Government to close loopholes to stop multinationals claiming losses via subsidiaries

The Abbott government is pushing ahead with a Labor budget measure to close a loophole that will stop giving offshore-based multinationals “systemic tax advantages” that are not available to Australian-owned companies.

The loopholes in current law mean that multinationals can, with the use of subsidiaries, structure their affairs to avoid paying capital gains tax and claim losses that give them a tax advantage.

Treasury on Monday released a discussion paper saying it wants to amend the loopholes and is calling for feedback.
It comes as Treasurer Joe Hockey on ABC’s Q&A program on Monday night pledged the government would look at new measures to tax multinationals.
The loopholes given to offshore-based multinationals, which often avoid paying tax by using subsidiaries, were first identified by Labor as a 2013-14 budget measure.

When the Coalition took office the budget measure was part of a backlog of measures that had not yet been enacted. The government then promised to look at 92 tax-related measures, including this tax anomaly.

A working group, chaired by the Treasury and consisting of members of the ATO and private sector tax specialists, had previously also looked at the issue and had asked for data to assess the revenue impact of the problem, but was told this was not available.

The working group had identified six tax advantages that these “multiple entry consolidated” MEC groups have over ordinary consolidated groups. It pointed out that there may still be tax losses that companies are not entitled to and suggested that there may be scope for current laws – known as anti-avoidance measures – to be strengthened to “capture internal transactions that are intentionally structured to avoid capital gains tax”.

The working paper said that this would “have the advantage of allowing greater certainty for taxpayers and the ATO as to the consequences of the transaction” but “given that there is currently no data to allow an assessment of the significance of the revenue risks associated with these tax advantages and that targeted solutions could involve significant compliance costs” it suggested these options not proceed at the time.

But now the government is willing to revisit the options, with the release of the Treasury paper. It comes as evidence emerged last week that the main legal weapon used by the tax office to hunt down multinationals trying to avoid paying tax often doesn’t work, and could cost the federal government billions a year.

Australia’s general anti-avoidance rule, Part IVA, can be used against multinationals that shift profits through subsidiaries in “secrecy” or “low-tax” countries if it can be proven that these activities are not for commercial purposes. But as an ATO internal document noted, proving these activities are not “commercial” is very difficult.

The laws have previously been tested in the courts. Ironically by the second top person at the ATO, Second Commissioner Andrew Mills, who previously worked for tax advisory firm Greenwoods & Freehills.

At the time he was tax lawyer Mr Mills had launched a historic battle against the then tax commissioner Michael D’Ascenzo, and won. In a landmark judgment, the High Court overturned a Federal Court ruling that threatened to limit the capital-raising options of banks and saved Mr Mills’s client, the Commonwealth Bank, $45 million in taxes.