Anti-avoidance powers to hunt multinationals 'ineffective': ATO

The main legal weapon used by the tax office to hunt down multinationals trying to avoid paying tax often doesn’t work, a problem that could cost the federal government billions a year.

A Tax Office internal document, Offshore hubs mitigation strategy overview, said that Australia’s general anti-avoidance rule, Part IVA, in some cases can’t be used to combat tax avoidance.

The power can be used against multinationals that shift profits through subsidiaries in “secrecy” or “low-tax” countries if it can be proven that these activities are not for commercial purposes. But proving these activities are not “commercial” is very difficult.

The document, obtained under the freedom of information law and contained in a Uniting Church submission to the federal inquiry into corporate tax avoidance, states that: “intelligence from compliance activity indicates that Part IVA is likely to be ineffective in many cases”.

Uniting Church spokesman Mark Zirnsak said the internal documents prove that there are tax avoidance arrangements set up by multinational companies that current Australian law cannot deal with.

“Australia should follow the lead of other countries that have made it harder for companies to sneak profits to low-tax secrecy jurisdictions,” he said.

Australian Taxation Office assistant deputy commissioner Michael O’Neill said that while the anti-avoidance powers cannot be used in some cases, there are a range of other powers including transfer pricing laws that it can draw on.
He did not say what extra powers the Tax Office could be given to combat tax avoidance, but said these were under discussion with Treasury.

If the tax office wants to use the anti-avoidance powers it needs to put this before a committee of business people and tax experts to make a decision.

Mr O’Neill, who works in the large business and internationals group in charge of fighting multinational profit-shifting, said last year the General Anti-Avoidance Rules panel looked at 30 matters and and anti-avoidance rules applied in 21 of those cases.

Mr O’Neill said this year there were 47 cases being considered to be referred to the panel. “But I can’t tell you at this time, how many are [involved in] profit-shifting,” he said.

For the first time, Mr O’Neill revealed also the ATO’s estimate of the consequence and likelihood of profit-shifting. The ATO believes it is getting better at mitigating profit-shifting risk, and has reduced its estimate of the “consequence” of profit-shifting happening from $12.1 billion to $8.3 billion over the past financial year.
Mr O’Neill said the ATO had estimated, in a “worst-case scenario”, about 20 per cent of the $8.3 billion may actually be at risk, but that one could not use this to extrapolate a dollar figure for how much revenue may be at stake.

The ATO uses risk rating systems to firstly detect the consequence, and then ascertain how likely that is to eventuate.

Mr O’Neill compared it to the consequence of a cyclone hitting Sydney. For example there could be a chance of a
cyclone hitting Sydney, he said, but the likelihood of it actually happening is low.

“These things are not an exact science, it requires an overall judgement,” he said. “What we’re doing here is setting benchmarks for the Tax Office.”

In terms of actual tax collected from multinationals involved in profit-shifting, Tax Commissioner Chris Jordan told a Senate committee last month that they had hit 13 multinationals with tax bills amounting to $250 million, and were on track to recoup $1 billion of revenue.

The Tax Office said one focus area – in a bid to get that $1 billion – involves service or marketing hubs between an Australian taxpayer and an offshore customer.

The use of hubs is common. Fairfax Media recently revealed that more than half of Australia’s trade is money being sent offshore by companies to their overseas arms – with almost a third going to Singapore and Switzerland.
“If the fee charged by the service hub is inaccurately priced, profits can be shifted from Australia, often to a low/no tax nation,” Mr O’Neill said.

In the ATO internal document it said at the time the revenue at risk from 15 service hub cases was $680 million – “however through ISAPS and other mitigation strategies, including audits, we have reduced this overall risk”, Mr ONeill said.

The head of Treasury’s revenue group, Rob Heferen, confirmed at a Senate estimates hearing last month that Australia could move ahead of the OECD’s work, as tasked by G20 governments, to stop tax evasion as political pressure to stop companies such as Google, Apple and Microsoft from shifting profits to low-tax or no-tax jurisdictions intensifies.