The ATO supporting a business-led recovery

Jeremy Hirschhorn, Second Commissioner, Client Engagement
Keynote delivered to Financial Review CFO Live
6 December 2021
(Check against delivery)

Introduction

Hello, it’s good to be here today.

This is the third CFO Live event I have attended, and I must say it is one of the events in my calendar that I really look forward to.

As CFOs of some of the largest companies in Australia, you are vital influencers in the tax system. Most directly, the tax your companies pay to support the community, your role in remitting tax of your employees, your reporting of tax data of others. Indirectly, what you do sets the tone for the broader community, and many smaller players look to you as role models for how they should engage with the system. You can also tilt the playing field towards other honest businesses.

Now, as we begin to emerge from the pandemic, your role in the system is likely to be drawn into even sharper focus. The decisions you make and the behaviours you exhibit will be viewed with greater scrutiny than before. It’s a challenging position to be in, but with your level of expertise, and with the right advice and guidance, I am confident CFOs and your respective companies can rise to the occasion. The ATO hope to support you in this challenge.

This is why at the ATO we always want to be on the front foot when it comes to engaging with you and discussing our respective priorities. We know that an open and transparent relationship is good for both of us. Similarly, we are always keen to listen to your priorities and understand any concerns that we may be able to help you with.

Today I’ll discuss:

• The overall corporate tax landscape
• Knowing where your company stands – and you letting others know
• Incentives in the tax system to encourage a business-led recovery
• Your role in supporting smaller players in the economy
• Observations for CFOs overseeing tax matters
• International tax developments.

The overall corporate tax landscape

Australia continues to have one of the strongest corporate tax systems in the world. Our most recent estimate (for 2018–19) is that 92% of the tax owing or almost $59 billion of tax in the large market was paid voluntarily, or with little intervention from the ATO. This is world leading, and a credit to both the vast bulk of large companies in Australia which pay the corporate tax due, and the work of the ATO in robustly holding the remainder to account. After compliance action, this performance increases to an estimated 96% of the corporate tax due.

Supported by the Tax Avoidance Taskforce funding, the ATO has the resources to address the large market, with a strong legislative underpinning, including reforms such as a strong General Anti-Avoidance Rule, the most up to date transfer pricing legislation, the Multinational Anti-Avoidance Law (MAAL) and the Diverted Profits Tax.

Later this week the seventh annual Corporate Tax Transparency report will be released, with the legislatively prescribed (but limited) data about Australia’s largest companies. The report covers the tax affairs of the largest companies operating in Australia, showing that for the 2019–20 year they made up around 65% of all corporate tax. I know you will be interested in the detail of the report, as will the media. When the report is released on Friday, we will again be publishing extensive commentary along with the data in an effort to provide the context, and why the community should not leap to conclusions, including where a company has not paid tax for a period of years.

Knowing where your company stands – and letting others know

The cornerstone of our engagement with the large market is our Justified Trust program, which was first applied to our Top 100 population in 2016, and later expanded to GST for the Top 100 population in 2019. By achieving ‘Justified Trust’ a company can be confident the ATO can take a less intensive monitoring approach, and it forms a strong foundation for future engagements.

The program has been hugely successful. Our most recent report shows that approximately half of the 100 largest companies operating in Australia have attained an overall high assurance rating. This figure was just 6% in 2019. Once the 30% which have achieved medium assurance are included, this means four out of five of the largest businesses in Australia have achieved either a high or medium assurance rating.

Separately, with the ATO providing what is effectively a ‘tax due diligence’ report on your organisation, you and your Board will know exactly where you stand in your tax affairs from the ATO’s perspective, with (hopefully) the confidence that you are in a good place with little risk of ‘surprises’, or conversely knowing the areas that will need addressing.

Thirdly, the ATO provides detailed reports of the outcomes of its ‘top 100’ and ‘top 1,000’ programs, with the most recent ‘top 1,000’ report being released last Friday. These reports allow you to benchmark your performance against other similarly sized businesses.

