Evidence of corporate tax avoidance and aggressive minimisation
This chapter explores the evidence provided to the committee in respect
to the frequency and importance of corporate tax avoidance and aggressive
minimisation. Specifically, the chapter considers:
the robustness and responsiveness of Australia's corporate tax
recurrent and emerging challenges;
the usefulness of effective tax rates; and
existing measures to address corporate tax avoidance.
The robustness and responsiveness of Australia's corporate tax system
In general, stakeholders broadly indicated that Australia's corporate
tax laws are strong and, in many respects, world leading. When combined with an
effective tax administrator, high voluntary compliance rates are observed.
That said, the committee notes that there are a minority of very high profile
multinational companies that pay little, if any, corporate tax in Australia
despite deriving significant revenue from activities in Australia.
As the primary agency responsible for revenue collection, the Australian
Taxation Office (ATO) is best placed to comment on the adequacy of the
corporate tax system. In its submission, the ATO stated that most corporate
taxpayers generally comply with the law based on the work it undertakes in
relation to data analysis, economic trends and compliance assurance. According
to the ATO:
A suite of indicators generally suggests that companies are
paying the income tax required under Australia's tax laws. Tax risk appetite
has declined over the past decade.
Company income tax receipts continue to move in line with
macro-economic indicators, reflecting broad compliance by corporates with their
income tax obligations.
Indeed, companies that responded to the committee's request for
information indicated that they fully comply with their obligations under
Australia's tax laws and pay the required level of tax as assessed by the ATO.
For certain transactions, disputes may arise with the ATO where there is a
difference of opinion in how tax rules are interpreted and the tax consequences
of these different interpretations. As discussed in chapter 6, the ATO
encourages corporations to engage early with the ATO to minimise the risks of a
tax dispute emerging. The Tax Institute succinctly reflected the views of many
Australia is renowned for having one of the most complex and
robust tax systems in the world. This complexity creates great difficulty for a
taxpayer to navigate their way through the system to determine what their
obligations may be under the Australian tax law. However, the robustness serves
to markedly reduce the opportunity for a taxpayer to not comply with their
The four big 'professional services' firms—Deloitte, EY,
PricewaterhouseCoopers and KPMG—which provide tax advice and audit services to
most large domestic and multinational corporations indicated that they hold
Australia's tax system in high regard. For example, Deloitte considered that:
...the Australian corporate tax system in its current form is
extremely comprehensive and robust, is administered by a respected tax
authority and generates a high degree of voluntary compliance. In seeking to
reform and improve the Australian tax system, it is important to appreciate and
build on the strengths of the current corporate tax system.
And EY contented that:
Australia's existing tax system is already considered to be
robust internationally in preventing tax avoidance. Risks to revenue are
consistently being identified by respective governments and dealt with as part
of an ongoing law reform agenda.
In addition to highlighting their concerns about the activities of some
multinational corporations, the Uniting Church of Australia, Synod of Victoria
and Tasmania, also indicated that many others pay the taxes they should in
While Australia's tax system is generally held in high regard, concerns
were raised that some specific aspects of the corporate tax system, including
the complexity of the system, are enabling companies to reduce their tax
Reflecting the views of a number of participants, Mr Julian Clarke, CEO
of News Corp Australia, was adamant that the current tax system was too
We find that the Australian tax system is incredibly complex,
and you have to ask why. I am a very average sort of person. It is beyond my
comprehension, the amount of detail that a company like ours has to deal with.
I am not suggesting that it is not all important—it is—but surely there is a
way of simplifying it.
And the costs of compliance are relatively high in the system because satisfying
tax rules is generally complex, subjective and time consuming. PricewaterhouseCoopers
indicated that qualified professionals were often required to assist
corporations understand tax rules:
Australia's tax laws are highly complex and are at times open
to interpretation. Because of this, intermediaries, such as PwC Australia, play
a vital role in enabling participation in Australia's tax system and
contributing to its operation. Just as the tax laws are set by Australia's
elected Parliament, and the tax system is administered by the ATO, qualified
tax advisers provide a vital service by helping people understand the
complexity and structure of tax rules.
