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  • We assist and assure the tax compliance of large corporate groups

    One of our strategic aims is to sustainably reduce the tax gap. We know old approaches centred on active compliance programs of reviews and audits will not achieve that aim. Instead, our first focus is on active prevention.

    We believe the majority of taxpayers prefer to avoid tax risk where possible. To do so, they need to know where our concerns lie and our compliance stance on various aspects of the law or areas of the economy. Our goal is to only have taxpayers entering into disputes with us where they know what our position is, and have made a conscious decision to operate contrary to it.

    In order to achieve this goal we are being more explicit about where we have concerns. We are communicating our thinking across all aspects of our compliance activities. We are being more creative and flexible in the type and form of guidance we produce. This means we now have tailored guidance products for specific purposes as well as our traditional public rulings.

    Public guidance also supports community confidence in the system by letting the public know we are identifying and dealing with matters of concern.

    Through early engagement and private advice we are also working directly with large corporate groups. This helps to identify higher risk transactions and reduce disputes. It allows us to work with the taxpayer to agree on the appropriate tax treatment before they lodge their tax return.

    Sometimes we can’t avoid disputes and we will pursue matters through audit and to litigation where necessary. The community expects us to take strong action against deliberate non-compliance where we find it. A credible compliance presence also deters others from pushing the bounds of acceptable behaviour.

    On this page:

    Population-wide approaches to preventing non-compliance

    Large corporate groups have multiple tax obligations. The complexity in fulfilling these obligations can be costly. We’re improving the system to give more certainty and reduce corporate administrative costs. This includes renewing our focus on public guidance.

    We will continue to monitor the environment to understand what’s happening in the economy, tax system and business. This will ensure we provide relevant and timely guidance.

    We will also consult with stakeholders on their needs so our advice is practical and contemporary. This consultation has already resulted in us developing new guidance products.

    Law companion rulings

    Law companion guidelines (LCRs) provide practical certainty, in the form of a public ruling, on how we will apply significant new law. LCRs we have published to date mostly cover various aspects of the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and new superannuation and GST measures.

    We have also issued an LCR on Country-by-Country (CbC) reporting. We have issued the final LCR on the diverted profits tax and draft LCRs on the business continuity text for losses and consolidation churning of joining entities by foreign-owned groups.

    See also:

    Practical compliance guidelines

    Practical compliance guidelines (PCGs) are designed to provide a practical compliance solution where there is uncertainty, impracticality or discord between the law and current commercial practices. They may also provide our view of what constitutes a low or high risk activity or arrangement in relation to a specific area of the law. PCGs issued cover income tax, excise and GST matters.

    We are currently finalising PCGs for:

    • identifying where a company's central management and control is located – see PCG 2018/D3 Income tax: central management and control test of residency: identifying where a company's central management and control is located
    • related party derivative arrangements as another type of arrangement covered by our related party international financing – see Schedule 2 of PCG 2017/4DC1 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions
    • offshore shipping service hubs as another type of arrangement covered by our centralised business models – see Schedule = 3 of PCG 2017/1DC2 ATO compliance approach to transfer pricing issues related to centralised operating models.

    See also:

    • PCG 2017/1 ATO compliance approach to transfer pricing issues related to centralised operating models involving procurement, marketing, sales and distribution functions
    • PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions
    • PCG 2018/5 Diverted profits tax
    • PCG 2018/7 Part IVA of the Income Tax Assessment Act 1936 and restructures of hybrid mismatch arrangements
    • Practical compliance guidelines

    Taxpayer alerts

    We’re using taxpayer alerts to flag arrangements of concern with the community, taxpayers and advisers.

    Each taxpayer alert describes an arrangement and our concerns about it. Taxpayer alerts don’t provide our interpretation of the law, but outline where we currently have concerns and what we are doing to address them. They also invite taxpayers to seek advice from independent advisers or us. We encourage this if they have or are considering entering into a similar arrangement as described in the alert.

    Taxpayer alerts help taxpayers and their advisers make more informed decisions. They stop the proliferation of tax schemes. They also buttress community confidence in the tax system.

