Transfer pricing presents huge challenge for ATO
Transactions within, rather than between, companies now accounts for about a quarter of Australia’s economic output, the Tax Office says.
In a sign of the challenges facing the government’s crackdown on corporate tax erosion, the ATO said related-party dealings now amounted to more than a quarter of a billion dollars in annual trade.
“On any given year, about 20-25 per cent of the Australian economy happens between related parties,” ATO assistant commissioner Michael Jenkins said.
“We record and capture information on about $270 billion to $280 billion [of] related-party dealings.”
Related-party transactions pose a threat to Australia’s tax base due to the fact that companies can on-sell things to themselves at marked up prices.
This process, known as transfer pricing, can result in a tax-free advantage for companies – particularly large multinationals shifting billions at a time.
Mr Jenkins said a growing proportion of related-party transactions dealt with intangible goods, highlighting the need for new tax rules to address changes in the economy.
“Whilst it’s still the case that predominantly, related-party dealings are accounted for by tangible property exchanges, the bigger and increasing proportion of the dealings that are happening involve things like financing, intellectual property and services,” he said.
“And those are the things that become more difficult, and introduce more difficult challenges generally, certainly transfer-pricing specifically when you’re trying to run the test over [arrangements].”
The ATO is tackling transfer pricing as part of its push to clamp down on multinationals shifting profits between entities and countries to avoid tax. It is presently involved in a landmark court case with Chevron over the issue.
Transfer pricing is a greater concern among companies that have “footloose” assets, such as those in the tech industry.
But Mr Jenkins warned it also applied to a growing number of companies that were aware the value to their business rested in intellectual property and services, rather than manufactured goods.
“Thirty years ago, you didn’t have a global market for capital … the Australian dollar wasn’t floated,” Mr Jenkins said.
“This is all about trying to keep up with changes in the global economy.”
A report by the Tax Justice Network last month claimed about 60 per cent of world trade now takes place within, rather than between, corporations.
This created substantial opportunities for companies to manipulate transactions and reduce tax, it said.
The ATO is engaged in one of the biggest transfer pricing disputes in its history.
As revealed by Fairfax Media, tax authorities allege multinational oil giant Chevron used a system of loans and related-party payments worth billions of dollars to slash its tax bill by up to $258 million.
Chevron is disputing the claim, which is now being heard in the NSW Federal Court.