Further, the interaction of tax systems across jurisdictions adds to the
complexity and acts to further facilitate corporate tax avoidance. According to
Action Aid Australia:
The varying rules and regulations between the residence
country and source country, as well as companies having the ability to declare
their actual residence in a completely different country that serves as a tax
haven, result in an exceptionally convoluted system that facilitates corporate
Tax treaties also play a role in facilitating tax avoidance as described
by Mr Martin Lock:
Corporate tax planning thrives on complex, uncertain and
inequitable laws. Inequity arises when two or more laws produce substantially
different tax outcomes for substantially the same transaction depending on
which of those laws are triggered.
Inequity commonly arises from differences in tax rules and in
tax rates across different double tax agreements, or 'tax treaties'. A tax
treaty grants rights to Australia to tax residents (which can include
companies) of the other treaty country but it also limits those rights,
sometimes quite significantly. Resident and foreign resident companies in
Australia often can easily establish a subsidiary in a tax treaty country that
best suits the group's tax plan and can then transfer assets, or channel
Australian sourced income, to it. Different assets and different kinds of
income can be transferred or channelled to whichever subsidiary or branch in
whichever treaty or non-treaty country best suits the plan. A variety of
beneficial tax provisions in treaties offers choice.
Recurrent and emerging challenges
As the primary tax authority, the ATO provided the following assessment
of what it considers to be the main risks to the corporate revenue base:
...over the past four years the nature and risks in the
corporate marketplace has remained relatively unchanged, with one exception—the
growing base erosion and profit shifting risk.
Base erosion and profit shifting (BEPS) refers to tax planning
arrangements that exploit gaps and mismatches in tax rules to artificially
shift profits to low or no-tax jurisdictions where there is little or no real
It is how multinational activities are structured and accounted for that
poses the greatest base erosion risk:
Increasing globalisation, the continuing growth of e-commerce
and the enhanced capabilities of large multinational corporations to engage in
financial engineering has seen the use of tax planning or structuring to avoid
tax. These arrangements are complex, deal with significant amounts and involve
a range of interactions with the tax system, giving rise to both income tax and
indirect tax liabilities and entitlements, at both the corporate and
The base erosion and profit shifting risks identified by the ATO that relate
to profit shifting activities of multinational corporations are well known. The
practices that present these risks to the integrity of the tax system are:
transfer pricing (for example, non-arm's length pricing of
related party dealings—often there are different views, particularly about
valuations and comparable benchmarking);
thin capitalisation (funding Australian operations using
international restructures and adopting global supply chains,
with profit shifting consequences;
complex financing arrangements that result in 'stateless' or
untaxed income; and
digital business platforms that have large economic presence in a
jurisdiction relative to the tax contribution.
The ATO considers that the main risks to the corporate tax system posed
by multinationals are increased debt deductions, an absence of permanent
establishment in Australia and aggressive transfer pricing.
The Uniting Church of Australia, Synod of Victoria and Tasmania, made a
The indicators of increased risk of MNE [multinational
enterprise] tax avoidance include increased use of subsidiaries in secrecy
jurisdictions, business restructures like digital duplication of domestic
businesses to shift profits to a low tax jurisdiction, pricing mismatches with
large mark-ups ending up in an offshore service hub, creation of stateless
income, tax arbitrage via hybrid entities/instruments, treaty abuse, the
alienation of intangibles at 'non arms-length' prices, debt dumping into
Australia and 'innovative' financing arrangements.
Stakeholders generally agreed that the biggest risk to corporate tax
revenue was base erosion and profit shifting by foreign based multinationals.
Professor Kerrie Sadiq, from the Queensland University of Technology, contended
...appropriate taxes are not being paid in the location of
economic activity. Tax rules need to focus on the underlying economic substance
of transactions. To this end, the current laws are inadequate and out of date.
Professor Richard Vann, Challis Professor of Law from the University of
Sydney, considered that the major tax risk for Australia is likely to be
foreign corporates with local sales. He explained that, because dividend
imputation is largely irrelevant to foreign multinationals and their
shareholders, it was a key reason they posed the greatest risk to the corporate
tax revenue base:
...the real risks for Australia are mainly the foreign
corporates. Imputation does not impact them. The shareholders of those
companies get no benefit out of imputation. So there is no natural floor on the
tax planning in which they can engage.
This view was supported by the Uniting Church of Australia, Synod of
Victoria and Tasmania:
Multinational companies that gain the greatest benefit from
tax dodging in Australia will be foreign based multinationals operating in
Australia, as any tax dodging is likely to be of direct benefit to the
shareholders or owners of the company. It is then likely that privately owned
Australian based multinational corporations have the next highest incentive to
dodge paying tax in Australia, as again any tax dodging on corporate income tax
is likely to be of benefit to the owners.
