Macro-level analysis is giving us confidence
Macro-level analysis of large corporate groups is giving us confidence in their tax compliance.
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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. They are also significant contributors to the tax system, accounting for almost half of total corporate income tax.
We found an observable long-term correlation between:
- the pre-tax profits of publicly listed businesses, sourced from their financial reports
- 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
1. Indexing allows for a comparison in the growth of 2 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
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We've 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's 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's 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 very significant contribution to overall tax paid by the top 10 Australian companies. These companies collectively contribute nearly a third of all corporate income tax.
After removing the 10 largest companies from the population, what we see is the tax payable to total income ratio for Australian public, private 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
Estimating 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's sometimes split into 2 components:
- gross gap is the difference before our compliance activities
- net gap is 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 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 4.2% or $2.6 billion in 2019–20. This compares to approximately $59.4 billion in tax paid in the same year. In other words, in the 2019–20 year, we estimate large companies paid approximately 95.8% 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.
We intend, supported by new laws, funding and approaches, to sustainably reduce the large corporate groups gross and net income tax gaps. We recognise this work is likely to take several years to flow through to our formal estimates.
Importantly, we're not attempting to audit our way to success. To reduce the gap, we aim to head off non-compliance before it occurs. We also focus 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 4-year cycle. We aim to have coverage that allows us to confidently and positively assert there's either full tax compliance or we're 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 before 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's also agreement to lock in the appropriate treatment for future years. For example, we'll only settle a dispute over the appropriate rate of interest on a related party loan in prior years if there's also agreement on any appropriate interest rate in future years. This not only locks in forward compliance, it also frees up capability and resources
- addressing inappropriate conduct by advisers to discourage the promotion and implementation of tax avoidance schemes; and uncooperative, misleading and obstructive behaviour during our investigations.
It will take several years for these strategies to be fully reflected in the published tax gap estimated, given the nature of the population and the approach we use to estimate the large corporate groups income tax gap. But we're 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 Australian tax gaps - overview.
Macro-level analysis of large corporate groups is giving us confidence in their tax compliance.