Attaining high assurance is no longer exceptional or exclusive, it is quickly becoming the norm. This is the club you want to be in if you are a CFO. A high assurance rating signals our confidence in you that you are operating within the rule of law and making your tax contribution to the Australian community. Businesses that have not achieved a high assurance rating or demonstrated a willingness to improve their tax governance have a higher risk profile and this will prompt more comprehensive and intensive reviews by us, including audits.

I first spoke about the importance of transparency to the public by large corporate taxpayers to this summit two years ago and it is just as important today as it was in 2019. As CFO’s I would encourage you to get out and tell your own tax story to the Australian community; don’t leave people to make their own assumptions based on limited ATO data, or simply let it play out in the media.

A number of organisations are already taking steps to be transparent to the public about their own tax affairs, with 189 companies having published at least one report under the voluntary tax transparency code. We are also seeing a steady increase in the number of significant global entities lodging general purpose financial statements, whether to the ATO or ASIC. Of course, there is an expectation – and I think rightly so – that any organisation who adopts these transparency measures commits to them to fullest extent possible and doesn’t just meet the technical requirements.

I would encourage companies to publicly share their assurance ratings, and not just in their tax transparency reports. A high assurance rating signals to their clients, shareholders and the broader community that this company is operating soundly and is proud of its good track record. Similarly, a high assurance rating from the ATO has been set as a KPI for many large corporate tax teams.

On the flip side, from an investor perspective, particularly where a potential investee company has an inexplicably low cash or accounting effective tax rate, I would encourage you to ask the investee about their justified trust rating.

Incentives in the tax system to encourage a business-led recovery

The ATO are responsible for ongoing tax system measures to boost cashflow for eligible businesses. Two signature initiatives are:

• Temporary Full Expensing, which has already been claimed by approximately 40,000 taxpayers for almost $3 billion of new capital expenditure.
• Loss Carry Back, which has already been claimed by approximately 7,000 taxpayers for refunds of almost $500 million.

I note that these are early numbers, with many tax returns for 30 June 2021 taxpayers only due to be lodged in January 2022.

The nature of these measures is that they will generally be timing differences from a financial accounting perspective. As such, as CFOs, it is important that you emphasise the potential cash flow benefits when investment proposals are under consideration.

Separately, the ATO has a variety of administrative initiatives to support investment in Australia, and to facilitate transactions.

We have launched the New Investment Engagement Service or NIES, a service for companies proposing to make significant investments in Australia. It streamlines processes to deliver outcomes that meet transaction timeframes, and to provide requested guidance in a tailored report, including highlighting any concerns and mitigation steps. It also provides tailored information about other ATO services and programs, assistance in navigating the Foreign Investment Review Board process, and co-ordination of ATO binding advice. Already, since its launch on 1 July 2021, there have been 9 engagements, 3 of which have proceeded to a formal engagement.

But even if you don’t fit neatly within the NIES program, if you are thinking of making a significant investment or transaction, please engage with us early. The largest companies on their largest transactions are now routinely coming to us prior to deal announcement to gain certainty in advance around the tax outcomes both for the company and their investors. At last count we had received over 150 requests for this type of tailored advice since 1 July. As an aside, this is another advantage of having obtained justified trust – when it comes to the pinch on these big transactions, the existing relationship and mutual trust really pays dividends.

Of course, these are over and above the economic stimulus measures administered by the ATO over the past two years which have provided immediate support to over one million entities, and four million individuals across Australia. Through the JobKeeper, Cashflow Boost and Early Release of Super measures the ATO released $164 billion in much needed support to the community. Of this about $9 billion went to large businesses under the JobKeeper program.

