ATO’s tax gap figures revealed: $2.5 billion missing from corporates, multinationals

An estimated $3.5 billion in revenue from large corporates and multinationals is at risk to the economy, but through audit activity this will reduce to $2.5 billion, according to the Australian Taxation Office.

On Wednesday the agency is releasing the first tranche of its long-awaited highly anticipated “tax gap” figures, which focuses on 1400 corporate groups with gross income of over $250 million.

This is the first time the agency has ever put specific dollar values on the tap gap, which measures the theoretical difference between the total amount of income tax collected and the amount the ATO estimates would have been collected if every one of those taxpayers was fully compliant.

The agency’s figures show that in 2014–15, large corporate groups reported $1.5 trillion in gross income and paid about $41 billion in tax. The agency estimates that after audit activity, the net income tax gap for this group is $2.5 billion in 2014-15 or 5.8 per cent of tax payable.

Room for error

This trend has been steady for a number of years, the agency said, and the gap primarily reflects differences in the interpretation of complex areas of tax law.

Since the estimates rely on predicting the outcomes of audits still underway – and also do not measure all instances of non-compliance (that is the companies the ATO chose not to audit) – there’s some level of error.

Deputy Commissioner Public Groups Jeremy Hirschhorn likened measuring the tax gap to drug testing undertaken during the Olympics: “They don’t do drug testing to catch lots of drug cheats but to make sure that there’s a clean Olympics,” he said.

Mr Hirschhorn said a 5.8 per cent tax gap was was “pretty good on a global scale, but our aim is to significantly reduce that”.

But Oxfam Australia’s Economic Policy Advisor Joy Kyriacou said $2.5 billion was a conservative estimate. “The ATO can only report on what large companies are bound to tell it, not on taxes which multinationals are dodging through legal tax avoidance,” she said.​

ATO to keep cutting deals

Over the past few years, under the leadership of Tax Commissioner Chris Jordan, the ATO has opted to cut deals with big business rather than had to court.

In the 2014-15 year there was a huge $3 billion variance between tax bills initially issued by the ATO to 81 large companies, and the money the agency ended up pocketing after it cut deals with these companies.

The ATO has $4 billion worth of disputes going on with big business at the moment, most of which are transfer pricing cases, such as the $1 billion dispute with miner BHP Billiton over its Singapore marketing hub, and some of which date back almost over a decade.

BHP Billiton has said it’s willing to head to court to settle the dispute.

But speaking generally about the tax gap figures, Mr Hirschhorn, who has much input into what cases the ATO litigates, said the he expects they will settle most of the $4 billion cases under dispute out of court.

There had been higher audit activity under tougher domestic laws like the Multinational Ant-Avoidance Laws which has led to companies like Google restructuring, Diverted Profits Tax and stronger transfer pricing powers, he said.

The coming year would be another big year for settlements, he said, but the variance between what the ATO wanted and settled on would slightly shrink, he said.

Disputes about margins

Mr Hirschhorn said the biggest driver of the tax gap was “primarily transfer mispricing”.

Of $4 billion in tax bills issued to large corporates and multinationals in the 2016-17 financial year, he said about $1 billion related to transfer mispricing of related party debt (as seen in the case of Chevron), about $1 billion was transfer mispricing of inbound e-commerce and about $500 million was transfer mispricing via commodity trading hubs.

He said some corporates had already entered into 50/50 arrangements whereby the pay half the the tax bill in advance of objections.

The issue with cases of companies channelling money through low-tax Singapore, wasn’t that companies were using marketing and service hubs, but rather the profit margins they are attributing to doing business there.

“The issue isn’t having a Singapore hub – that’s a commercial decision,” he said. “What we say is, ‘how much profit are you attributing to these people [in Singapore]?

“If you were to outsource that function would you give them a ten times profit?’ We would say, ‘no. You’d give them a good profit – they are smart people working hard for you – but you wouldn’t give them all the profit’.”

Delay in release

While Britain has been publishing tax gap figures for some time, the ATO has been taking its time in releasing numbers – it was supposed to do so in last year’s annual report.

The agency is yet to release tax gap figures for sectors of the economy where it says black economy activity is prevalent including, the highly wealthy individuals market segment, the small business segment and for other individuals.

“Our plan is to progressively review tax gaps for other markets over the next few years,” Mr Hirschhorn said.

The ATO’s corporate tax gap estimate covers a seven-year period between 2008–09 and 2014–15. The tax gaps for earlier years were $2.7 billion in 2008-09, $2.3 billion in 2009-10, $2 billion in 2010-11, $2.7 billion in 2011-12, $2.5 billion in 2012-13, and almost $3 billion in 2013-14.

Criticisms of tax gaps

One of the expert panelists who helped pull together the figures, tax expert and UNSW Business School adjunct professor, Richard Highfield, said the estimates were in line with those of other revenue agencies such as Her Majesty’s Revenue & Customs (HMRC).

But the HMRC 214-15 tax gaps figures of £36bn, or 6.5 per cent, have been condemned for ignoring estimated tens of billions lost in profit shifting and tax avoidance by multinationals.

Professor Highfield noted for the ATO data, there was some error relating to audit activity or non-audits, but it would be relatively small.

But Oxfam’s Ms Kyriacou said the ATO figures also don’t capture the more than $US100 billion that multinationals are estimated to be ripping out of developing countries every year by avoiding taxes.

The Corporate Tax Association’s Michelle de Niese, whose members include hundreds of big corporates, said “cracking down on large corporates is not the panacea for Australia’s budget woes”.