems to indicate the acceleration of JT activity in 2019 and a slight tapering off of activity in 2020.
• In 2020 participants are on average spending 12% of their time managing JT reviews (8% income tax, 4% GST), very similar to 2019 where they spent 13% of time (10% income tax, 3% GST). In 2020, 4% of time was spent on managing reviews, audits and disputes outside JT reviews (6% in 2019), possibly indicating less matters in dispute or the closing out of older reviews.
• The full time equivalent (FTE) for Australian based teams has stabilised at around 7.5%.

The cost to operate a team has reduced from $3 million in 2018 to around $2.6 million with 70% of the costs in wages. The use of external advice has reduced, and this is the main contributor to the reduction in costs.

Other points to note:

• Of the Top 100 companies, over 30% have a high assurance rating for income tax. Many of the Top 1000 of companies are yet to receive the outcome of their review.
• There is a marked difference in the FTE averages between the Top 100 and 1000.
• Overall income tax return compliance accounts for 14% of tax team activity.
• On average FBT Compliance and advice remains significant at 7.8%.

Independent review

In 2019–20 the ATO carried out a post implementation review of the Large Market Independent Review (LMIR). The purpose of the review was to assess the effectiveness and efficiency of the service and determine if there are any areas for improvement.

Several external respondents observed that the objection process could be made more efficient if the reviewer is the decision maker on any subsequent objection of the audit position. This has been implemented.

Stakeholders were dissatisfied with the effectiveness of the LMIR in transfer pricing disputes and there was a general recognition that the current process is not ideal for resolving transfer pricing disputes. Further work is required to consider the approach for transfer pricing cases.

The draft recommendations cover:

• application of the LMIR process to transfer pricing disputes
• clarifying the cases where an LMIR is not appropriate, for example cases identified as being of strategic importance where the case has already been subject to in-depth scrutiny and review independently from the audit team by senior ATO officers
• LMIR is not appropriate where an ATO view has been published. This includes draft rulings. Members noted their concern with this approach and the value of public consultation on draft ATO views.
• allowing for escalation of referrals to Chief Tax Counsel and the Deputy Chief Tax Counsel
• improvements to process and communication.

Other business

Advice regarding permanent establishment applies to 17 September 2020 which has passed. CTA has seen a rise in questions regarding this. The ATO noted that this date has been extended to 30 September 2020 and is considering some feedback it has received. Taxpayers should contact the ATO for further advice on their circumstances.

Attendees

Apologies