    See also:

    Working with the tax profession

    The vast majority of tax professionals provide support for the integrity of the tax system. We work with the tax profession and explain our concerns to them at the earliest opportunity. In this way, we enable them to provide appropriate advice to their clients. We also use our strong relationships with tax professionals and their representative bodies to develop our approaches.

    We will act quickly with advisers who undermine the integrity of the tax system or facilitate non-compliance. In addition to the regulatory work of the Tax Practitioners Board, we collaborate with professional associations to uphold the reputation of the tax profession. In serious cases, promoter penalty laws may apply to promoters of tax avoidance schemes.

    The types of behaviour that cause us concern include:

    • engaging in conduct designed to frustrate and prevent the collection of facts and information and the proper administration of tax laws
    • the promotion or otherwise of tax avoidance schemes that are not reasonably arguable.

    See also:

    Using our formal information gathering powers

    We issue formal notices to advisers and their firms known to be associated with arrangements covered by our taxpayer alerts. The notices ask for information and documents for taxpayers to whom they provided advice. We issue the notices to identify:

    • information about the involvement of certain known taxpayers in the schemes
    • any other taxpayers who may have been involved in the schemes
    • who designed the schemes, why they were designed and the processes involved in their design
    • what promotion of these schemes has taken place.

    We are pursuing a range of cases to obtain documents, including testing claims for legal professional privilege, and for the consequences of breaching information notices, which include criminal sanctions.

    Legal professional privilege

    Legal professional privilege (LPP) protects confidential communications between a lawyer and their client for the dominant purpose of providing legal advice. This is an important common law right as it protects a client’s privacy and encourages full disclosure between the client and their lawyer when obtaining and providing legal advice or services.

    We want taxpayers to get high quality advice as this underpins the self-assessment system. Most advisers, whether at accounting or law firms, provide this and support the tax system.

    We are dealing with LPP claims that are reckless or knowingly false and made to obscure facts from us. They often include claims over underlying contracts, board minutes, and internal emails documenting why a transaction was done.

    In an increasing number of cases, we are seeing claims of privilege over thousands or even tens of thousands of documents. But when we ultimately receive the documents, they were clearly never privileged.

    The challenge for us is primarily one of administration and enforcement. It is about how to deal with privilege claims not grounded in the law, but grounded in a desire to obscure the facts.

    One-to-one engagement with large corporate groups

    We engage one-to-one with large corporate groups. This gives us assurance over approximately two-thirds of all corporate income tax.

    Differentiation based on risk

    We assess the risk of each corporate group in the entire corporate groups population. This helps us to understand the consequence (potential impact) and likelihood (tendency to have a tax outcome we don't agree with) of non-compliance by each corporate group.

    We continually engage with the large corporate groups who have the highest consequence of non-compliance. Most of our contact occurs prior to lodgment of tax returns. We seek to clarify issues and risks as they arise. Being transparent about issues that concern us provides a catalyst to resolve them early.

    We are developing an engagement and service approach to help taxpayers understand the consequence of their risk rating in a tangible sense. We will leverage our risk analysis of taxpayers to guide and differentiate the actions we take with particular groups of taxpayers.

    See also:  

    How we gain confidence the right amount of tax is being paid

    We are focusing on whole-of-taxpayer profiling and risk assessment. This helps us understand the taxpayer's business model and any tax planning motivation and opportunities they may have. This profile and the risks involved tell us what we need to do to gain confidence each taxpayer is paying the right amount of tax.

    We’re taking a structured approach to gaining this confidence by considering four key things:

    • the taxpayer’s tax governance framework
    • whether the taxpayer is involved in any arrangements we have indicated we are concerned about or consider high risk
    • understanding the tax impacts of any significant and new transactions the taxpayer has entered into
    • if the taxpayer's accounting and tax results vary, understanding why this is the case.

    Our effective tax borne (ETB) methodology provides an approach to analyse the tax and economic performance of corporate groups. It identifies an economic group’s worldwide profit from Australian-linked business activities and the Australian and offshore tax paid on that profit.