Profit shifting risks by large and medium sized multinationals and
private groups can present complex challenges for the ATO which may lead to
costly and drawn out disputes. The operational approach taken by the ATO to
identify and address these issues is discussed in chapter 6.
While there are concerns about the tax practices of many private
companies, particularly those controlled by wealthy individuals, the ATO
appears to have processes in place to actively monitor and address these risks.
The base erosion and profit shifting issues that Australia faces are no
different from other jurisdictions. According to the OECD:
The debate over BEPS has also reached the political level and
has become an issue on the agenda of several OECD and non-OECD countries.
In response to these long standing concerns, the OECD embarked on an
ambitious multilateral reform project in 2013 to develop a coordinated response
to address base erosion and profit shifting. This initiative is explored in
detail in chapter 4.
Transfer pricing is the setting of the price of goods and services sold
between controlled (or related) entities within an enterprise. Transfer prices
are important as they are a significant contributor to income and expenses, and
therefore taxable profits, of associated entities in different tax
Transfer pricing is one of the main ways to undertake tax arbitrage by
shifting profits from high to low tax jurisdictions. The OECD considers the
establishment of transfer prices for tax purposes to be one of the most
difficult issues associated with the taxation of multinational enterprises.
The Business Council of Australia succinctly outlined the issues
associated with transfer pricing:
Long-standing rules require transactions between related
businesses to be priced comparably with those between independent parties, the
so-called arm's length principle. However, in practice, the transfer price can
be difficult to determine if there is no comparison price, or with unique
transactions or assets, such as intellectual property rights. This gives rise
to ambiguity of interpretation and complexity of outcomes and decisions.
Indeed, Professor Vann indicated that intellectual property was an
important factor in facilitating profit shifting:
Companies with a lot of intellectual property are the ones
who have the biggest opportunity to shift profits. This is not just the big
tech companies, but most of our companies. BHP has intellectual property in the
form of the way it mines and the technology it uses. But, compared to its
value, that is a relatively small part of its value. For Google, Apple et
cetera, their intellectual property is a much larger part of their value. They
are the companies where the profit shifting is the greatest.
The OECD transfer pricing guidelines provide a variety of methods for
calculating appropriate transfer prices consistent with the arm's length
principle. The two main categories are:
Traditional transaction methods—the comparable uncontrolled price
(CUP) method, the resale price method and the cost plus method—are regarded as
the most direct means of establishing whether commercial and financial
relations between associated entities are arm's length.
Transactional profit methods—the transactional net margin method
and the transactional profit split method—may be the most appropriate method in
certain circumstances. Such circumstances include where entities have highly
integrated activities, where there is no or limited publicly available gross
margin information on third parties, or where each of the parties makes
valuable and unique contributions in relation to a controlled transaction.
Throughout the inquiry, the committee was provided with numerous
examples from a variety of industries where multinationals were potentially
using transfer pricing to minimise their Australian tax obligations. The
investigation by the committee centred on whether the transfer prices charged
to Australian subsidiaries actually reflected an appropriate revenue split.
Foreign supply of goods and
services that embody significant amounts of intellectual property
The setting of transfer prices and how these prices affect profits, and
ultimately tax liabilities, is important for companies providing products and
services that embody considerable amounts of intellectual property and
intangible goodwill, particularly in the pharmaceutical industry and the
digital economy. As many products are developed for the global market, transfer
pricing issues can arise in countries where final products are sold but not
In Australia, transactional profit methods appear to be favoured by the
majority of these multinationals and many companies seek Advanced Pricing
Arrangements (APAs) from the ATO to guide the determination of transfer prices
over a fixed period of time. The use of transactional profit methods and APAs
has raised concerns within the committee about the relatively low profitability
level of, and associated tax paid by, Australian subsidiaries.
Many products and services in the digital economy contain and/or use
technologies that have required substantial research and development costs for
innovations that may or may not have been commercialised.
In the case of Apple, the committee questioned whether it was plausible
that the Australian subsidiary could have a taxable income of only
$247 million from revenue of $6,073 million in 2013–14, effectively
representing an operating margin before tax of just over 4 per cent.
As a result, Apple paid only $80 million in tax for this period which
appears to the committee to be low given the company is very profitable
Apple responded that it had participated in the ATO's advanced pricing agreement
(APA) program since 1991 in order to apply an agreed arm's length principle to
these international related party transactions.
