5 July, 2018
This article outlines the key Australian income tax developments in the last month affecting your business, including the Senate Economics References Committee's recent report on corporate tax avoidance.
Top 7 developments in tax this month you need to know
Spotlight on the Senate Committee's Report on Corporate Tax Avoidance
What you need to know:
The Senate Economics References Committee released its final report on corporate tax avoidance in Australia – 'Corporate Tax Avoidance – Part III: Much heat, little light so far'.
The report looked into corporate tax avoidance in Australia and made 13 recommendations to improve the integrity of Australia's corporate tax system.
The Labour led report has been endorsed by the Greens party and criticised by Coalition senators. Any implementation of or talk of implementing the report's recommendations has yet to be seen.
Overview of the report
The Senate Economics References Committee has tabled its final report on corporate tax avoidance in Australia – 'Corporate Tax Avoidance – Part III: Much heat, little light so far'.
The investigation commenced in October 2014 to assess Australia's implementation of the OECD Base Erosion and Profit Shifting (BEPS) project and because of widespread concern that Australian corporations and multinational enterprises were not paying their 'fair share' in Australian tax. The initial inquiry was aimed at uncovering tax avoidance and aggressive tax minimisation by corporates, assessing the performance of the Australian tax system, ATO and ASIC and identifying areas for reform. Over the course of the inquiry, the Committee's focus zeroed onto Australia's offshore oil and gas sector, digital economy and pharmaceutical industry.
On 30 May 2018, following the release of two interim reports, the Committee tabled its final report and recommendations. Nearly four years since the Senate referred the inquiry, the report is released after the introduction of certain corporate tax reforms (such as the newly introduced MAAL and DPT integrity measures). In this context, the report makes 13 recommendations for improving the integrity of Australia's corporate tax system.
Australia's corporate tax avoidance landscape
The report formed the view that through complex structuring, foreign ownership and cross border operations, multinationals are often not paying an appropriate amount of Australian tax relative to the profits derived from activities in Australia. While a variety of international and domestic anti-avoidance measures have been introduced, the report indicates that further reform is required to strengthen the integrity of Australia's tax system.
In the international tax environment, the report indicated that the ongoing implementation and monitoring of BEPS compliance is essential to addressing multinational tax avoidance globally.
In a domestic context, the report indicated that due to recently implemented unilateral measures (such as the MAAL, DPT, updated transfer pricing guidelines, harsher penalties and Voluntary Tax Transparency Code), some multinationals have restructured to avoid the punitive multinational tax measures. In the report, the ATO predicted that the introduction of the MAAL has restored $100 million of income tax to the Australian revenue base and helped the ATO resolve disputes from prior income years. The report identified the need for further reform around the application of transfer pricing rules and taxing the digital economy.
What did the report recommend
Recommendation 1 – Thin Capitalisation Rule Amendments
One of the common corporate tax avoidance methods the report zeroed in on was debt loading and the excessive use of interest deductions relating to intragroup debt of multinationals.
While Australia's thin capitalisation rules are intended to reduce the instances of multinationals claiming excessive interest deductions in Australia, the rules give multinationals a variety of options to maximise their interest deductions (such as through safe harbour provisions, 'arms-length' tests and worldwide gearing ratios). The Committee commented that the current thin capitalisation rules are not sufficient and recommends that they be amended (removing the safe harbour provisions and arms-length test) so that the worldwide gearing ratio is the only method by which interest related deductions should be calculated for the purpose of tax treatment in Australia.
Recommendation 2 – Transfer Pricing
Following the ATO's recent success against Chevron, Australia's transfer pricing rules have been put under the spotlight. The Committee found that the current transfer pricing regime is inadequate as the current approach to attributing value between countries is systematically abused by multinationals. The current regime allows multinationals to 'price gouge' Australian consumers, sending the majority of profits offshore without paying relative Australian corporate income tax.
The committee recommends that the government undertake an independent review into the detriment to Australian tax revenue that arises from the current transfer pricing regime. It further recommends that the government explores options to modify transfer pricing rules, or other tax laws, to ensure multinational enterprises make the appropriate contribution to Australian tax revenue.
