There has been quite a lot in the media about the Australian Tax Office cracking down on large multinational firms who are using a number of strategies to avoid paying their fair share of tax.

The 2016 Australian Government budget flagged that the Australian Tax Office will focus on multinationals, large companies and wealthy individuals who are not paying the tax they should. This applies to Australia’s largest 1000 companies, mainly large multinationals with a global turnover of $1 billion or more a year.

The Issue

Most large companies pay 30% tax in Australia, but a study by the University of Technology Sydney found that 76 of the largest multinationals in Australia pay only 16.5%. If these companies had paid 30%, the Australian Government would have had over $5 billion more in 2013 and 2014.

The study showed that pharmaceutical and technology companies were the most effective at avoiding tax, paying an average of 5.7% and 7.4% tax respectively.

The two main ways of avoiding tax were ‘profit alienation’ and ‘debt loading’.

Profit alienation involves holding the intellectual property rights for drugs or technologies in a no or low tax country. Any profits made in Australia are then used to pay the parent company at the low tax country.

Debt loading involves financing Australian operations with unusually high-interest rates – say 40% or more. Companies shift profits made in Australia offshore to repay the loans and record them as a loss. Resource and energy companies favour this method.

Large companies are accused of booking their sales revenue offshore to avoid paying tax in Australia.

New Powers and Penalties

Last December the Government introduced some new laws and penalties to ensure multinationals pay a reasonable amount of tax in Australia. This included stronger penalties for companies avoiding tax and profit-shifting. It strengthens country-by-country reporting so authorities in different jurisdictions have a better idea of what is happening.

The Government is developing a tax transparency code to encourage large businesses to publish information. This allows better public scrutiny.

The maximum penalty for failing to lodge a tax return and similar tax documents is going to rise from $4,500 to $450,000. The maximum penalties for making false or misleading statements to the ATO will double.

There will be stricter penalties for multinationals not complying with Australian Tax Office requirements and not disclosing the information or income they should.

New Diverted Profits Tax

From 1 July 2017, multinationals using contrived or artificial arrangements to reduce tax by diverting profits offshore will have to pay an additional tax. The Diverted Profits Tax will allow the ATO more powers to identify large corporations shifting profits offshore. They can then levy a 40% tax rate on transactions that are caught. This gives the ATO better powers to work with uncooperative multinationals.

Closing Legal Loopholes

Multinationals have been able to exploit differences in separate countries’ tax regimes. This has given multinationals an unfair advantage over Australian domestic companies. Multinationals can shift costs and profits between their various subsidiaries, depending on what suits them best.

Working with other OECD countries, new rules will come into effect by 1 January 2018. There will be new transfer pricing rules reflecting OECD guidance and standards.

ATO Tax Avoidance Taskforce

The ATO is establishing a new section to focus on tax avoidance by multinationals and wealthy individuals. It will cost $679 million dollars but should recoup much more than that in currently unpaid taxes.

Whistleblower Protection and Information Disclosure

Better protection for whistleblowers reporting tax avoidance is on the way. The ATO is also exploring new rules for tax and financial advisors to report on possibly aggressive tax planning schemes.

At Hart Partners we work wholly within the ATO’s guidelines to ensure our clients take advantage of every opportunity to reduce their tax liability. To learn more, we invite you to contact us today on 03 9600 3220.