ATO to unveil large business hit list, clamps down on Singapore hubs

Hundreds of millions of dollars of revenue could be up for grabs as the Tax Office announces reviews of multinationals using offshore hubs in Singapore to minimise their tax.

The ATO has issued a warning to multinationals to come forward immediately to discuss their overseas hub arrangements, if they have not done so already.

The warning comes as Tax Commissioner Chris Jordan will begin publishing the tax details of the nation’s largest public companies later this week, and the ATO outlines its specific areas of “compliance focus” for large businesses in 2015-16.

Fairfax Media has obtained a copy of a document that lists the ATO’s key focus areas for the year ahead. Aside from hubs, areas on the hit list include the goods and services tax treatment of local and overseas transactions, multinational related-party or cross-border transactions, offshore deals involving secrecy jurisdictions, business restructures, and tax planning by wealthy individuals and their private groups.

Big revenue at stake

In a taxpayer alert issued this month, Deputy Commissioner Mark Konza said the overseas hubs were seen as a core tax revenue risk and the ATO would be using its controlled foreign company (CSC) rules, transfer pricing and anti-avoidance powers to investigate.

The recent Senate inquiry into corporate tax avoidance revealed that a number of companies (such as Google, Apple, Microsoft, BHP Billiton and Rio Tinto) were under ATO audit for using hubs.

The amount of revenue at stake because of hub structures could amount to hundreds of millions of dollars, but it is unclear how much money the Tax Office will be able to recoup, given that the arrangements may be considered legitimate by Singapore’s tax authority.

Clayton Utz tax partner Niv Tadmore said corporations should “constructively engage” with the ATO, but if Singapore’s tax authority had a view that was different from the ATO’s then the matter might end up as a tax revenue dispute.

“Definitely, they could disagree on a lot of money, and there is a risk of double taxation,” he said.

The ATO said it was focusing on multinationals which had split functions so that a “procurement hub” received services from a related offshore entity known as a “services hub”.

These services were usually in exchange for a fee, which might be calculated as a percentage of sales or profits.

But the procurement hub “does not substantially transform the goods it buys on behalf of the [multinational enterprise]” and typically had few or no employees and assets, so there was “little or no commercial justification” for the separation of the procurement function into two separate entities.

The ATO was also concerned with the “substance and pricing of some of these arrangements from a transfer pricing perspective”.

ATO may have to litigate

The ATO will also this week release its compliance focus for large businesses with revenue more than $250 million for the year ahead. While the goal was to “resolve disputes early and quickly, litigation may be necessary where there is a contentious or uncertain point of law”.

Tax planning by wealthy individuals and their private groups will come under its watch.

The ATO would check that correct GST was being paid on cross-border transactions, and that sharing economy services such as Uber and Airbnb, as well as large property developers, were meeting their GST obligations.

It would also ensure businesses were meeting the federal government’s new requirements for GST on imported digital products and services, which take hold on July 1, 2017.

Compliance regarding other taxes paid on excise (alcohol, tobacco, fuel and energy) and the luxury car tax and wine equalisation tax would also be examined.

Cross-border deals under fire

To ensure multinational profit is not artificially shifted offshore, the ATO would continue its International Structuring and Profit Shifting (ISAPS) program.

This program has so far raised $250 million in liabilities and Tax Commissioner Chris Jordan has said it would hit $1 billion in assessments.

The ATO is looking closely at the “use of related-party or back-to-back cross-border activities” and “inappropriate application of thin capitalisation rules” and other related-party financing arrangements that result in tax deductions.

It was also looking at “trust schemes” used to conceal income and reduce tax, especially offshore dealings involving secrecy jurisdictions.

Restructuring a company before its sale to a third party in order to reduce tax could spark anti-avoidance provisions. General business restructures such as mergers and acquisitions, demergers, share buy-backs and major divestments would also be examined, and th ATO would look at the “correct timing and calculation” of capital gains or losses following key events such as corporate restructures.

It would also look into private equity firms making investments in Australia, and assess the privatisation of public infrastructure.

Companies misusing the research and development tax incentive regime and which had applied capital gains tax incorrectly would be looked at.