Show download pdf controls
  • Macro-level analysis is giving us confidence

    Macro-level analysis is giving us confidence in large corporate groups tax compliance.

    On this page:

    Corporate tax collections

    Corporate tax collections are tracking with corporate profits

    Publicly listed businesses have greater reporting requirements, giving us data to undertake additional analysis on these corporate groups. Publicly listed businesses are also significant contributors to the tax system, accounting for almost half of total corporate income tax.

    We have found an observable long-term correlation between the pre-tax profits of publicly listed businesses (sourced from their financial reports) and their tax payable (sourced from their tax returns). This correlation gives us confidence the growth in tax payable is appropriate given the net profitability reported by these publicly listed large corporate groups.

    Indexed income tax payable and pre-tax profits of ASX-listed companies

    In 2016–17 the index value of income tax payable was 103.4 while for pre-tax profit it was 107.4 (base year 2011–12 = 100). The index value of income tax payable was less than 100 in 2012–13 and 2015–16. The index value of pre-tax profit was less than 100 from 2012–13 through to 2015–16.

    Chart notes:
    1. Indexing allows for a comparison in the growth of two variables. The base year is set to 100 and each subsequent year’s variable is divided by the base year’s variable and multiplied by 100.
    2. Population: ASX-listed public groups excluding loss makers, on a matched basis.
    3. Pre-tax profits sourced via Morningstar, matched to company income tax returns.

    Company financial report data sourced via Morningstar

    © Copyright 2016 Morningstar All rights reserved. Neither Morningstar, nor its affiliates, nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at morningstar.com.au/s/fsg.pdf (PDF, 151KB)This link will download a file. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ('ASXO').

     

    We have seen how significant the very largest taxpayers are to tax contributions by the large corporate groups population. This is further evidenced by comparing the tax-to-income ratios of various subsets of the population.

    Similar data is not available for majority foreign-owned companies. This is because their group accounts include their total global income so it is not possible to isolate the Australian part of their businesses. However, we can use the macro data above to gain confidence that Australian public groups are paying about the right amount of tax. Then we can extrapolate, based on another measure, the tax-to-income ratio. If this ratio is comparable between Australian public companies and majority foreign-owned companies, it suggests the majority foreign-owned companies have a similar level of compliance.

    We compare tax-to-income ratios for Australian public companies and majority foreign-owned companies. It is clear Australian public companies, as a group, pay more tax, and a higher proportion of tax, out of income than their majority foreign-owned counterparts. However, this result largely reflects the high profits made by some of Australia’s largest companies.

    After removing the ten largest companies from the population, what we see is the tax payable to total income ratio for Australian public and majority foreign-owned companies becomes much closer. The trend in the ratio for all Australian public companies and majority foreign-owned companies is also similar. The following chart demonstrates this.

    Tax-to-income ratios of Australian public and majority foreign-owned large corporate groups

    In 2016–17 the tax-to-income ratio of large corporate groups was 3.4% for Australian - public, 2.0% for Australian - public (excluding largest 10) and 1.5% for Majority foreign-owned. In 2011–12 the respective figures were 3.3%, 1.6% and 1.9%.

    Estimating the amount of tax not paid – the tax gap

    The tax gap is the difference between the amount of tax payable according to law, and the amount of tax actually paid. It is sometimes split into two components:

    • gross gap – the difference before our compliance activities
    • net gap – the difference after our compliance activities.

    Our key goal is to sustainably reduce the net tax gap to a minimum achievable level, noting that a zero tax gap is not practically achievable.

    Tax gaps are estimates only, and they are informative, not definitive. We use the best available information and methodologies for our tax gap estimates but recognise all estimates are subject to limitations and have a margin of error. We have estimated the large corporate groups income tax gap using a bottom-up illustrative methodology. This relies on expert views to inform assumptions and the results of our compliance activities.

