Budget 2015: The Treasurer's Plans for a Multinational Tax Avoidance Crackdown

Thursday 14 May 2015 @ 11.13 a.m. | Corporate & Regulatory | Taxation

As promised, Australia's top finance official, the Treasurer, has, in his second budget (delivered Tuesday night - 12 May 2015), introduced legislation intended to force global corporations to pay a fair amount of tax on their Australian earnings. The potential for such legislation, if it succeeds, is to boost government revenue by billions of dollars and add momentum to international efforts to combat corporate tax avoidance.

What the Treasurer Announced?

The key items relating to this matter are detailed in Budget Paper Number 2 - Part 1: Revenue Measures under the broad heading "Combatting multinational tax avoidance" and are in three broad areas of proposed changes, namely:

a targeted anti-avoidance law;
new transfer pricing documentation standards; and
stronger penalties.

A Targeted Anti-Avoidance Law

To this end, the government propose the introduction of a new targeted anti-avoidance law through the amendment of Part IVA (Schemes to reduce income tax) of the Income Tax Assessment Act 1936 (Cth). The new laws are to be: ". . . aimed at multinationals that artificially avoid having a taxable presence in Australia".

The Budget paper indicates that the new law will apply to tax benefits obtained from 1 January 2016 and that it will apply to both new and existing schemes. The amount of revenue to be gained by the measure is said, by the Budget Paper, to be estimated as ". . . an unquantifiable gain to revenue over the forward estimates period".

It is indicated that the new law will target approximately 30 companies (as to which see our previous article The ATO's Ready Reckoner for Catching Out Corprate Tax Avoiders) where the:

activities of an Australian company or other entity are integral to an Australian customer's decision to enter into a contract;
contract is formally entered into with a foreign related party to that entity; and
profit from the Australian sales is booked overseas and subject to no or low global tax.

Where such arrangements are detected and found to be entered into for a principal purpose of avoiding tax, these measure are intended to ensure that the profits from Australian sales are taxed in Australia. The Budget Paper anticipates that the new measure will apply only to companies with a global revenue of $1 billion or more.

New Transfer Pricing Documentation Standards

This is a measure by which the government hopes to improve the Australian Taxation Office's (the ATO's) access to information on the activities of multinational comapnies. The measure is to be achieved by the government implementing the Organisation for Economic Co-operation and Development's (the OECD's) new transfer pricing documentation standards from 1 January 2016. The Budget Paper indicates the Government will provide the ATO with $11.3 million over the forward estimates period to implement the new standards and the government says the measure is estimated to have ". . . an unquantifiable gain to revenue over the forward estimates period".

The type of information the ATO will receive on large companies that operate in Australia under the new documentation standards, is as follows:

a Country-by-Country Report showing information on the global activities of the multinational, including the location of its income and taxes paid;
a master file containing an overview of the multinational's global business, its organisational structure and its transfer pricing policies; and
a local file that provides detailed information about the local taxpayer's inter-company transactions.

These reports, the government says, will provide the ATO with ". . . a global picture of how multinational entities operate, assisting it to identify multinational tax avoidance". Like the anti-avoidance measure, this measure will only apply to companies with global revenue of $1 billion or more.

Stronger Penalties

As a final measure the government has indicated that it will double the maximum administrative penalties that can be applied by the Commissioner of Taxation to large companies that enter into tax avoidance and profit shifting schemes.

The Budget Paper indicates that the increased penalties will come under Schedule 1 to the Taxation Administration Act 1953 (Cth), and will ". . . help to deter tax avoidance and will apply for income years commencing on or after 1 July 2015". It should be noted that penalties will not change for taxpayers who have what the government describes as ". . . a 'reasonably arguable' tax position, as defined under Schedule 1 of the Taxation Administration Act 1953 (Cth)".

Like the previous measures announced is estimated to have ". . . an unquantifiable gain to revenue over the forward estimates period" and will only apply to companies with global revenue of $1 billion or more.

Reaction to the Proposed Measures

Predictably the opposition reaction has been that:

"Joe Hockey’s best effort at tackling multinational tax avoidance is worth a total of $30 million over four years – less than 1/60th of Labor’s multinationals package. . . . After spending months promising to reap 'billions" from tax integrity measures, Joe Hockey’s own budget papers reveal him as a fraud. . . . There are no billions, only asterisks".

The opposition by referring to asteriks is referring to the "unquantifiable gain" statements attached to all the measures and gives the $30 million to the government by virtue of measures to "Modernising the Offshore Banking Unit regime" which are not strictly "Combatting multinational tax avoidance" measures.

The ABC News quotes the Tax Institute's Steve Healey on the measure, indicating his concern that the government's plan was:

". . . yet more tinkering with an already complicated tax system. . . . We caution against hasty changes . . . against the backdrop of extensive global, coordinated efforts to address base erosion and profit shifting, . . . This measure has the potential to increase uncertainty and compliance costs in our tax system. . . . We have a tax reform white paper process underway and we are keen to ensure this process is not compromised by ad-hoc announcements along the way."

Indeed the real fear appears to be that in the haste to do something, very little will be done, especially not very much that actually delivers a result for Australian Taxpayers, namely more tax receipts from global multinationals.

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