The ATO's Ready Reckoner for Catching Out Corprate Tax Avoiders

Thursday 7 May 2015 @ 11.31 a.m. | Corporate & Regulatory | Taxation

Last year (15 October 2014) we posted an article on the Senate Economics References Committee (the Committee) inquiry into corporate tax avoidance (see Not so Taxing Times: Senate Committee to Investigate Low-Tax Companies). The inquiry was required to investigate and to then report by the first sitting day of the Federal Parliament in June 2015. Submissions to the inquiry were to be made by 2 February 2015. Last month in the period 8 April 2015 to 22 April 2015 the inquiry conducted public hearings in Sydney, Melbourne and Canberra - public hearings attended by many of the multinational corporations the subject of the inquiry.

Generally, the inquiry was to look at tax avoidance and aggressive tax minimisation by corporations registered in Australia and multinational corporations operating in Australia. At the public hearings conducted by the Committee during April 2015, much was made of the amounts of profits diverted overseas and the extent of aggressive tax minimisation being undertaken by various multinational corporations operating in Australia.

However, a real difficulty for the Committee's inquiry proved to be getting accurate numbers for the actual amounts of profit and amounts of corporate tax paid. Now the Australian Taxation Office (the ATO), it is reported by the ABC News, has come up with a method/formula for making such calculations easier to make.

What the Multinationals Said in Their Submissions

In an overview, the SMH reported on the submissions of various companies and what they indicate they pay in corporate tax and what they state their profits as being. Some examples from the SMH report are:

Google, it was reported on most recent accounts show that, in 2013, their revenues for Australia were $358 million with before tax profits of $46.5 million. Google Australia paid $7.1 million in Australian corporation tax for 2013.

Apple, it was reported paid " . . . only $80 million in tax on $6 billion in revenue but that was double what it paid the year before". SMH further reported that in its own investigation in 2014 it found that Apple shifted $8.9 billion in untaxed Australian profits to its operations in Ireland.

News Corp, in its Australian operations it is reported by SMH, has been accused of ". . . dramatically cutting the tax it pays by siphoning $4.5 billion in untaxed profits and shares to its offshore parent company". Which according to SMH means it has paid ". . . the equivalent of 10 percent on its profits, well under the company tax rate of 30 percent". The News Corp response being its financial reports were audited and complied with the law.

Microsoft, it was reported by SMH, has previously been investigated by the US Congress for its tax minimisation strategies and was found to have reduced its US taxes in 2011 by $2.43 billion, or around 44 percent, through an international profit-shifting network. In its submission to the Committee's inquiry, Microsoft it is reported, said it complied with the tax laws of all jurisdictions in which it operated and that in fact its effective tax rate was above 30 percent in Australia for the past three years.

ATO's Response to the Committees Inquiry - The New Method

The ABC News reports that the ATO has given the Committee inquiry into tax avoidance ". . . a blueprint on how to properly calculate the amount of tax multinationals should be paying each year on their Australian operations".

The ABC indicate that the ATO, in a 13 page document which it issued in response to questions on notice from the Committees inquiry, has provided "a ready reckoner" on how to calculate the effective tax paid by multinationals, rather than having to rely on what they say they pay.

The ready reckoner is reported in The Converations as being:

". . . basically a formula to compute the effective tax rates (ETRs) of corporate groups. The concept of ETR is not new, but what’s interesting about the ATO formula is it adopts an economic perspective, effectively overriding the legal structure of a corporate group. This approach is critically important in the context of the battle against corporate tax avoidance".

Labor Senator Sam Dastyari who heads up the Committee is quoted as saying:

"It is a powerful tool for the Senate committees . . . some companies could find themselves in contempt of Parliament if they have given misleading evidence . . . This is an extraordinary development. It's a wake-up call for the biggest tax minimisers and tax dodgers that we will get to the bottom of this and we won't let you off the hook, . . ".

The Senator further explains that companies have been very clever in how they have provided the Committee with information and that in the ATO's own language the information provided has been factually incorrect ". . . We haven't been comparing apples with apples and this methodology [the ATOs ready recknoner/formula] will allow us to do it."

The Labor senator said that many multinational corporations had structured themselves to make their tax affairs as complex as possible, but this information from the ATO will help cut through that complexity, further it might give the Committee the opportunity to go back to the companies and ask them to recalculate based on the ATO's new formula.

Chances for Success

Associate Professor at University of Sydney Antony Ting writing for The Conversation says the ATO's ready reckoner assists with identification and then determines the correct amount, two aspects of information lacking at present:

"The ATO should be applauded for striving to achieve two goals in response to this type of activity. First, it is identifying corporate groups that are engaging in aggressive tax avoidance structures. Second, it is challenging those arrangements aiming to collect the 'fair' amount of tax."

Also apart from the above there is the useful element of deterrence, as Antony Ting says:

"Besides detection, the ATO ETR formula also serves another useful function: deterrence. The disclosure of the formula by the ATO sends a loud and clear signal to corporate groups that aggressive tax avoidance structures will not escape scrutiny."

Regarding the success of the ATO's approach there is still the big hurdles of actual enforcement and collection.

"Of course, detection is just the first goal of the ATO in the battle against corporate tax avoidance. The second goal of successfully challenging tax avoidance structures and collecting additional tax revenue is easier said than done."

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