• Ensuring corporate taxpayers pay the correct amount of tax

    As administrators of a very complex system, we monitor the environment to ensure that the tax law is achieving its intended outcomes. An effective, functioning tax system supports the social benefits we all enjoy. Our tax system relies on a high level of willing participation. This is built on both community confidence in the ATO as administrator of the system, and by taxpayers paying the right amount of tax. Our ongoing focus is on prevention before correction to ensure compliance. To assist the majority of businesses doing the right thing, we focus on tax governance, transparency, early and cooperative engagement, and increased guidance. The Tax risk management and governance review guide outlines how – at both the board and managerial level – large companies can test and ensure the effectiveness and sign-off of their controls.

    To make sure the system is working as intended and to identify issues for further investigation, we:

    • apply risk filters to 100% of the large market
    • monitor the market
    • use our understanding of risk
    • maintain a focus on industry and specific subject matters, such as consolidation, international related-party dealings, and private company profit extraction.

    For private companies, we use sophisticated data-matching techniques to detect their relationship with other private group entities, including wealthy individuals, companies, trusts and partnerships. We refer to this as a private group approach. This approach enables us to risk-assess compliance behaviours and target our assurance approaches at a group level.

    We cross-reference our understanding of market performance against other measures on an ongoing basis. Any anomalies are identified, analysed and mitigated – through improvements to our detection processes or further review – to ensure the ongoing health of the tax system.

    In 2014–15, overall company income tax receipts continued to move in line with macro-economic indicators, reflecting broad compliance by corporates with their income tax obligations.

    Assurance

    We assure ourselves that corporate tax entities are meeting their obligations and complying with the law through a range of client engagement activities – from support and assistance work, and advice, all the way through to audits and investigations, and takes place both before and after lodgment.

    Overall, more than half of the corporate tax population (based on total tax paid) is covered by our assurance activities.

    As large private companies are often associated with wealthy individuals and their private groups, we maintain an ongoing focus on the tax compliance of high wealth individuals and their private groups to ensure they pay an appropriate amount of tax.

    We also undertake one-on-one client engagement with our largest corporate entities and private groups. This enables us to better understand the commercial drivers behind major transactions in real time, to resolve potential tax issues and assure correct tax treatment in advance of tax return lodgment.

    Over a third of the Australian-owned public companies and foreign-owned entities, and more than half of the Australian-owned resident private companies in the 2014-15 Report of entity tax information (and/or the groups they are connected to), have been subject to some form of ATO review over the past three years.

    Risk scans, including our profit-shifting risk models (and domestic risk models) are regularly refined based on the latest intelligence. In addition, government funding from 2006 to 2009 (for the Review of self-assessment 2006–09 and Strategic compliance initiative 2010–13) facilitated assurance that large market losses brought forward from prior years were genuine and that utilisation was in accordance with the law. We monitor this on an ongoing basis.

    Our confidence that companies are complying is further supported by the increasing number of companies coming to us for early engagement and ruling requests, providing both parties (the ATO and the companies) with the certainty that the tax law is being applied correctly to those typically major transactions.

    Audit yield

    As a result of our client engagement activities, we identify taxpayers who are not complying with the law and make adjustments to their tax liability. Over the past three years, the adjustment level for companies reporting total income exceeding $250 million has been less than 3% of total tax paid. Our adjustments are measured as audit yield.

    Audit yield for large businesses in terms of liabilities raised and cash collected has remained relatively consistent. Liabilities have been higher than cash collections as a proportion of liabilities raised because large audits resulting in disputes take time to resolve through court processes and/or may subsequently be settled under our code of settlement. For the period 2013–14 to 2015–16, collections have averaged approximately $1.3 billion while liabilities raised have averaged approximately $1.9 billion per annum. Importantly, collections based on audit yield for large businesses are not directly comparable to the transparency population. In 2014–15, we undertook 53 audits and 384 risk reviews for large public companies.

    For the period 2013–14 to 2015–16, on average, we raised liabilities of over $1 billion per annum for Australian private companies in the transparency population and their associated entities, which include groups controlled by high wealth individuals. Collections average well over 60% of liabilities raised. In 2014–15, we undertook 125 audits and 1,228 risk reviews for large Australian private companies.

    Our areas of focus

    Over the past four years, the nature of the risks in the corporate marketplace has remained relatively unchanged, with one exception – the growing base erosion and profit-shifting risk. Ongoing systemic risks include capital gains tax (CGT), consolidations, inappropriate profit extraction, losses and international issues (including transfer pricing and offshore evasion).