Before moving on, I might make a few observations about JobKeeper in general, and in relation to large business in particular. Based on our initial review work to date, JobKeeper was an extraordinarily high integrity program, in terms of payments only going to those legally entitled to them. Secondly, it was a deliberate feature of the program that, once qualified by a reasonable estimate of a downturn in revenue (or actual downturn), a business remained qualified for a period of up to another 5 months regardless of a rebound in turnover.

Much has been made of a few examples of large businesses which had rebounding turnover and kept claiming JobKeeper (and have not repaid some or all of it), as well as the overall amount estimated to be paid to rebounding businesses. (Noting that, if anything, large businesses were under-represented in rebounding businesses claiming JobKeeper relative to smaller businesses and not for profits.) What I would say though, is if you are a large business that had rebounding turnover, it is still not too late to take stock and return any excess JobKeeper that you actually did not need - join the 100 businesses that have approached the ATO, with around $270 million already repaid.

Similarly, and as I mentioned last year in relation to the newer stimulus measures, please access them and use the proceeds to invest in your business. But also think twice if your plan is to access them simply to pay bigger dividends or executive bonuses.

Your role in supporting smaller players

Looking at the economic impacts of COVID-19, it’s fair to say that many small businesses have had to rapidly adapt the way they operate to stay afloat, and while some businesses have thrived, some have experienced no impact, many are still doing it tough.

Small businesses form a vital part of our economy and will be essential to the economy bouncing back as fast as possible. That’s why it’s important that we work together to support Australia’s 4.3 million active small businesses to make a strong recovery.

You would be aware for years the Government has been focused on introducing measures that support small business to operate more effectively. For example, by making business-to-business transactions fairer and more transparent, and ensuring interactions with the tax and super system are easier by embedding them in the natural business systems in which they operate.

Two particular initiatives that I would urge you as CFOs to embrace:

• The Payment Times Reporting Scheme requires large business (and large government enterprises like the ATO) to report their small business payment times and practices. This helps small businesses make informed decisions about who to do business with and creates incentives for large business to improve their payment times and practices. It also helps the public make decisions about the large businesses they buy from.
• I will also mention e-invoicing as a simple and easy to adopt economy-wide reform. As large procurers of services from other businesses, your early adoption of e-invoicing could be the necessary prompt for small businesses to take up an e-invoicing solution and enjoy the savings and efficiencies of automating their invoicing system.

I would also urge you to ensure tax rigour in your supply chain in order to advantage honest small businesses over dishonest businesses, for example:

• Ensure that the ABNs you are quoted are valid and make sense, for example by using ABN look up functionality either directly or via your procurement software.
• Embrace the Taxable Payments Reporting System, which is mandatory for payments to contractors in some industries, and optional for others. It is increasingly common for Government agencies and large businesses to report all contractor payments through a Taxable Payment Annual Report (TPAR) for ease of administration.
• Consider asking your significant suppliers for a 'statement of tax record'.
• Ask how your significant suppliers ensure the tax rigour of their supply chain, e.g. in relation to their own suppliers.

Observations for CFOs

In my presentation last year, I suggested some areas that a CFO should think about in relation to their company’s tax position:

• KPIs for the tax team
• tax corporate governance, and whether it is ‘lived’
• understanding the relationship between financial reporting and tax, especially GST
• understanding where you sit relative to peers
• getting assurance over your tax ‘infrastructure’
• Resolution of tax disputes
• being a transparency role model
• looking for a wise adviser not a clever one.

I will not cover that ground again today, but merely note that these remain just as relevant.

I will however touch on developments in two areas: resolution of tax disputes, and looking for a wise adviser not a clever one.

On the latter, the ATO has been working closely with the largest tax firms to facilitate their development of ‘large market adviser principles’. These principles, once finalised, will ensure that the firms have appropriate controls in place to ensure that their advice is of a consistently high standard. As a CFO, you will be in a position to gain extra confidence in the reliability of advice by asking whether (or indeed requiring that) the firm providing the advice has signed up to the principles. We are hopeful that the firms will be able to finalise these principles in the balance of this financial year.

