“Much heat, little light so far” is the provocative title of the Senate’s final report into corporate tax avoidance.
The title is a swipe at the efficacy of recent corporate tax reforms, but one could argue it’s a more apt description of the Senate Economics References Committee inquiry process itself.
“Time has passed the committee by. Things got done — a very effective set of things got done while they were talking about it,” Thomson Reuters Australia Senior Tax Writer Jerry Reilly said.
But the final report still serves as an important document, particularly if we’re to see a change of government next election.
Here’s what companies should know about the committee’s final report in light of Australia’s recent corporate tax reform journey.
Context of its birth
The matter of corporate tax avoidance was first referred to the Senate Economics References Committee in October 2014.
If you cast your mind back, you’ll recall then-Prime Minister Tony Abbott had just handed down his tough first budget and the likes of Starbucks, Google, Apple and IKEA were hitting the headlines for shifting profits.
“There were huge concerns about the perception that large corporations, particularly multinational corporations, were engaging in fairly large-scale tax minimisation,” Reilly said.
“It was not a good look at a time when budgets were running under huge strain and with huge deficits.”
At the same time, there was a global movement for countries to collect their “fair share” of tax — you may remember the UK’s proposed “Google tax”.
Action in the interim
In the years since the inquiry was launched, a great deal of corporate tax reform has been achieved, both in Australia and internationally.
“There has been an unprecedented level of activity in terms of large corporate multinational taxation arrangements and measures introduced to deal with them,” Reilly said.
Significant domestic measures include the introduction of multinational anti-avoidance legislation (MAAL), the Diverted Profits Tax, the doubling of penalties for multinationals avoiding tax, and adoption of the OECD’s Base Erosion Profit Shifting (BEPS) transfer pricing changes.
Other measures have included modification of country-by-country reporting requirements and the 2018-19 Budget announcement subjecting certain government suppliers to tax compliance clearance from the Australian Tax Office (ATO).
Concurrently, tax reform initiatives have been launched on the international stage, including the BEPS project.
Thomson Reuters Regional Bureau Chief (Asia-Pacific) Nathan Lynch said Australia’s commitment to enforcement has been made clear.
“You could see this in the aggressive public stance the ATO took compared with other tax authorities [following the release of the Paradise Papers],” he said.
The ATO has made it clear that it has the tools and mandate to crack down on the use of offshore centres if the primary goal is to avoid tax obligations.
Another thing sets Australia apart, from an enforcement perspective, is the strength of our financial intelligence agency.
“AUSTRAC has set up an operations hub in Sydney where it co-locates industry and banking experts along with its own ‘fintel’ analysts,” Lynch said. “It’s the first partnership of its kind in the world.”
Dealing with reforms
With regards to the BEPs process, Lynch noted, “Australia did a great job of getting on the front foot and providing certainty”.
But that doesn’t mean it has been an easy ride for businesses operating in Australia.
“The deadlines for BEPS compliance are posing significant challenges for affected businesses in Australia. On the whole, they’re taking a cautious approach,” Lynch said, whose expertise is in Financial Crime and Risk reporting.
“Our research has shown they’re willing to pay for outsourced tax and accounting services if it means they have comfort about their readiness and level of compliance.”
One of the biggest ongoing headaches is country-by-country reporting.
“Businesses have pretty quickly discovered that you can’t do this properly with spreadsheet-based tools,” Lynch said.
“IT upgrades are a big challenge. Businesses need to make sure their master and local files are compliant and be in a position to lodge them properly.
“With the time that IT projects take to roll out, and the consequences of getting things wrong, this isn’t an easy task.”
The stakes are high — not only can non-compliant global firms find themselves facing serious fines in multiple jurisdictions, but reputational damage can be even more costly.
There is more work to be done on corporate tax reform, as the not-so-subtly titled Senate report — Much heat, little light so far — argues.
The title is a quote from Professor Richard Vann’s appearance before the committee in 2017.
He said at the time: “I gather … you are mainly interested in what has been the impact of all of the committee’s activities and the government’s activities … on the problem [of] tax avoidance by large corporates. As far as impact is concerned, my summary is: much heat, little light so far.”
Vann went on to point to recent tax receipts as evidence of that.
“The ATO has already raised $2.9 billion in tax liabilities from seven large multinational companies … I think they have probably collected $1 or $2 of that so far. Raising a liability does nothing,” said Vann, who was appearing before the committee in a private capacity and has previously worked for the OECD, IMF, Treasury and ATO.
