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  • The role of transparency in large market tax compliance

    Rebecca Saint Deputy Commissioner of Public Groups
    Address to 14th International Tax Administration Conference
    23 November 2021

    Introduction

    Thank you for inviting me to speak to you today. I was close to coming in person, but I think after extended lockdowns in Melbourne I haven’t quite got my head around interstate travel yet.

    Today I would like to cover our views of the current state of transparency through the lens of the large market compliance program.

    Whilst the voluntary tax transparency code plays an important role in transparency and we continue to encourage its adoption, transparency is typically viewed through three lenses. And whilst these aren’t new, it’s helpful to remind ourselves of these, as each plays an important role in improving compliance and building community confidence in large market tax performance and the tax system more generally.

    Three lenses

    Taxpayers being transparent with the ATO.

    The ATO being transparent with the community on large market tax compliance; and

    Organisations being transparent with the community about its tax performance.

    I’ll first focus on the important role and status of transparency between taxpayers and the ATO. I’ll then move to some observations about the Voluntary tax transparency reports, where we’ve seen some positive trends and where we think there is room for improvement.

    Transparency to the ATO

    It is critical to our role as a tax regulator that we are able to access taxpayer information as part of our investigations. We obtain more information from large corporates as part of our standard lodgment programs than any other market. For example, large corporates are required to provide details of uncertain tax positions in their Reportable Tax Position schedule and information about their cross-border dealings through the international dealing schedule or country by country reports.

    This ‘standard’ information supports our ability to monitor key risks across the population, identify new and emerging risk and also detect specific taxpayer related issues.

    Our justified trust program (which covers the top 1,100 companies) requires further detailed information, and audits can involve the collection of thousands of documents to assess compliance. So, we have access to vast arrays of information.

    We do of course have broad information gathering powers. However, positively, the vast bulk of information gathering with large business is done informally without the Commissioner resorting to the use of formal powers. In our experience, most taxpayers voluntarily provide the information we need in order to conduct our investigations.

    However, in those small number of cases where we have been unable to obtain the information we need informally, we do resort to using formal powers. Typically, this will happen after numerous efforts over an extended period to obtain the information without success.

    To give a sense of orders of magnitude, we conservatively estimate that we issue more than 2,000 informal requests for information across our programs per annum and around 70 formal notices to taxpayers (most of which relate to audits). Supports the proposition that there are high levels of voluntary transparency by most taxpayers to ATO, allowing us to do our job effectively.

    There are some areas of concern though. We continue to look for improvements around transparency of legal professional privilege claims. Legal Professional Privilege is an immunity from production of information to the Commissioner and a taxpayer cannot be compelled to provide information that is privileged.

    The Commissioner is a strong supporter of LPP and encourages taxpayers to obtain professional tax advice, including legal advice. However, we have observed instances that have given us cause for concern that claims being put to the Commissioner are not valid. This can result in extended collateral disputes about information gathering, instead of focussing on resolution of the substantive issue.

    We need to be confident that we have received all of the information we are legally entitled to as part of our investigations. We want to do this as simply and in a way that both taxpayers and the ATO can be confident, reducing the likelihood that the Commissioner will need to challenge the claims.

    To this end we have been consulting on an LPP guide, which sets out what the Commissioner considers he needs to determine whether to accept or challenge claims. Voluntary to apply, the guide is directed at those small number of large businesses that have received a formal notice and are making privilege claims as part of that process. The recent Full Federal Court decision of CUB confirms the ability of the Commissioner to obtain particulars about LPP claims. Consistent with this we are seeking particulars in support of the claims. We do not require or encourage taxpayers waive privilege as part of this process.

    As noted, it is intended that the guide will improve transparency of claims and enable the parties to focus on the substantive dispute.

    Guidance to market about ATO views

    Transparency at a taxpayer level isn’t just one way. Regulators need to be open and transparent with business about their views and expectations and they need to act consistently with these.

    We know the key to an effective tax system is a high level of willing participation. We also know from our work with large business that most businesses will try to get it right and want to avoid tax disputes.

    Our public advice and guidance program is designed to help taxpayers get it right. Tax is complex and it is common for business and the ATO to have to deal with ambiguity in the application of laws. Guidance helps business understand ATO views and make informed decisions about the tax implications of their arrangements.

    Around five years ago, the ATO expanded the public guidance program to include practical guidance guidelines. Whilst these can vary in form, essentially they operate to provide business transparency about the ATO’s risk tolerance levels on key tax matters. By sharing our risk parameters and when we will and won’t apply compliance resources, taxpayers can make informed decisions about the compliance risk associated with their arrangements.

    Around the same time as the introduction of compliance guides, we also expanded the Reportable Tax Position Schedule to include a new category C. Broadly, this section requires business self assess and disclose compliance with various public advice and guidance products. In this way the RTP schedule allows a single view of risk of an organisation for key corporate tax risks. It is a powerful tool to understand the risk appetite of an organisation.

    The schedule is helpful to organisations as well as it allows boards to compare organisational views of tax risk against ATO criteria, perhaps confirming views or conversely highlighting areas of difference that may require further investigation and or understanding.

    We recently published our second RTP findings report. This report provides aggregate disclosures for each of the RTP questions. Importantly, it provides insights to the community of the prevalence of key corporate tax risks across the large market. Positively, the findings show that tax avoidance and high-risk arrangements are not widespread in the large market. However, it does show that there are pockets within the population that require investigation.

    Publishing the findings can aid in preventing organisations adopting or maintaining tax positions on the misapprehension that they are merely doing the same as their peers as organisations are able to use the RTP Findings Report to understand how they compare to peers. It is not uncommon for firms with high-risk arrangements to think they are merely doing what everyone else does. But the findings show that this is not the case.