Recommendations 3 to 9 – Transparency
Most of the Committee's recommendations centred around improving transparency for tax administrators and the Australian community (including journalists, academics and civil society).
The Committee recommended measures that would increase transparency for multinationals and private companies. It predicted that increased reporting obligations and transparency requirements would lead to increased community confidence in the integrity of the tax system.
To this end, the recommendations were not only focused on ensuring corporate transparency with the ATO and ASIC, but also with the public and interested parties. Many of the Committee's transparency recommendations were also aimed at tackling multinational misuse of corporate structures, accounting standards and other means to obscure their activities from public and administrative scrutiny.
The Committee's transparency measures include the following:
- require all companies with a total income equal to or exceeding $100 million for an income year to release tax information of the level specified in the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015;
- introduce a publicly accessible (either free of charge or at a reduced cost) central register that contains information regarding the beneficial owners of companies, trusts and other corporate structures;
- require all companies, trusts and other financial entities with income above a certain amount to lodge general purpose financial statements with ASIC;
- undertake an independent, public review of the ASIC statutory fees and charges to explore options for reducing or eliminating fees to access company information (including financial statements);
- make excerpts of Country-by-Country reports publicly available and free of charge. Information to be released from these reports would include high level data on how much revenue is collected and tax paid in jurisdictions the firm operates in and the number of employees;
- convert the existing voluntary transparency code to a mandatory code for all large and medium corporations operating in Australia, including subsidiaries of multinational corporations; and
- require the ATO to include a dedicated section on the number and value of significant tax settlements of $50 million or greater in its annual report.
Recommendations 10 to 13 – Petroleum Resource Rent Tax
Australia's oil and gas industry plays an important part in Australia's economy and tax revenue base. Of the 384 businesses active in the Australian oil and gas extraction industry, five companies account for over half the market (two of which are foreign owned companies). These companies are taxed using excises, royalties and resource rent tax under the Petroleum Resource Rent Tax regime. Overall, the ATO reports that compliance with the PRRT system is good and there is a general consensus among industry stakeholders that the regime is well designed and functioning. The Committee's review into corporate tax avoidance in relation to the oil and gas industry follows two other reports into the industry; the Callaghan Review and Treasury's Review of the PRRT. The Committee's report generally follows the recommendations of these two reports and concludes that the current PRRT regime is too generous to oil and gas multinationals.
The Committee's report recommends that:
- the government finalises and releases its response to the Callaghan report into the Review of the PRRT;
- the government overhauls the uplift rates for future PRRT eligible projects, so as to make them less generous;
- the ordering of deductions be rationalised for future PRRT eligible projects so that those with the highest compounding rates are used first for tax deduction purposes; and
- gas transfer pricing methodology for PRRT eligible projects be reformed to make it simpler and more transparent.
Ashurst's comments
The Committee's report has had a protracted history. The four-year lag time and absence of many of the original Senators driving the report (including previous Senators Dastyari, Lambie, Smith and Zenophon), means that the tax landscape and report outcomes are vastly different from what was originally intentioned.
The bi-partisan Report has received mixed responses across the political board. From the beginning, the report has been dominated by Labor Committee members and is in essence a Labor policy. Recommendation 3 essentially reinstates Labor's policy requiring companies with a total income equal to or exceeding $100 million for an income year to release its tax information. In 2015, the Coalition government increased this threshold to $200 million. In additional comments annexed to the report, certain Coalition Senators accepted some recommendations but were overall critical of the 'overreaching' report.
Most notably, the Senators dismissed the recommendation to amend the thin capitalisation rules and PRRT regime. The Greens' dissenting comments were also annexed to the report.
While ultimately endorsing the transparency recommendations, the Greens offered a stricter measure for Recommendation 3; minimum $50 million an income year for a company to be required to release tax information.
What happens next
We must wait and see whether the Coalition government will implement any of the recommendations that the Committee has put forward. While it is unclear whether the report provides any indication of future corporate tax avoidance reforms, it is likely that any significant tax reform items will be a subject of the upcoming Federal election.
For further information, please contact:
Vivian Chang, Partner, Ashurst
vivian.chang@ashurst.com