In relation to resolution of tax disputes, I wanted to touch on the topic of ‘legal professional privilege’. By way of background, the ATO is entitled to access any documents it needs in the course of its investigations, with the exception of documents where there is ‘legal professional privilege’ and the client wants to assert that privilege (critically, it is the client’s privilege not the lawyer’s).

We recognise that Legal Professional Privilege (LPP) is a fundamental common law right of the client and respect taxpayers making privilege claims. However, we are concerned with the emergence of practices whereby taxpayers and/or their advisors withhold information based on baseless or reckless LPP claims.

In our reviews, we rarely go to the stage of formal notices requiring production of information (only about 70 onshore notices last financial year). When we do, it is usually because of a breakdown of trust in the relationship, and that itself may be a signal to the CFO that something is awry.

But when we do, the question as to whether particular documents are privileged will often arise.

The ATO wants all taxpayers to get high quality professional advice, whether from a lawyer or accountant, and it’s our experience that most advice is of a high standard. We are also not that interested in someone else’s interpretation of tax law – we are mostly interested in understanding the full factual context.

Also, the ATO is not, and does not seek to be, the arbiter of privilege claims. However, to appropriately conduct investigations and audits, the ATO must be able to properly consider, and potentially challenge, what it considers to be dubious claims for privilege. This requires contextual information in relation to the underlying documents, such as who authored a document, who sent it, and who received it – which most taxpayers provide voluntarily. The recent full Federal Court decision in CUB confirms that the Commissioner is able to request these details and thereby determine whether the ATO might challenge an LPP claim in Court.

At this point I will reiterate that the vast bulk of our engagements in the large market are done without recourse to formal information gathering powers and we do not typically have LPP disputes with these taxpayers.

My first message to CFOs here is quite a simple one: engage with us openly and early to avoid drawn out and costly disputes. While we recognise there will always be disputes – particularly in areas of complex law – however recent disputes around the use of LPP are in our view completely avoidable. Once a dispute over LPP starts, they tend to be very time consuming and expensive for both sides.

Accordingly, we have set out our view of best practice for assessing engagements and making LPP claims in response to formal information gathering notices. It is designed to assist taxpayers and advisors by setting out the ATO view of good practice for assessing engagements and making LPP claims in response to formal information gathering notices. It is intended to be voluntary to follow and relevant to large businesses that have received notices typically as part of a dispute or audit activity. At the moment it is in draft and out for consultation.

The voluntary protocol provides guidance as to the type of information the Commissioner considers he needs in order to make such an assessment. It does not require nor encourage taxpayers to waive privilege. Rather, by following the procedures in the guide taxpayers can obtain a level of certainty and confidence as to whether the Commissioner is likely to accept or challenge their LPP claims. This allows the Commissioner and taxpayers to focus on the substantive matters in dispute rather than have collateral disputes about the information gathering process, also avoiding unnecessary and unpredictable costs.

In line with our open and transparent approach, the guide is currently subject to a public consultation process, so if you are keen to provide feedback please do so.

Finally, while I am here in front of a room of CFOs, I must make one final point about accounting for tax disputes. It is fair to say that, from our perspective, the accounting for, and disclosures around, tax disputes are ‘mixed’ and generally based on very optimistic analysis of tax risk. Although going too deeply into this issue is beyond the scope of this presentation, I would simply say that, in considering your financial statement disclosures (as well as in resolving the dispute), it is likely to be of benefit to get tax and financial accounting advice that is independent from those who were involved in the decisions that led to the dispute.

International tax developments

Australia continues to participate in work led by the Organisation of Economic Co-operation and Development (OECD) to develop new rules to address tax issues arising from the digital economy.

You would be aware a minimum global level of corporate tax of 15% was agreed to at the OECD Inclusive framework meeting in October. This is a major development for tax systems worldwide, including Australia’s.

