The Australian landscape - Current and future
The Australian economy has been heavily impacted by Covid-19, with the state of Victoria most disrupted due to recent lockdowns. Similar to the experience in other countries, the Australian economy contains a combination of significant winners and losers as well as a large number of corporates that have been negatively impacted by Covid-19, but not traumatically so.
Despite the relative success of the country in managing the virus so far, a large amount of government stimulus has been required to avoid a deep recession. From an economic perspective, as we saw in the financial crisis of the late 2000’s, largesse is often followed by an uptick in tax audits as the government of the day seeks to repair its battered balance sheet.
The Australian Taxation Office (ATO) is well funded, well-resourced and therefore well positioned to move into this next phase. There have been a number of tax and transfer pricing related legislative changes in recent years which, combined with a number of review programs already underway, are likely to generate significant tax revenues going forward.
The role of guidance
One area in which the ATO regularly upstages its policy-making peers is by providing a substantial amount of guidance to taxpayers in the form of public rulings and guidance. These publications can generally be used by taxpayers either to obtain some level of certainty in respect of the ATO’s treatment of a particular situation, or as a risk assessment tool by which to self-assess the overall level of risk in respect of a transaction or arrangement.
The ATO also provides ample transparency with respect to its target areas by publishing data on ‘tax gaps’ (being the differences between the taxes that it expects should be paid as compared with the amounts that are actually paid), and these calculations help inform its compliance goals. Interestingly, in recent years the tax gap in respect of multinational enterprises has shrunk, and now individual taxes are the largest source of potential tax leakage in Australia.
The ATO also makes considerable effort to align with international best practice and guidance issued by the OECD through the published TP Guidelines and BEPS Actions 8-10. However, it is not immune to unilateral action, as described below.
Whilst making an effort to conform to OECD guidance, the ATO has no qualms in taking unilateral action to protect its revenue base. By way of example:
- Australia has its own, complex version of the local file under CbCR; and
- Australia enforces significant penalties for non-compliance such as failure to lodge on time for Significant Global Entities (SGEs), with late lodgement penalties starting at AUD 111,000 and rising to AUD 555,000.
More recently, a new and expanded SGE definition has been introduced (August 2020 - SGE Definition) which has resulted in many more groups (particularly those headed by private equity, pension funds or wealthy individuals) becoming subject to these punitive penalties.
A sophisticated enforcement approach
The ATO runs a number of compliance programs which are aimed at ensuring that groups operating in Australia pay the right amount of tax. For example, the ATO has recently completed the first round of their ‘Top 1,000’ program that was applied to Australia’s largest 1,000 corporate groups. Now, the ATO has commenced reviews of the ‘Top 500’ and ‘Next 5,000’ private groups. This will mean ATO engagement with thousands of taxpayers, as they roll out an approach similar to that adopted for corporate groups to assess the tax affairs of private groups and wealthy individuals.
The ATO’s sophistication and expertise is also reflected through some significant wins in local court cases, for example the Chevron case changed the landscape for intra group financing.
These programs and initiatives demand resources and accordingly the Australian government has increased the ATO’s resources significantly in the form of a ‘Tax Avoidance Taskforce’ to ensure sufficient coverage, manpower and expertise. This investment has generated a significant ROI, with over AUD 13.9 billion of tax liabilities collected between July 2016 and 2019, a return that most corporates could only dream of in the current economy!
Taxpayers who do business in Australia, whether SGEs or not, should be prepared to deal with a sophisticated and demanding tax authority that places significant emphasis on good governance, processes and controls. While Australia typically only forms a small component of a multinational group’s overall value chain, local conditions typically mean that doing business in Australia requires a high level of compliance with tax and transfer pricing related obligations.
Taxpayers are therefore strongly encouraged to prepare and maintain robust analysis and evidence to support the positions that are adopted by the group. Compiling information contemporaneously as decisions are made in quick response to unfolding commercial events, will best position corporates to defend their positions in the likely event of a tax authority review of COVID-19 related tax years in the future.
To stay up-to-date with key transfer pricing trends, issues and insights from Australia, read BDO’s Transfer Pricing Alerts or visit our Transfer Pricing services page. For further information, contact your local office.