    Role of the VTTC

    I would like to turn next to transparency to the public.

    The ATO continues to be a strong supporter of tax transparency. It is the foundation to community confidence of the tax system (impacting compliance in all markets), it is the bed rock to informed public debate and fundamental to sound policy development.

    We publish significant amounts of information about tax performance of the large market. We see this as critical to supporting an informed public debate. However, we’re at saturation point. here isn’t much more information that we are able to provide.

    Key publications include the annual corporate tax data with detailed contextual information, tax and corporate Australia (which is effectively a state of the nation for the large market), and findings reports from key programs.

    Whilst the ATO can provide system level information we need corporates to do their part by telling their tax story. As such, we continue to encourage large corporates to adopt the Voluntary Tax Transparency Code.

    At this stage take up of the tax transparency code is largely dominated by Australian corporates. If the benefits of transparency are to be fully unlocked, we need to see more foreign multinationals publishing tax transparency reports and details of their role in the Australian tax system.

    Justified Trust Program

    ATO programs support taxpayers being able to make credible statements to the public about their tax profile and contribution.

    Under our Justified Trust program, we assure that large businesses pay the right amount tax. Under this program we assess whether the tax outcomes of the organisation are correct, having regard to objective criteria and the evidence supplied by the organisation. At the conclusion of the review organisations are provided with justified trust ratings of high, medium, or low assurance.

    The program was designed to provide the community confidence that large business is paying the right amount of tax. We are now in our third year of publishing ratings from the Top 100 and Top 1,000 programs.

    We’ve reached a milestone in the Top 100 program (which includes the largest economic groups in Australia), with around 50% now achieving high assurance and around 80% having achieved high or medium assurance. The community should have a level of confidence that most large businesses are doing the right thing and we are aware of and dealing with those that don’t. This confidence does not stem from us merely saying it is so but from having done the work with large business against transparent and objective criteria.

    We can’t publish the ratings for individual companies due to confidentiality reasons. As the Commissioner noted this morning, we have observed a positive trend in how corporations value their justified trust ratings, with many now publishing their ratings in their tax transparency Reports. This is most common for those organisations in the Top 100 population.

    Publication of justified trust ratings contributes to community confidence, increases the currency of the justified trust program, and positively influences other large businesses to strive to achieve high levels of compliance.

    There is a contagion effect particularly for Australian corporates in the Top 100, that they ‘want one too’. So we have seen and increased desire over time of top 100 companies striving to achieve justified trust.

    We haven’t seen this effect as much in the Top 1,000, which I assume is at least in part due to the lower likelihood that they will be in the public spotlight and tax is not as strong a driver for their social licence to operate.

    Perhaps unremarkably, we observe that it is more common for those entities that have achieved high assurance to publish their results. This provides a form of filtering of the market even if imperfectly. Instead of the whole large market be tarred as not paying their share of tax, it allows the community to understand those that do. Whilst we need to be careful about drawing negative inferences about those that choose not to publish their ratings, it does create a level of uncertainty and perhaps questions.

    Who is most likely to invest in the justified trust program? We see the greatest investment in the justified trust program by Australian corporates and those sectors that are highly regulated or where the need for social licence to operate is highest, for example financial services and energy and resources (although with energy and resources this is still dominated by Australian corporates). These organisations have been able to achieve highest levels of trust with the ATO. We are now able to leverage this trust to provide enhanced service offerings with a view to provide tax certainty.

    For example, for those in the Top 100 population we adjust the intensity and scope of our investigations to focus on new arrangements or material changes to the business. The strong foundation of trust, combined with comprehensive understanding of the business, supports open and early engagement on transactions with a view to providing tax certainty for business and the ATO. Brings obvious benefits to both the ATO and business, helping business invest with confidence about their tax and compliance outcomes.

    Disputes

    Whilst we have seen positive trends in transparency of tax risks and tax profiles, disclosure of tax disputes to the community could benefit from greater transparency.

    We continue to see low numbers of disclosures of disputes in financial statements and tax transparency reports. We find it particularly strange where disputes are not disclosed in financial statements are subsequently settled for significant sums of money.

    Similarly, we often see a reluctance by business to publicly disclose that they have settled a dispute with the Commissioner.

    We consider it best practice for corporates to disclose these matters.

    Settlements

    If I turn to settlements in particular.

    Settlements are part of good administration. It is simply impractical and too expensive to litigate every matter. However, there is a strong desire by the community to have transparency about these matters to ensure we aren’t doing sweetheart deals with large business.

    Public disclosure by organisations brings settlements into the open and whilst doesn’t disclose the terms of any agreement, the mere disclosure of a settlement helps to bring a sense of confidence and ‘nothing to hide’. Further the public should have confidence that tax transparency reports provide a full and accurate view of the organisation’s tax story, not just the glossy shiny bits.

    Disclosure settlements can also provide other benefits. Significant settlements can set standards for industry. We saw this in the BHP settlement. They can also provide confidence that taxpayers are getting treated consistently, meaning taxpayers can have confidence that they are not getting treated differently to their peers or getting a ‘worse deal’.

    Recognising the importance of disclosure of settlements, we continue to encourage taxpayers to make public disclosures in this regard. This won’t always require a disclosure at a press release level, but we do encourage disclosure in tax transparency reports and/or financial statements.

    Conclusion

    Transparency at taxpayer and ATO level is generally good, although there are some known tension points which we are working with stakeholder to address.

    Continue to see a strong appetite for public transparency in Australia and globally. ATO continues to encourage and support taxpayers to adopt and improve transparency in a way that provides true and real insight into their affairs.

    Thank you

    Last modified: 03 Dec 2021QC 67394