    Essentially, the ETB determines the weighted average of the cash tax paid ratios (cash tax paid over Australian-linked profits) for each jurisdiction. Analysing and understanding a taxpayer's ETB provides evidence of the absence of risk and assistance in identifying risk.

    We are considering how we may apply a modified ETB methodology to Australian private businesses.

    See also:

    Helping corporates strengthen their tax governance

    We have developed the Tax risk management and governance review guide primarily for large public businesses. It articulates better practices that boards and management can adopt to enhance governance and manage tax risk.

    The guide is designed to help businesses self-evaluate their governance framework and manage their strategic and operational tax risks. The guide sets out what we believe to be better tax corporate governance practices. We have also provided guidance for privately owned groups to help them develop or improve the effectiveness of their tax governance framework.

    Both of these guides are what we recommend, rather than mandate.

    Where we are satisfied that companies have strong and lived governance we can have increased confidence in their financial and tax reporting.

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    Active prevention: one-to-one

    We recognise that willing participation supports a healthy and strong tax system. Approaches that prevent tax risks support willing participation better than corrective approaches. Our one-to-one active prevention approach seeks to influence taxpayer behaviour. We get involved before the taxpayer reports the tax outcomes of their business transactions to us.

    We apply active prevention approaches to the largest corporate taxpayers. This is important because their compliance influences not only the revenue base but also the willing participation of other taxpayers. Our one-to-one prevention includes our annual compliance arrangements (ACAs), pre-lodgment compliance reviews, private rulings, and advance pricing arrangements (APAs). It may also include informal guidance and interactions.

    The key is that taxpayers have openly and transparently discussed their plans and their view of the tax implications. Active prevention succeeds when clients modify their behaviour based on the concerns we raise.

    We estimate the wider revenue effects of these strategies wherever possible. Most techniques are evidence-based. We use information supplied by clients to estimate the difference in tax paid due to engaging early. This allows us to understand their proposed tax position and the impact of shifting that position, where necessary.

    Private rulings

    Early engagement discussions are a key tool we use to assist large corporate groups seeking advice on complex transactions they are considering, or have already implemented. These discussions allow for timely identification and management of tax risks. It enables businesses to enter into transactions with confidence.

    We’ve also introduced an option for taxpayers to provide a draft ruling for review and endorsement by us. We will still review the arrangement proposed and ensure the appropriate application of the law before any ruling is issued. This will deliver a more streamlined process and improve the client experience.

    We recognise taxpayers are not obliged to follow our advice under our self-assessment system. Where our risk identification processes have identified a concern, we may engage in compliance activities to test if the transaction is implemented in materially the same manner as described in the private ruling request. As part of our assurance reviews of the largest taxpayers, we seek confirmation of facts upon which we provided advice and that our advice has been followed.

    See also:

    Pre-lodgment compliance reviews

    Pre-lodgment compliance reviews (PCRs) are a key approach to ensuring prevention before correction. Through early engagement and a transparent relationship we are able to work with large corporate groups to identify and resolve potential compliance concerns as they arise and before tax returns are lodged.

    See also:

    Advance pricing arrangements

    Advance pricing arrangements (APAs) lock in compliant outcomes by agreeing on the criteria for transfer prices in advance of transactions occurring. They can eliminate the need for costly post-lodgment reviews and audits. They also give the community more confidence in the compliance of multinational enterprises.

    Before we agree to an APA, we need to understand the entire value chain and allocation of profits globally. We are applying the same structured approach we use to gain confidence in the tax paid by large corporate groups to our analysis to determine the basis for any APA we enter into. We do not simply look at the immediate transaction between the Australian entity and the related party.

    Under an APA, taxpayers provide us with an annual compliance report. This demonstrates how they have complied with the terms of their APA. The APA and our review of the annual compliance reports assure us the taxpayer is reporting the appropriate revenue on these related party transactions in their tax returns.

    Last modified: 13 Dec 2018QC 53316