    Due to features of tax disputes involving large corporate groups, which often take several years to resolve, our estimates are based on the effectiveness of historic activities rather than current activities. Implications of this are that improvements in practices will take several years to appear in gap estimates and our estimates can be subject to revision over time.

    Our best estimate of the net income tax gap for large corporate groups is approximately 4.40% ($2 billion) in 2016–17. This compares to approximately $47 billion in tax paid in the same year. In other words, in the 2016–17 year, we estimate large companies paid approximately 96% of the total theoretical tax payable.

    The large corporate groups income tax gap estimates use our compliance and tax assured data. Tax assured data allows us to more accurately calculate the expected amendments and determine a non-detection rate. Both are used in our methodology to estimate the net gap.

    The gap is driven by the complexity of the tax law and the different interpretations this gives rise to. Our compliance actions most commonly lead to an adjustment in cases involving profit shifting, treatment of offshore income and the use of controlled foreign companies, business restructures, and debt-equity tax arbitrage.

    This gap is comparable with the large business gap published by HM Revenue and Customs (HMRC). The United Kingdom is the only country which publishes a tax gap for a broadly comparable market segment. Their estimate has remained broadly flat, at around 5% for large businesses since 2012–13. The UK experience is also similar to ours in that their estimate of the tax gap for small businesses is considerably higher than for large businesses.

    We intend, supported by new laws, funding and approaches, to sustainably reduce the large company net income tax gap. We recognise this work is likely to take several years to flow through to our formal estimates.

    Importantly, we are not attempting to audit our way to success. To reduce the gap, we are aiming to head off non-compliance before it occurs. We are also focusing on the most important compliance issues.

    Initiatives to sustainably reduce the tax gap

    We have a number of initiatives underway to improve voluntary tax payments that will sustainably reduce the large corporate groups income tax gap even further.

    Some of the key initiatives are:

    • increasing internal capability and accessing specialist talent from outside the ATO
    • appropriately applying legislative measures like the multinational anti-avoidance law (MAAL) and diverted profits tax and encouraging potentially affected taxpayers to engage early on all of their tax issues
    • making full use of additional information available under measures like Country-by-Country reporting and automatic exchange of rulings
    • increasing our emphasis on large corporate groups having robust, lived corporate governance on tax issues, so they don’t inadvertently take risky tax positions
    • publishing practical compliance guidelines clearly providing our view on critical issues, enabling large corporate groups to consciously choose to take low or no risk tax positions
    • quickly issuing a taxpayer alert, when we see an arrangement we have concerns with, so other large corporate groups don’t unwittingly enter the arrangement
    • requiring large corporate groups to lodge a reportable tax position schedule disclosing their approaches on key tax issues and any arrangements covered by a taxpayer alert they have entered into
    • performing detailed one-to-one reviews of the large corporate groups population. For the top 100 these reviews occur annually, for the remainder they occur on a four year cycle. Our aim is to have coverage that allows us to confidently and positively assert there is either full tax compliance or we are taking action on any non-compliance detected
    • when providing certainty to taxpayers on a specific area of their business via, for example a ruling or advance pricing arrangement, reviewing their tax outcomes holistically by understanding their entire global supply chain rather than looking at issues individually
    • focusing on addressing important, systemic issues, or issues with the potential to proliferate, including, where appropriate, through litigation
    • offering taxpayers the opportunity to engage with us prior to a transaction in order to obtain certainty in real time, through a range of private advice and guidance products
    • generally only settling prior-year disputes where there is also agreement to lock in the appropriate treatment for future years. For example, we will only settle a dispute over the appropriate rate of interest on a related party loan in prior years if there is also agreement on any appropriate interest rate in future years. This not only locks in forward compliance, it also frees up capability and resources.

    Given the nature of the large corporates group population and the approach we use to estimate the large corporate groups income tax gap, it will take several years for these strategies to be fully reflected in the published tax gap estimates. But we are confident these strategies are already having a significant impact on sustainably reducing the large corporate groups income tax gap from its already low level.

    See also:

    Last modified: 18 Oct 2019QC 53278