A profit-based method was deemed to be the most appropriate method to apply the
arm's length principle, specifically a Transaction Net Margin Method. As such,
Apple Australia's cost of purchasing products from affiliates is not calculated
on a product by product basis.
This profit-based approach to determining arm's length transfer prices
is applied consistently in other countries across Europe and the Asia Pacific
region where there are Apple subsidiaries with a similar distribution business
model to Apple Australia.
However, this does not mean that Australian consumers pay comparable retail
prices for Apple goods and services than other jurisdictions.
Apple acknowledged that its APA was not rolled over when it came up for
renewal and that the ATO is 'contesting whether these affiliate sales have been
struck at a fair price'.
Apple is part of a group of 12 companies in the 'e-commerce IT area'
that the ATO has 'under review either for using structures that do not declare
sales or for using aggressive pricing to shift profits out of Australia'.
Multinational pharmaceutical corporations generally have large research
and development costs associated with identifying and bringing novel
pharmaceuticals to market. This process generally involves substantial and
uncertain investment in underlying research, clinical trials and
commercialisation of products. According to Medicines Australia, whose members comprise
the majority of the Australian pharmaceutical industry:
...pharmaceutical companies that distribute in Australia purchase
products from their parent companies or manufacturing subsidiaries, with a
fixed range of profit rate that is often agreed with the ATO. This profit rate
range is based on an independent, arm's length comparator entity, which
reflects on the risks, assets and functions in Australia.
Marketing hubs for multinational
The marketing arrangements of mineral exports were raised as another
area where multinational resource companies may be taking advantage of transfer
pricing to reduce their corporate tax obligations in Australia. In particular,
the use of marketing hubs based in Singapore to add value to the export of iron
ore and other commodities was explored as part of the committee's
In the context of this inquiry, marketing hubs (also known as commercial
centres) are intergroup structures that purchase commodities from Australian
resource extractors and facilitate the sale and delivery of these resources to
final customers. The two largest Australian resource companies, BHP Billiton
and Rio Tinto, both have marketing hubs in Singapore.
BHP Billiton's centralised marketing organisation is headquartered in
Singapore and employs approximately 400 people. It is responsible for:
providing a well-informed, analytically rigorous and insightful
view of long run supply, demand and pricing of commodities;
presenting one face to markets and customers across multiple
managing the supply chain from assets to markets;
understanding how products are used by customers and how their
particular needs are evolving; and
maximising sales prices.
BHP Billiton indicated that, while transactions between its Australian
and Singapore operations are conducted on an arm's length basis, it still earnt
profits from its Singapore marketing operations of US$5.7 billion between
2006 and 2014 on which the tax paid in Singapore was US$121,000.
However, BHP Billiton submitted that:
All of the value of production of our commodities here in
Australia is subject to Australian tax...This means that when we sell Australian
commodities to a customer, nearly 100 per cent of those sale proceeds are
captured within the Australian tax net.
Consistent with the dual structure created as part of the merger between
BHP Limited and Billiton Plc, the Singapore marketing entity is 58 per cent
owned by BHP Billiton Limited in Australia. As a result, 58 per cent of the
profits are liable for Australian company income tax under the Controlled
Foreign Company (CFC) rules. This meant that BHP Billiton has paid 'top-up' tax
of A$945 million on the profits from the Singapore marketing operation.
BHP Billiton also indicated to the committee that it had a number of
open ATO actions for commodity transfer prices and CFC rules as they related to
the Singapore marketing operations. The total value in dispute was
A$522 million (including interest and penalties). The company has put
aside US$339 million in contingent liabilities for these matters.
Rio Tinto also has a commercial centre in Singapore that undertakes
marketing activities, shipping, procurement and other services. This commercial
centre employs around 330 people and undertakes activities that, according to
Rio Tinto, could not be sensibly undertaken elsewhere.
As a result of the value adding activities undertaken by its commercial
centre in Singapore on operations globally (not just commodities sourced from
Australia), Rio Tinto made a profit from these activities of $719 million
In relation to the tax implications of the activities of its commercial
centre, Rio Tinto explained that:
Before we undertook any activities in Singapore, we went to
the tax office and talked to them about the price that they would charge for
those activities on the basis of seeking to agree and that was an appropriate
We have various transfer pricing matters that we have ongoing
discussion with the tax office in relation to.
