You’ve got to love the language of the Australian Taxation Office. Over the last six months, a group of ‘high risk’ large Australian and foreign multinationals received a friendly letter from Mark Konza, the Deputy Commissioner of Taxation, talking about entering into a more ‘open’ and ‘transparent’ relationship and confirming the ATO has begun a series of ‘pre-compliance reviews’ with these so-called high risk businesses.
These reviews are a new initiative for the ATO and on the surface, are designed to ensure any controversial and uncertain issues large businesses have in terms of complying with tax law are aired and explored prior to the annual lodgement of their returns.
In the letters the ATO confirms the list of tax issues on which it is focusing this year as it conducts audits.
The list is extensive and includes: major or unusual transactions, cross-jurisdictional transactions, share buy-backs, capital raisings, refinancing and changes in internal accounting policies. Pretty much all the usual activities in which corporates engage.
Ashley King, who leads Deloitte’s Tax Controversy area and is himself a former ATO Senior Assistant Commissioner says, “most of the largest corporate taxpayers are pretty much seen as high risk and there are around 19 entities in the highest risk group.”
King says the key issue on which the ATO is concentrating is “international finance. They are concerned about high levels of debt and businesses paying high interest payments that can shift profits to another country.”
Another area on which the ATO is focused is structured finance transactions that use accounting and tax arbitrage to deliver a positive outcome for the business.
“The ATO is concerned that Australia’s tax base is eroded through these structures,” he says.
Transfer pricing is a perennial area of concern. “Corporations can use different pricing in different countries to tip revenue into other jurisdictions, so transactions need to be done at arm’s length value,” King advises.
According to King, the ATO is also looking at businesses that shift functions such as marketing or sales to another country. “The ATO is concerned about businesses that restructure because they think it could be a tax issue – but this is hard to prove and these types of situations involve complex audits and genuine commercial objectives.”
Frank Drenth, executive director of the Corporate Tax Association, says although the ATO’s rhetoric is all about co-operation and transparency “there are concerns the process isn’t really co-operative.”
Drenth says processes around the pre-compliance reviews are still being worked through, but that the idea of a review of a business’s tax compliance “raises questions about the self-assessment regime. There is some consultation going on between the ATO and companies, but I’m not sure the approach is completely settled.”
“There are also concerns about providing information on a quarterly basis; this increases the cost of compliance for businesses and also requires them to make early judgments about what their potential tax issues are. We say they shouldn’t be expected to read the Commissioner’s mind. It’s fair to say not everyone is entirely relaxed about the process,” he says.
“We have asked the ATO to think about acting in a way that encourages companies to disclose uncertainties around their tax position and to give businesses confidence they will be treated fairly, not just in a pro-revenue way. There is real apprehension within companies that if they act co-operatively with the ATO, it will just come down like a tonne of bricks on them.”
According to Drenth “boards and CEOs want a positive and co-operative relationship with the ATO but that doesn’t mean all companies are relaxed about the ATO’s compliance work.”
King says Australian businesses should be aware the ATO works closely with its global counterparts.
“Co-operation between different tax authorities has dramatically increased and the effectiveness of exchange of information has improved significantly,” he says,
“It used to take months to write a letter to a tax authority in another country and receive a response, but now things can be done in weeks or days. And different countries are doing simultaneous and joint audits on multi-national corporations and working on the same issues at the same time. The whole landscape has changed.”
The Australian Financial Review, 14 June 2011