    International risks

    Globalisation and the expansion of e-commerce have resulted in increasing cross-border trade, between both related and unrelated parties, and increased elements of that trade being attributed to intangible assets. Our focus is ensuring that Australia receives its correct share of tax under the current international tax rules.

    The international risks we are examining include:

    • Non-arm’s length pricing of related-party dealings – Transfer pricing is not an exact science and often leads to differing views, particularly about valuations and benchmarking involving comparability. This includes marketing and procurement hubs in low tax jurisdictions.
    • Excessive allocation of debt to Australian operations – or thin capitalisation, including using valuations and other complex mechanisms, which may enable the thin capitalisation thresholds to be technically met. Such approaches may result in additional tax deductions for interest payments, which may not have otherwise been available. In some cases, interest rates that are significantly in excess of the external interest rates may be used, which is also a transfer pricing risk.
    • International restructures of multinational enterprises – adopting global supply chains, with profit shifting consequences – in particular, significant profits attributed to intangible assets or functions purported to be located in low- or no-tax jurisdictions.
    • Complex financing arrangements – sometimes employing hybrid structures or complex instruments, such as cross-currency interest rate swaps, resulting in ‘stateless’ or untaxed income.
    • Digital business platforms – that have a large economic presence in a jurisdiction relative to their tax contributions, while claiming not to trigger a taxable presence.
    • Insertion of entities into structures – to inappropriately gain access to the tax treaty framework, or treaty shopping.

    International issues make up a significant percentage of risks currently being addressed in public groups and foreign-owned corporates. Our four-year International Structuring and Profit Shifting program focused on a large number of companies that have undertaken international restructures or have significant cross-border arrangements. The program is now in its final year and entails reviewing structures and arrangements to determine if they represent an inappropriate shifting of profits outside Australia. This enhanced audit program ensures compliance with laws dealing with transfer pricing and thin capitalisation.

    The government passed a new multinational anti-avoidance law which came into effect on 1 January 2016. The law will prevent multinationals from:

    • intentionally structuring their operations to avoid having a taxable presence (a permanent establishment) in Australia, and
    • avoiding tax in Australia where the economic activity that generates the profit actually occurs.

    We are bolstering our efforts to combat corporate tax avoidance through the Tax Avoidance Taskforce. As part of the 2015–16 federal Budget announcements, the government committed $679 million over four years to fund this taskforce from 2016–17.

    While investigating international risks, we apply a whole-of-tax-code approach. This ensures that any domestic tax risks, such as CGT or consolidation, are fully considered as part of our compliance activities.

    Structuring risks

    With increasing globalisation, the continuing growth of e-commerce and the enhanced capabilities of large multinational corporates to engage in financial engineering, some large taxpayers have been using tax planning or structuring to minimise or avoid tax. These arrangements are complex; they deal with significant amounts and involve a range of interactions with the tax system, giving rise to both income tax and indirect tax liabilities and entitlements at the corporate and shareholder level. In our compliance program, we are targeting international as well as domestic structuring risks.

    Domestically, structuring events are a natural part of Australia’s open economy and business operations. They include mergers and acquisitions, divestment of major assets and demergers, share buybacks, capital raisings and returns of capital, private equity entries and exits, initial public offerings, and cessation of business in Australia. Tax concerns arise when these events are structured to achieve more than the business outcome.

    The structuring risks we see include:

    • Consolidation – Issues may arise when businesses restructure or undertake a merger or acquisition. Of particular concern is the incorrect or contrived application of the consolidation cost-setting rules when an entity joins or leaves a group. This can lead to incorrect or unintended uplifts in the tax cost of assets
    • Taxation of financial arrangements – for example, unnecessary and contrived steps in financial arrangements.
    • Infrastructure investment – has been increasing, particularly through development of Australia’s natural resources, government initiatives and the sale of government-owned entities. Privatisation and infrastructure investments give rise to a number of tax issues spanning financing tax risks, tax deductibility of certain expenditure, CGT on sales of capital assets, and capital allowances for depreciable assets.
    • Privately-owned corporate groups (often controlled by a wealthy individual or family) may design complex business structures (including discretionary trusts) to extract company profits without payment of appropriate tax. This includes shareholders and their associates accessing company profits for personal expenses, using business lifestyle assets for private purposes, and restructuring to transition wealth in a tax effective manner as part of succession planning.
      Last modified: 09 Dec 2016QC 44476