The October 2022 Federal Budget announced a number of tax and compliance related measures directed at large multinational companies. These included, extending funding for the Australian Taxation Office’s (ATO’s) compliance programs (in particular, the Tax Avoidance Taskforce) and a suite of measures referred to as the Multinational Tax Integrity Package.
This package includes measures to amend Australia’s thin capitalisation rules, deny deductions for payments relating to intangible assets held in low or no-tax jurisdictions and improve tax transparency.
These measures are not unforeseen, largely implementing OECD BEPS measures, having been foreshadowed in a consultation paper in August 2022.
Extending funding for the Tax Avoidance Taskforce
The Budget included increased funding for the ATO Tax Avoidance Taskforce of approximately $200 million per year over 4 years from 1 July 2022 and further extended funding until the end of the 2025-26 fiscal year. The increased funding is intended to allow the taskforce to pursue new priority areas of observed business tax risks, with a particular focus on multinational enterprises and large public and private businesses. This measure is estimated to increase tax revenues by $2.8 billion at a cost of $1.1 billion over the 4 years from 2022–23
Though not particularly significant in terms of the Budget bottom line, the Tax Avoidance Taskforce has historically represented a good investment for the Federal Government.
The Government initially funded the taskforce with $679 million over 4 years in 2016, with a further $1 billion of funding allocated in the 2019–20 Federal Budget to extend the operation of the Tax Avoidance Taskforce to 2022–23.
As of June 2021, an additional $22.9 billion in tax liabilities have been raised as a result of Tax Avoidance Taskforce activities, of which approximately $12.7 billion has been recovered, and the major part of this is attributable to large public groups and multinational companies.
Tax Avoidance Taskforce activities have also enabled the Government to obtain favourable rulings such as the high profile Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (settled on appeal to the High Court for approximately $340 million), which have led to significant settlements being reached. In particular, the ATO has been able to settle disputes with several large multinational companies including, BHP ($529 million), Bupa ($157 million), ResMed ($381 million), Google ($481 million) and Microsoft ($39 million). The ATO has also recently reached a $1billion settlement with Rio Tinto, representing the largest tax settlement in Australian history.
Such cases may have emboldened the ATO and we may well see similar settlements reached in the future. However, as ATO Deputy Commissioner Rebecca Saint notes, Australia already represents one of the best preforming tax systems in the world overall, particularly in respect of large corporations, with 92% voluntary tax compliance and 96% after compliance activities.
These compliance figures are derived from the ATO’s Tax Gap Assessment for Large Corporate Groups. The Tax Gap Assessment is a widely used methodology that identifies a fiscal gap, of which, one of the attributed factors is the prevalence of tax avoidance or aggressive tax mitigation and planning. Such assessments seek to measure the theoretical difference between the total amounts of tax collected and the amount the revenue authority estimates it would have collected if every taxpayer were, in its view, fully compliant.
However, it is improbable that the entirety of this figure represents revenue capable of collection as there may be diminishing returns on further investment as the compliance rate moves closer to 100%.
That having been said, with the average tax gap for Large Corporate Groups for the 2008-09 to 2019-20 fiscal years at approximately $2.4billion a year, the Government’s forecasted revenues of $2.8billion over 4 years represents a modest 29.15% recovery of that sum.
Introducing mandatory disclosure requirements
As part of the Multinational Tax Integrity Package, the Budget announced the introduction of reporting requirements to require large multinational companies to publicly disclose certain tax information from 1 July 2023.
The Budget Papers outline that the Government will require Significant Global Entities (an entity or member of a group of entities with an annual global income of $1 billion or more), to prepare and publicly release certain tax information on a country-by-country (CbC) basis, including a statement on their approach to taxation.
The Government will also require Australian public companies (both listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile.
This measure is estimated to have an ‘unquantifiable impact’ on receipts and to cost $5.1 million over the 4 years from 2022–23.
Details of exactly what disclosures will be required under these measures are yet to be released, however, given the consistency of other budgetary measures with the OECD BEPS recommendations, it is likely that they will be consistent with the OECD Action 12 Report on Mandatory Disclosure Rules.
This report recommends that countries introducing mandatory disclosure regimes include a mixture of specific and generic hallmarks, the existence of each triggering a requirement for disclosure.
The Board of Taxation Tax Voluntary Tax Transparency Code may also indicate what materials might be required to be disclosed. The code establishes minimum standards to guide the public disclosure of tax information by businesses. These include:
- a reconciliation of accounting profit to tax expense and to income tax paid or payable, which identifies any material temporary or non-temporary differences;
- the entities’ effective tax rate (ETR), calculated as company income tax expense divided by accounting profit, with the basis on which the ETR was calculated and any underlying assumptions clearly defined;
- the entities approach to tax strategy and governance including its approach to risk management and governance arrangements, attitude towards tax planning, accepted level of risk in relation to taxation and approach to engagement with the ATO;
- a tax contribution summary for corporate taxes paid; and
- information about international related-party dealings.
In respect of what might be required in an entities statement on its approach to taxation, some guidance may also be had from the Reportable Tax Position Schedules (RTPS). The RTPS requires entities to disclose tax positions for which there is uncertainty in their tax return or the financial accounts. Broadly speaking, this amounts to positions which are about as likely to be correct as incorrect or are less likely to be correct than incorrect. The RTPS also requires disclosure of arrangements, transactions and positions that have specified characteristics or are subject to ATO taxpayer alerts or practical compliance guidelines.
No further details have been provided in the Budget. However, with a stated commencement date of 1 July 2023, one would expect to see a draft law in the coming months. It would also appear likely that the disclosure rules will specify criteria that will trigger the disclosure obligations and that companies will be required to disclose information about the amount of tax paid, what proportion of pre-tax profit this represents and details of their related parties and their dealings with them.
Other 2022 October Budget articles
What the Budget Did Not Address – Unfair Tax Minimisation Using Discretionary Trusts, by Sonali Walpola.
Australia’s First Wellbeing Budget Leaves People Behind, by Ben Spies-Butcher, Troy Henderson and Elise Klein.
Proposed Changes to Australia’s Thin Capitalisation Rules, by Mark Brabazon.
Demand-Side Climate Related Measures, by Diane Kraal.
The Vested Interests Behind the Technical Expertise of the Big Four in Global Tax Reform, by Ainsley Elbra, John Mikler and Hannah Murphy-Gregory.
Click here for 2022 March Budget articles.
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