Tax Office goes hard in pursuit of tax lost to ‘aggressive planning’

Tax Commissioner Chris Jordan has rapidly abandoned several agreements with multinationals aimed at giving companies certainty about the tax they are required to pay in Australia in future years, after deeming they had misled and engaged in “aggressive tax planning”.

Taxpayers can enter into a deal to lock in the tax they pay for a period of about three years with a deal called an “advanced pricing agreement”, or APA.

Several Australian companies including the Macquarie and Lend Lease have in years gone by been able to channel profits through Luxembourg, and thereby avoid paying tax in Australia, through the use of APAs.

The agreements are also used in Australia and can give companies certainty about future tax treatment for a period of around three years.

But as a sign the Tax Office is getting more serious about taxing multinationals, Mr Jordan rejected six advanced pricing agreements (APAs) with multinationals in the past six months alone, across various sectors, including technology companies.

While agreements have been rejected in the past, it is not common for so many to come off the table in such a short period.

To give context, a recent report by the Inspector-General of Taxation, Ali Noroozi, said that between July 2011 and February 2013, 20 APAs had been abandoned in the large business market.

In an exclusive interview with Fairfax Media before the G20 summit in Brisbane next week, ATO deputy commissioner Mark Konza said there were 179 of these agreements currently in operation. Another 59 were “under negotiation”, meaning companies with cross-border transactions had requested one, but the Tax Office had not yet agreed to it.

Of the six rejected agreements Mr Konza said they were due to “aggressive tax planning”.

“We don’t take them away unless we are convinced that we’ve been misled, in which case there’s no valid agreement,” Mr Konza said in an interview following a closed-door conference hosted by law firm Clayton Utz and the Business Council of Australia where business and tax officials have gathered to discuss the OECD and G20 fight against base erosion and profit shifting, or BEPS.

“The commissioner had asked us to make sure that APAs did not cover aggressive tax planning,” he said.

Mr Konza said while the government was working to ensure that any plan as part of G20 did not “kill growth”, and still allowed fair competition between countries fighting for investment, some multinationals clearly overstepped the line. “If countries are able to [offer an] attractive tax rate, that’s fair tax competition.

If they parasitically attract paper income away from those places where economic activity is taking place, that’s unfair tax competition and the G20 and most countries concede that’s not acceptable.”

Mr Konza said they had not yet looked at the ICJC documents, but that those arrangements with the Luxembourg authorities had been entered into years ago and were not likely to continue to be possible under the OECD and G20 plan against tax evasion. Australia is already working hard to recoup revenue, including new powers that give the commissioner the ability to “reconstruct” company transactions.

There is also a special unit within the Tax Office, which falls under Mr Konza’s area, that’s now reviewing about 80 high-risk multinationals with operations in Australia.

The Tax Office said 10 of these companies were going under audit. The rest will be reviewed in the coming months and could also end up in audit if tax evasion is suspected.

Mr Jordan said in a statement that apart from revoking APAS, the Tax Office had “stepped up” its efforts to ensure multinationals pay tax on the income they earn in Australia.

“We are very aware that taking action with those who do not do the right thing is critical to community confidence in our fairness and integrity, and ultimately the sustainability of the system,” Mr Jordan said.

Tax experts have warned against the G20 going too far in its ambitious plan to ensure digital companies pay tax where profits are earned, saying one country’s gain could be another country’s loss and could end up in wars for taxing rights.

“A key aspect of the BEPS process is to create a stronger system whereby tax authorities resolve differences between themselves,” Clayton Utz tax partner Niv Tadmore said.

“This is central to avoiding double-taxation and to the success of the process.”

Tax Institute senior tax counsel Rob Jeremenko said governments would have to ensure no more tax havens were in operation through greater information sharing.

“Luxembourg is one of the last bastions of tax havens,” Mr Jeremenko said.

“It is one of a handful of countries that does not have a tax information exchange agreement with Australia.”

But he was critical of the ATO following a report by Fairfax Media that revealed several companies had shifted profits through Luxembourg and avoided paying any tax on Australian profits.

“Tax transparency is key and it is certainly less than satisfactory for the Tax Office to have to rely solely on receiving crucial tax information via good investigative journalism,” Mr Jeremenko said.