Australian tax office audits of multi-nationals

In the wake of the G20 meeting in Australia last month and the Tax Office Compliance in Focus 2013-2014 publication of July 2013, it is no surprise that tax audit activity is on the rise.  As part of the global initiative to prevent BEPS the Australian Taxation Office has commenced audit activity on 86 multi national businesses. No doubt the usual names are considered to be on this list but the ATO are being somewhat guarded as to the targets .

The question that comes to mind is whether audit activity is the answer. It seems that the problem lies with the current law, as in many cases the multinationals (that have received press coverage about their tax payments)  have acted within the framework of what is the law.

The law it seems is what is out of sync with current business operations and dynamics. The forming of a global set of robust rules is where the attention is required but equally very challenging as evidenced by the recent response to the OECD transfer pricing recommendations).  It is relevant to note, as highlighted by the ATO , transfer pricing is not suggesting illegal activity unlike profit shifting.

What somehow seems to have gotten lost in translation, is that financial engineering does not mean that something has been done incorrectly. Inappropriate practices will get caught by these audits but it will be interesting to see if in fact the outcome will be matched by the ATO view that lower taxation has arisen due to inappropriate practices .

A significant part of the problem is determining how to tax online business, the digital economy. The business economists face a challenge in working through the modelling as to how to determine what revenues and costs are to be attributed to the various locations.

Into this mix comes the added dimension of different jurisdictions wanting to attract business and offering tax based incentives. How difficult will it be for all locations wanting to be pulled in the same direction while endeavouring to be more attractive than their global neighbours? In many cases, such jurisdiction based benefits have been the catalyst for corporations moving location.

Going back some 13 years, James Hardie Industries (unashamedly) moved to the Netherlands due to the change in global operations and tax inefficiencies. As cited on their website

“In summary, the establishment of a Dutch-based parent company and the restructure were driven by the group’s increasingly global focus and international financial tax efficiencies. .”

Such taxation considerations, including tax concessions as business drivers illustrates just how challenging these issues are. The R & D concessions are an example of how countries (appropriately) try to attract business.

Relocation of businesses and how they transact is clearly a battle zone, the rules for which shall take some time to develop. In the meantime the tax authorities continue to rely on audit activity to catch those parties that they feel have not been doing it correctly. It will be interesting to see the dollars raised against the cost of the recent audit initiative .

OECD - Global standard on information exchange - just released

OECD and BEPS – Global standard on information exchange.

For those in the cross border tax advisory arena, the world is a rapidly changing one. The changing face of business and cross border dealings including but not limited to e commerce is pregnant with issues of how business and the tax regimes can cooperate while not adding disproportionate costs (being only one of the concerns) in preserving the tax base.

Last week the OECD unveiled a uniform global standard for the automatic exchange of information between tax authorities worldwide.

Discussion about this new standard by some respected commentators and industry participants suggest that it does not achieve what it set out to do. One concern as expressed by PWC was that it caters for needs of the revenue authorities without regard to business. Concerns include costs and confidentiality. These aspects alone gives rise to serious reservations about the success of the standard.

Of particular concern was the 2 tier file system that business will need to maintain. Specifically the requirement to keep a file that meets country requirements as well as a separate “Master” file that will need additional documentation. One fear is that there will be a mismatch resulting in double taxation.

Some interesting points are also made in a paper put out by Bond University and whether the ‘modernisation’ provides a solution to BEPS or whether the solution to BEPS lies in international cooperation. The paper can be found at : http://epublications.bond.edu.au/rlj/vol23/iss1/3

Dirkis, Michael Dr. (2013) “On the eve of the global response to BEPS: Australia’s new transfer pricing rules,” Revenue Law Journal: Vol. 23: Iss. 1, Article 3.

According to the OECD, the standard is a “game changer” in terms of cooperation and transparency in the fight against tax evasion. The underlying thinking behind the strategy is an extension of the thinking behind the US legislation FATCA and general anti money laundering positions of many jurisdictions. The question is whether in fact it has given sufficient thought to the totality of the situation?

Annual data is to be automatically provided rather than on a request basis. The level of data to be provided by financial institutions and the taxpayers to whom it applies will be better known once the report is presented at the next G20 meeting in Australia on February 22nd / 23rd .
Apart from the strong reservations of PWC, other jurisdictions have made comment that they are reviewing the standard but they may not adopt it at this stage.

Hong Kong by way of example is of the view that their current legislation which was introduced in 2009 is adequate to protect against inappropriate taxation practices and in principle is in line with the OECD program. Hong Kong will seek feedback from stakeholders at this stage.

The OECD is expected to deliver a more detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.