Coalition committee members rejected the “little light so far” characterisation in the final report’s dissenting comments.
“Coalition Senators feel that the government has been successful in applying pressure on multinational corporations that try to avoid paying tax in Australia, and as a consequence many of the companies in question have changed how they report taxable activities in Australia,” they stated.
Thomson Reuters Australia Senior Tax Writer Reilly added: “In terms of what the committee is asking for, they’re really down to skirmishing on the margins now — this is residual stuff that they’ve picked up.”
So given the great flurry of reform that’s taken place since the Senate inquiry began, in what ways are the final report of any relevance?
A roadmap to reform under a Labor government
The committee report clearly reflects its non-government majority and, as such, may serve as a blueprint for tax reform under a possible future Labor government.
So let’s take a look at the committee’s key recommendations and potential implications.
Recommendation 1: That the thin capitalisation rules be amended so that the worldwide gearing ratio is the only method by which interest-related deductions should be calculated for the purpose of tax treatment in Australia.
“Moving towards the worldwide debt ratio as the sole debt test under a Labor government is probably an even bet,” he tipped. “But if the government is returned that measure is unlikely to go through.”
Coalition senators argued the Turnbull Government had already moved to strengthen thin-cap rules.
In the 2018-19 Budget, it was announced that companies will be required to align the value of their assets for thin capitalisation purposes with the value included in their financial payments.
Reilly explained this was a response to concerns that companies were manipulating the debt tests by allocating much higher valuations for tax purposes than they were in their financial statements.
Recommendation 2: That the government undertake an independent review into the detriment to Australian tax revenue that arises from the current transfer pricing regime, and explore options to modify transfer pricing rules, or other tax laws, to ensure multinational enterprises make the appropriate contribution to Australian tax revenue.
In light of recent reforms, this recommendation seems redundant.
“Transfer pricing wise, it’s difficult to see what more can be done,” Reilly noted.
“The Government rewrote the transfer pricing rules before the committee started, it got a country-by-country reporting regime going and it’s got the most recent OECD transfer pricing guidelines being effectively integrated into the Australian transfer pricing rules.”
A future Labor government, however, may need to find some room to move after the report stated that: “the current transfer pricing regime does not serve Australia’s interests well … it allows multinationals to price gouge Australian consumers and send the vast majority of profits offshore while only paying relatively small amounts of corporate income tax to Australian authorities”.
Clamp down on special purpose financial reports
Recommendation 5: That the government require all companies, trusts and other financial entities with income above a certain amount to lodge general purpose financial statements with the Australian Securities and Investments Commission.
This recommendation was directed at concerns about the growing trend for multinational companies to lodge special purpose financial reports which disclose far less information than general purpose financial reports.
The report suggested that to reduce the compliance burden, mandatory general purpose reporting be aligned with the $100m income threshold used for the tax transparency reporting regime.
Further transparency measures
Recommendation 3: That all companies with a total income equal to or exceeding $100 million for an income year be required to release tax information of the level specified in the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015.
If implemented, this recommendation (which would lower the income threshold for private companies) would have little practical effect, Reilly noted.
“I think this is largely a PR exercise and it doesn’t really bother anybody — there is very little that you can actually interpret from those numbers.”
Recommendation seven, meanwhile, could have much more substantive implications:
Recommendation seven: That excerpts of country-by-country reports be made publicly available free of charge. Information to be released from country-by-country reports would include, at a minimum, high-level data on how much revenue is collected and tax is paid in jurisdictions the firm operates in, and the number of employees.
This is consistent with ALP policy, however, the ATO and Coalition have expressed concerns that it would be in breach of Australia’s multilateral agreement obligations for confidentiality.
Reilly added that there was also a real chance the information, once redacted, wouldn’t be all that helpful and could create problems for business.
“The potential for people outside of the tax office and tax specialists to make mischief with this information is quite large,” he noted.
The future direction of Australia’s corporate tax reform journey will not only be guided by the result of the next federal election, but also by the bedding-in process associated with recent reforms.
In particular, with more than 60 nations signing on to the BEPs reforms, the full extent of their impact remains to be seen.
“As changes flow through international tax agreements, the ripple effect takes a while,” Reilly noted. “It will be some time before everybody understands how they might impact individual corporations under a particular agreement.”
Thomson Reuters will be watching this process keenly and reporting on it in our Weekly Tax Bulletin. For compliance assurance book a demo of our ONESOURCE end-to-end tax compliance solution – covering everything from Corporate Tax, BEPs, Transfer Pricing, FBT and Indirect tax.