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ATO Concentrates On Tax Payments By Larger Companies

Friday, February 19, 2010

In a speech to the Seventh Annual Corporate Tax Summit, Jim Killaly, a Deputy Commissioner of the Australian Taxation Office (ATO), outlined its perspectives on the large business sector in Australia that, with around 1,100 corporate groups having a turnover of more than AUD250m (USD225m), accounts for 36% of total tax revenue.

“In recognition of this,” he said, “the ATO has deployed significant resources into assisting large businesses in voluntarily complying with the tax law. These activities include advance pricing agreements, annual compliance arrangements, public and private rulings, technical discussion groups and industry liaison forums.”

Killaly confirmed that the ATO is continually rethinking how it could improve its part of the relationship with large business. For example, he disclosed that: “Last year we had a co-design forum to follow through on our earlier review of the advance pricing agreement program, and to take on board other external and internal feedback on how to improve the process. We are hoping to be able to implement the agreed recommendations by the end of June this year.”

Nevertheless, he said, there continues to be a compliance question as to whether tax declared by the large business sector is consistent with the underlying economic performance. In that respect, he noted that: “Over the 2005 to 2008 financial years, more than 40% of the company income tax returns lodged by large business taxpayers had a tax payable of zero and around half those were showing losses.”

Killaly disclosed that high value sectors, like “energy and resources, pharmaceuticals, motor vehicles, finance and major sales and distribution sectors” would receive the greatest attention. In addition, the ATO’s assessment of a large company’s appetite for risk, and of the strength or weakness of its governance processes, is a significant factor. The taxpayer’s compliance history also has a bearing, and there are, he said, some large businesses that are in the course of their third or fourth successive audit, each with material adjustments.

One of the most difficult aspects of tax administration is dealing with legacy issues, Killaly added, over tax risks that arose some years ago and are still unresolved. He hoped that the early signs of success with more cooperative approaches, like the annual compliance arrangements which highlight issues at the time of tax return lodgment and can also deal with legacy issues, will start to reduce overall risk in the tax system.

All large businesses, he continued, “are subject to a level of statistical analysis aimed at understanding their business performance, generally over a number of years to allow for business cycle impacts, and whether their tax performance is consistent with their business results.”

There is, however, another level of analysis of those cases where the reported business performance is inexplicably bad given the level of investment and the extent of operations. “In some transfer pricing cases,” Killaly said, “we see companies that are in loss for many years and in these cases we cannot accept financial statements at face value.”

He pointed out that there is a third level of analysis directed to the tax reconciliation process. For example, the ATO’s “examination of cases involving deductions being claimed for interest expense paid to offshore entities that is then returned to Australia as a tax exempt dividend is another example, which in my view is a fairly blatant and artificial form of tax avoidance.”

He said that the ATO’s fourth level of analysis relates to the rate of tax paid on taxable income. In this area, he disclosed, “some cases have come to our attention, involving fairly intricate arrangements where income is taxed in another country and a foreign tax credit arises but the arrangements allow the Australian company to get a form of set-off from another party in the arrangement for the foreign tax paid so they are not out of pocket.”

In those cases, “the large business seeks to use the foreign tax credit to reduce its Australian tax payable. We will continue to give close attention to such cases and explore ways of challenging them.”

He confirmed that international dealings continue to be an important ongoing focus. Around 40% of large businesses are foreign owned, he said, and there are various levels of foreign shareholder participation across the remaining 60%. “There is a significant level of debt funding associated with this inbound investment,” he added, “and this has brought cross-border financing sharply into focus.”

“The ATO has significantly stepped up its exchange of information with other countries, and has begun doing so with jurisdictions that provide bank and entity secrecy pursuant to the expanding network of taxation information exchange agreements (TIEAs). We have signed TIEAs with 11 countries, five of which are now in force, we have obtained information in six cases, and around another dozen TIEAs are being progressed.”

“Transfer pricing is again an area of increasing focus, with the areas of corporate financing and ‘cost of goods sold’ requiring a lot of attention from the ATO. There is an emerging issue in relation to the pricing of natural resources sold to offshore associates. We are still continuing with our examination of offshore marketing arrangements.”

While “multinationals have structures and functions that extend across national borders and give greater access to offshore possibilities for the placement of asset ownership and funding channels,” Killaly reiterated that Australia “will be seeking avenues to challenge treaty shopping.”

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