This will redirect some of the taxes that large multinationals pay to the countries where their products or services are sold, instead of the taxes going only to the country they’re headquartered in. This move is designed to fit the modern digital economy and help to stop multinational corporations from shifting their profits to low-tax countries. Almost every OECD Inclusive Framework country has agreed to participate.

In the context of Australia, these measures build on, and should be understood in the context of, a strong foundation in Australia’s rapid and pragmatic adoption of the previous BEPS 1.0 initiatives, including the MAAL and funding of the Tax Avoidance Taskforce, as well as the inclusion of imports of services and low value goods into the GST net.

As a direct result, most, if not all, of the companies in scope of ‘Pillar One’, have already restructured their arrangements away from the ‘sell here, bill from somewhere else’ model to a more traditional distribution model, and have been paying tax in Australia based on their activities here. Just last week, it was reported in the AFR that Netflix was the latest company to change its arrangements to now bill Australian subscribers directly from Australia (rather than through the Netherlands). Our understanding is that globally this is the exception not the rule. In relation to ‘Pillar Two’, we have also been very effective in addressing some of the major transfer mis-pricing issues affecting the Australian tax base, for example related party financing and commodity hubs. This is also supported by a strong controlled foreign company (CFC) regime.

While high-level political agreement has been achieved, there is still work to do to nail down various technical and administrative issues in the background. Australia is at the forefront of these discussions.

For Pillar One Amount A, the current focus is on the development of the text of the Multilateral Convention (MLC) and model rules for domestic legislation by early next year.

For Pillar One Amount B, the current focus is on defining the in-country baseline marketing and distribution activities, with specific focus on the needs of low-capacity counties, by the end of this year.

For Pillar Two, the current focus is on the development of the model rules and supporting commentary which set out the mechanics of the Global anti-Base Erosion (GLoBE) rules. As well as the model treaty provision to give effect to the subject to tax rule (STTR).

The process for arriving at the inclusive framework has in large part been due to the infrastructure that has been built as part of BEPS 1.0. Now, our mechanisms for exchanging information, ensuring transparency and providing certainty will need to be developed further to enable them to effectively support the administration of this Two-Pillar Solution. Once the design of the Pillars is more advanced, to enable effective implementation by 2023, the ATO plans to progress lodgment and systems upgrades, internal capability and develop guidance materials. We expect to work closely with business as we work through this process.

This is a promising development for the Australian tax system, and the ATO has continued to work closely with Treasury to provide input to the ongoing technical work of the relevant OECD working parties.

We also work directly with over 50 international revenue authorities through the OECD’s Forum on Tax Administration (FTA) to identify, discuss and influence relevant global trends and develop new ideas to increase the fairness, efficiency and effectiveness of tax administration, reducing burdens and improving tax compliance and tax certainty.

For the inclusive framework, we are collaborating with the FTA on implementation and administrative issues (working closely with Treasury on the policy elements) so that we are ready to support Australian taxpayers once the Pillars work is finalised.

I will be attending the OECD FTA plenary next week and look forward to more productive discussions on how we will apply the new agreement to the Australia situation.

From a CFO’s perspective, if you have international operations it is worth starting to consider if these measures might affect you. In particular, if you have profitable operations in low tax jurisdictions or benefit from tax holidays or other significant tax concessions, you may want to think about whether you may fall within Pillar Two.

Conclusion

It has not been the year any of us expected or anticipated, but we are here today and hopefully at the start of better times.

As the CFOs of some of our largest companies, you play an instrumental role in the Australian economy. The decisions you make and the behaviours you exhibit will make a difference to Australia’s capacity to recover from the challenges of the past two years.

From the perspective of the ATO, we hope to support you in this challenge. Our strong relationship, based on trust and mutual respect will help to pave the way, and I have every confidence that you are up to leading the charge for Australia.

Thank you for your time today. I’m happy to take questions.

Second Commissioner Jeremy Hirschhorn's keynote delivered to the Australian Financial Review CFO Live event, 6 December 2021.