Multinational tax avoidance is a controversial issue that has been frequently debated in the public sphere for some time. In Australia, significant political attention has been given to large international corporations, who have attempted to avert or minimise their Australian taxation obligations, and the potential deficiency this creates in Australian taxation revenue.
Recently, the Turnbull Government introduced several reforms designed to combat tax avoidance with further measures due to be introduced over the next 12 months.
Designed to increase transparency on companies’ existing taxation arrangements, the measures aim to shift the onus onto multinational corporations to provide information to the relevant Australian authorities, and provide the Federal Government with greater oversight powers.
Federal Government’s Budget Measures
Tonight, the Federal Government has announced a strengthened diverted profits tax, or so-called “Google tax”, as a priority in the 2016 Federal Budget. This builds on the Government’s recent initiatives to crack down on multinational corporations who pay minimal tax to Australia, despite deriving significant revenue in the market.
Treasurer Scott Morrison focused on multinational tax avoidance in his Budget address, stating that Australia needs to fix:
“Specific problems in our tax system so we can sustainably cover the Government’s responsibilities for the next generation. This means combating tax avoidance, especially by multinationals, with new measures to ensure everyone pays the tax they should on what they earn in Australia, not avoid tax by shifting their profits offshore.”
The “Tax Integrity Package – a New Diverted Profits Tax” is aimed at multinational corporations that artificially divert profits from Australia. The tax will apply to income years commencing on or after 1 July 2017. This measure is estimated to have a gain to revenue of $200.0 million over the forward estimates period.
The new tax will target companies that shift profits offshore through arrangements involving related parties:
that result in less than 80 per cent tax being paid overseas than would otherwise have been paid in Australia;
where it is reasonable to conclude that the arrangement is designed to secure a tax reduction; and
that do not have sufficient economic substance.
Where such arrangements are entered into, this measure will apply a 40 per cent tax on diverted profits to ensure that large multinationals are paying sufficient tax in Australia.
This measure will apply to large companies with global revenue of $1 billion or more.
Companies with Australian revenue of less than $25 million will be exempt, unless they are artificially booking their revenue offshore.
This measure forms part of the Government’s Tax Integrity Package, which will strengthen the integrity of Australia’s tax system.
These laws will be supported by a “new operational taskforce of more than 1,000 specialist staff in the ATO to police and prosecute companies, multinationals and high wealth individuals not paying the tax they should”.
The Federal Government has issued a consultation paper on the Diverted Profits Tax, calling for submissions due by 17 June 2016.
In a move to align Australia with the OECD’s international recommendations, and mitigate domestic tax avoidance, the Federal Government has implemented a series of legislative and policy reforms. These measures include:
1. Introduction of the Multinational Anti-Avoidance Law (MAAL):
The MAAL amends Australia’s general anti-avoidance provisions and is designed to ensure MNCs that make sales in Australia do not avoid tax by booking revenue offshore.
2. Adoption of some of the OECD’s reporting standards thus far:
Notably, Australia has chosen to implement the OECD’s recommended country-by-country reporting , which requires MNCs to provide specific information on the global activities of an entity including the location of its income and taxes paid.
3. New transfer pricing controls:
In a bid to increase global taxation transparency, the Legislature has imposed more onerous obligations on MNCs including doubled non-compliance penalties for profit shifting tactics and increased transfer pricing documentation at the time of lodging tax returns.
4. New requirements on foreign investment applications in Australia:
The Foreign Investment Review Board (FIRB) has expanded the Australian Taxation Office (ATO) powers in reviewing foreign investment applications, through a strengthened “national interest test” to include tax compliance. As part of these expanded powers MNCs are required to provide more detailed documentation to the ATO, giving the Government the power to force tax avoiders to divest their Australian if they fail to comply.
Senate Inquiry into Corporate Tax Avoidance
Commencing in October 2014, there has been a long running Senate Inquiry into Corporate Tax Avoidance, chaired by the opposition Labor Party. The Inquiry has issued two reports, including most recent report upon the Inquiry’s conclusion on 22 April 2016.
Most recently, the Inquiry called a special hearing on 21 April, where Tax Commissioner Chris Jordan outlined the ATO’s new measures it has adopted in response to the Panama Papers leak. These measures include asking the Federal Court to fast-track “strategically important” multinational tax avoidance cases that will establish important tax principles. Such cases have been known to take years to complete.
Jordan’s move to establish the courts as somewhat of a scapegoat for their apparent lack of progress in these matters is possibly designed to fight the public’s perception that the ATO lacks the authority to crackdown on tax avoidance itself.
Steve Murphy is a Senior Director in the Strategic Communications segment of FTI Consulting and based in Melbourne, Australia.
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