Australian Committee On Tax Avoidance Issues Interim Report

The Australian Senate inquiry into tax avoidance has released its interim report, which makes 17 recommendations, including the introduction of a mandatory tax reporting code.

The Senate Inquiry into Corporate Tax Avoidance was referred to the Economics References Committee in October 2014. The first hearing was conducted in April 2015, and a final report is due by November 30.

The report says: “In the past, a multinational company with a branch in Australia had a local board that was tasked with maximizing profits. But, increasingly, Australian operations of multinational companies are becoming agents, shifting revenue offshore specifically to minimize Australian profits.”

The committee found that while “high voluntary compliance rates are observed … there are a minority of very high profile multinational companies that pay little, if any, corporate tax in Australia despite deriving significant revenue from activities in Australia.”

In its evidence to the committee, the Australian Taxation Office (ATO) warned that base erosion and profit shifting (BEPS) is the main risk to the country’s corporate revenue base. The practices that present these risks include: transfer pricing; thin capitalization; international restructures and the adoption of global supply chains; complex financial arrangements that result in “stateless” or untaxed income; and digital business platforms that have a large economic presence in a jurisdiction relative to the tax contribution.

The interim report recommends that a mandatory tax reporting code be implemented as soon as practicable. Any Australian corporation or subsidiary of a multinational corporation with an annual turnover over an agreed figure would be required to publicly report financial information on revenue, expenses, tax paid, and tax benefits/deductions derived from specific government incentives. The committee also contends that the Government should consider implementing the model for country-by-country reporting developed by the European Union (EU) and publish excerpts from these reports. Tax legislation should be amended to enable the ATO to require non-reporting entities to disclose related-party information in financial reports under the Corporation Act, the report advises.

The other recommendations made in the interim report are as follows:

• The Government should continue to take a leadership role in finalizing and implementing recommendations from the Organisation for Economic Cooperation and Development’s (OECD’s) BEPS project, but international collaboration should not prevent the Government from taking unilateral action;
• The ATO, in conjunction with the Treasury and other relevant agencies, should table in Parliament an annual public report on aggressive tax minimization and avoidance activities that estimates foregone revenue, evaluates the effectiveness of existing policies, and proposes potential policy changes;
• The ATO should report to Parliament on: the number of audits or disputes launched concerning multinational corporations; the number of cases settled with multinationals; the number of successful legal proceedings concluded against multinationals; and the staff resources allocated to these activities;
• The Government should establish a public register of tax avoidance settlements reached with the ATO where the value of that settlement is over an agreed threshold;
• The government tender process should require all companies to state their country of domicile for tax purposes;
• Government agencies should notify the relevant portfolio minister when contracts with a dollar value above an agreed threshold are awarded to companies domiciled offshore for tax purposes;
• There should be an independent audit of ATO resourcing, funding, and staffing;
• The concept of “grandfathered large proprietary companies” should be removed from the Corporations Act, and these companies should be required to lodge financial reports with the Australian Securities and Investments Commission (ASIC);
• All proprietary companies should be required to review and confirm their size with the ASIC annually;
• The ASIC should be able to share information with the ATO without having to notify the affected person;
• Individuals who propose to become directors of companies should be required to provide evidence of their identity to the ASIC;
• A company should not be eligible for financial reporting relief where the ATO notifies the company and the ASIC that the relief does not apply to that company;
• The Australian Government should work with governments of countries with significant marketing hub activity to improve the transparency of information regarding taxation, monetary flows, and inter-related party dealings; and
• Existing tax transparency laws should be maintained.

In their response to the interim report, government members of the Committee explained they have deep concerns about some of the recommendations made. They have said the report fails to recognize that the Government has taken strong action in its nearly two years in office to combat tax avoidance.

The Government Senators’ Dissenting Report points out that Treasurer Joe Hockey has proposed the introduction of a new Multinational Anti-Avoidance Law (MAAL), under which multinationals that break the law would have to pay back the tax they owe (plus interest) and face penalties of up to 100 percent of the tax owed. The Government has also released exposure draft legislation to implement the OECD’s country-by-country reporting regime and will work with businesses to develop a code for the public disclosure of information on taxes paid by large companies.

“The Government is committed to ensuring companies pay tax on profits properly attributable to profit generating activities undertaken in Australia. In preference to introducing new taxes on Australians, the Government simply wants to ensure individuals or companies that are avoiding tax pay their fair share. The Government is determined to achieve this without increasing the overall tax burden, or imposing additional complexity on those individuals and entities that do abide by our taxation rules,” the Dissenting Report states.