Tightening anti-avoidance provisions for multinational companies

Budget Review 2015–16 Index

Les Nielson

The measures

In the 2015–16 Budget the Government has proposed tightening tax laws to collect appropriate revenue from multinational companies operating in Australia in three ways:

  • releasing an exposure draft of amendments to Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)[1]
  • announcing the implementation of new transfer pricing documentation standards and
  • announcing a doubling of the maximum administrative  penalties for large companies that enter into tax avoidance and profit shifting schemes.[2]

Other measures

At the same time the Government has announced that:

  • from 1 January 2016 Australia will implement country by country reporting that requires multinational companies to provide information on their world-wide operations, including tax paid in each country
  • Australia will adopt the Organisation for Economic Cooperation and Development’s (OECD) recommendations on tax treaties
  • the Board of Taxation has been asked to advise on the implementation of OECD rules governing the use of hybrid instruments and
  • the Australian Taxation Office has commenced the exchange of information on secret tax deals provided to multinationals by other countries that may contribute to tax avoidance in Australia.[3]

Do these measures run ahead of international efforts to address this issue?

Since July 2013, the OECD together with the Group of 20 Nations (OECD/G20) have been undertaking the Base Erosion and Profit Shifting Project (BEPS) designed to equip governments with the domestic and international instruments needed to deal with problems in collecting the appropriate revenue from multinational corporate entities.[4]

Coordinated action by all countries affected is seen as vital for the successful implementation of the suggested instruments.[5] Recently, the United Kingdom has been criticised for running ahead of international efforts by implementing its ‘diverted profits tax’ (that is, the ‘Google Tax’) in early 2015.[6] However, these proposed measures do not lay Australia open to the same charge.

In respect of the formal budget measures, the exposure draft strengthens existing general anti-avoidance provisions of the ITAA 1936: it does not introduce a completely new measure. Some of the language used in the proposed changes is that used in a 2014 OECD report entitled Preventing the Granting of Treaty Benefits in Inappropriate Circumstances which is part of the BEPS project (see further discussion below on ‘principal purpose or more than one principal purpose’).[7]  Further, the new documentation requirements for transfer pricing arrangements implement the OECD/G20 recommendations in this area.[8] And imposition of penalties is not a part of the BEPS project. The other announced measures (which are not part of the Budget) generally stem from the OECD BEPS project.

Revenue raised?

The budget announcement was remarkable for not estimating the amount of revenue that may be raised by these measures. This is not surprising, as Treasury representatives have been unable to quantify the extent to which Australian tax has been avoided by large multinational corporate entities operating in Australia, preferring to say that it may be substantial.[9]

Any tax payable under the proposed changes will be subject to litigation. Often a complex tax case may take between six and seven years before final resolution. Additional revenue raised under the proposed changes will not quickly flow into consolidated revenue. In this environment any estimate of revenue raised will be provisional, at best.

Will it work?

This budget announcement was unusual in that it was accompanied by the release of relevant exposure draft legislation. This enables some tentative initial comment to be made on the prospects for successful implementation.

Purpose of a scheme

One problem is the difficulty, noted recently by the Tax Commissioner, of interpretation of the purpose, let alone one of the principal purposes, of a scheme. Under the ITAA 1936, the Commissioner can take action against a scheme which has as its sole or dominant purpose the generation of a tax benefit. In one case the court was faced with 30 expert reports, put forward by 11 barristers, in relation to what on the surface was a simple case.[10] The overall effect is to enable ‘large corporations to build very confused or murky or convincing cases about why different ideas [other than obtaining a tax benefit] were really the purpose of what they were doing’.[11] Though these comments were made in relation to the current definition, the same difficulties would most likely apply in a case to decide whether a scheme had as a principal purpose or one of its principal purposes (the requirement in the draft new legislation) the generation of a tax benefit.

Low tax definition

One of the conditions of the proposed changes that apply to Part IVA is that the non-resident who is liable to pay Australian tax is connected with a ‘no or low corporate tax jurisdiction’. According to the OECD corporate tax database, in 2015 corporate tax rates ranged from 12.5 per cent (Ireland) to 35 per cent (United States).[12] Lower corporate tax rates apply in many non-OECD countries. In these circumstances, defining what may be a ‘low tax rate’ as opposed to a ‘normal corporate tax rate’ will be a rich source of argument.

These potential difficulties are not reasons for shelving these changes. The proposed changes are a significant improvement on the current tax law in this area. Should these draft laws be passed by Parliament, they are unlikely to lead to any quick solutions. But they will contribute to resolution of difficulties in appropriately taxing multinational corporations on their economic activity in Australia.


[1].          Treasury, Tax Integrity: Multinational Anti‑Avoidance Law, Exposure Draft, website, 12 May 2015.

[2].          Australian Government, Budget measures: budget paper no. 2: 2015–16, pp. 14–16.

[3].          Australian Government, Budget Overview, Fairness in Tax and Benefits, Leading the global fight against tax avoidance, 12 May 2015.

[4].          OECD, About BEPS, OECD website.

[5].          OECD, Addressing Base Erosion and Profit Shifting, Paris 2013, p. 8.

[6].          M Croker, Diverted Profits Tax - A rogue tax or a tax on rogues?, Institute of Chartered Accounts Australia, weblog, 15 December 2014.

[7].          OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, OECD/G20 Base Erosion and Profit Shifting Project (Action 6: 2014 Deliverable), Paris, 2014, pp. 11–12 and 66–74.

[8].          OECD, Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting, Paris, 2015 and Guidance on Transfer Pricing Documentation and Country-by-Country Reporting, Paris, September 2014, OECD/G20 Base Erosion and Profit Shifting Project.

[9].          R Heferen (Deputy Secretary, The Treasury), Evidence to the Senate Economic References Committee, Inquiry into Corporate Tax Avoidance, 9 April 2015, p. 24.

[10].       C Jordan (Commissioner of Taxation, Australian Taxation Office), Evidence to the Senate Economic References Committee, Inquiry into Corporate Tax Avoidance, 8 April 2015, p. 26.

[11].       M Konza (Deputy Commissioner, International, Australian Taxation Office), Evidence to the Senate Economic References Committee, Inquiry into Corporate Tax Avoidance, 8 April 2015, p. 26.

[12].       OECD, Table II.1. Corporate income tax rate, OECD Tax Database.

 

All online articles accessed May 2015. 

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