OECD targets Macquarie offshore tax-saving schemes

Aggressive tax strategies pioneered by Macquarie Group are under scrutiny both internationally and in Australia, putting at risk techniques the company has used to claim more than $1.3 billion in deductions.

The Organisation for Economic Cooperation and Development is targeting ”foreign tax credit generators” as part of its battle against tax avoidance by multi-national corporations, on which it is due to provide an update on Wednesday night.

And as part of Australia’s contribution to the OECD program, the Board of Taxation last week launched a review of debt and equity rules that raises the possibility the law covering complex transactions with offshore entities should be changed to ”eradicate mismatches in tax outcomes”.

Macquarie has a large overseas business and has been a heavy user of offshore banking units, which are taxed at 10 per cent rather than the normal 30 per cent.

The group’s use of offshore entities slashed its tax bill by more than $1.3 billion during the 2000s and drew the wrath of the Tax Office, which has hit it with an assessment estimated to be in the hundreds of millions of dollars.

In early September, the Federal Court threw out Macquarie’s bid to have part of the assessment set aside and the following month a full court said the company could not appeal the ruling.

However, then-acting treasurer Arthur Sinodinos threw Macquarie a lifeline late that month, putting off a crackdown on offshore banking units that was to begin on October 1.

The measure, introduced by the previous Labor government, has since been watered down and is due to begin on July 1 next year.

A Macquarie spokeswoman declined to comment on the company’s tax affairs or whether it lobbied Mr Sinodinos over OBUs.

Macquarie financial records and ATO statistics show that in 2002, the group’s tax deduction for ”rate differential on offshore income” was just $11 million, or 6.7 per cent of the total offshore banking unit deduction claimed by the entire Australian financial sector. However, in 2008 the deduction hit a peak of $303 million, or 30 per cent of the total claimed by the industry.

Macquarie’s use of OBUs has been investigated by the ATO as part of a full audit of its 2006, 2007 and 2008 tax payments. It has made a downpayment of up to $295 million to the ATO, which will be refunded if it overturns the assessments.

After the ATO audit began in 2011, Macquarie’s use of OBUs dramatically reversed, with the company last year declaring differing offshore tax rates had cost it $77 million.

Macquarie’s effective tax rate, which before the global financial crisis had been as low as 15 per cent, half the headline rate of 30 per cent, has also skyrocketed.

Last week the company said its effective tax rate this year would be 38 per cent, down slightly from 38.5 per cent in 2013.

The ATO’s interest in the alleged misuse of OBUs was sparked in 2009, when it first became aware of an exotic financial instrument known as an ”asymmetric swap”.

Australian banks used their offshore banking units to short a commodity, equity or currency index while at the same time their domestic banking units, which pay tax at the full rate, took a long position.

The deals were structured so that no matter how the underlying index moved, the Australian company was fully compensated by receiving a tax deduction or a tax loss.

ATO officials moved against asymmetric swaps in October 2009, issuing a draft tax determination that the scheme was ”artificial and contrived” and fell foul of the general anti-avoidance provisions in Part IVA of the Tax Act. The move prompted outrage from the finance industry, which said the determination was inconsistent with private rulings the ATO had given industry players that asymmetric swaps did not fall under Part IVA.

”The ATO’s change of view seems to be driven by hindsight-based revenue protection considerations,” one unnamed industry player said.

The ATO ignored industry concerns, issuing a final determination in 2010 and 2013, bringing the scheme to the OECD’s attention.

Credit: The Age Business Day