In response, the ATO indicated that transfer pricing for commodity sales
to marketing hubs was an ongoing issue of concern:
We are in the stage of an open audit, we are disputing their
[Rio Tinto and BHP Billiton's] hub activities. Rio [Tinto] were quite
transparent with you and disclosed that their Singapore hub made a profit of
$719 million in one year. That is precisely the issue that we are
disputing. Is it reasonable to say the activities that were carried on by that
Singapore hub should generate three‑quarters of a billion dollars profit,
largely not subject to tax in Singapore, or whether a substantial part of that
should be attributed back to the operations here in Australia?
While the committee accepts that there are significant costs associated
with the development of intellectual property, it is not convinced that the
current arrangements of some multinational corporations providing goods and
services using this intellectual property are appropriately allocating revenue
consistent with the value added in the provision of these goods and services to
The committee is continuing to explore transfer pricing issues,
particularly in relation to the pharmaceutical industry and other industries
that use transactional profit methods to determine transfer prices, and intends
to cover these issues in more detail in the final report.
Avoiding permanent establishment by
providing goods and services from another jurisdiction
One of the challenges for international tax policy, particularly with
the emergence of digital technology, is how to allocate income appropriately
and fairly between jurisdictions where products and services are purchased in
one country but ostensibly supplied in another country. The main examples
examined by the committee during the inquiry were structures used by Google and
Microsoft to effectively supply the Australian market from Singapore.
In the case of Microsoft, the committee was interested to learn that
revenue from Australia is predominantly booked for accounting purposes in
Singapore in the Asia Pacific regional operating centre [ROC]. Mr Bill Sample,
Corporate Vice‑President, Worldwide Tax, outlined Microsoft's
organisational structure and where Australia fits in:
Regional production, marketing and G&A [general and
administration] functions are performed by the Singapore ROC...Microsoft local
subsidiaries, such as Microsoft Australia, receive an arm's length compensation
paid by the ROC which takes into consideration the functions performed, assets
owned and the risks assumed by each entity.
The majority (85 per cent) of Microsoft's research and development is
undertaken in the United States and its Australian operations are marketing,
service and support subsidiaries. As such, non-consulting services and software
product revenue is billed and accounted for on the Singapore group books.
Mr Chris Jordan, Commissioner of Taxation, reflected on the evidence
provided by Microsoft:
Microsoft stated that the profits from its Australian
business are earned primarily in Singapore—approximately $2 billion with
$100 million remaining in Australia. The ATO audit of Microsoft is trying
to determine if this is the appropriate split of revenue.
The committee acknowledges that Microsoft provides some legitimate
services from the Singapore ROC, such as software updates from resident
servers. By using this business structure, however, Microsoft does not appear
to pay corporate tax in Australia on the majority of revenue it sources from
Similarly, Google has a regional head office in Singapore and an
Australian subsidiary. The Australian subsidiary is responsible for providing
sales and marketing support services to Australian businesses and users, and
provides research and development services to Google globally.
Revenue from Australian activity is billed and taxed through Google's
regional head office in Singapore and Google Australia receives payments from
other Google entities (Google APAC and Google Inc) for the provision of local
Google Australia reported a profit of just over $46 million on
revenues of $358 million in 2012–13. It paid only $7.1 million in corporate
tax, however, as it was able to claim a research and development tax credit to
the value of $4.5 million.
In response to her own question about why Google Australia does not pay
more corporate tax in Australia, Ms Maile Carnegie, Managing Director of Google
...like many other multinational corporations, whether they are
digital or otherwise, we pay the lion's share of our taxes to the country where
our headquarters is based...So at Google, our success and our profits stem from
our intellectual capital, and that is the technology that helps to drive things
like the algorithm which provides what we think is the most relevant answer to
whatever search you put into Google Search...This intellectual capital was
developed outside of Australia, and this intellectual capital is owned outside
In response to questions on notice, Google indicated that it paid US$3.3
billion in tax worldwide in 2014 on revenues of US$66 billion.
Its overall effective tax rate was 19 per cent, compared to the statutory
federal rate of 35 per cent in the US, where Google is headquartered. If Google
is paying the 'lion's share' of its taxes in the US, then it would follow that
it is not paying very much tax at all on the profit it derives from all the
other foreign jurisdictions where it operates.
In Singapore, for example, Google paid only US$4 million in company tax
in 2013 on undisclosed revenues not just from Australia but other countries in
By contrast, Google Australia paid A$7.1 million in company tax during the same
period without accounting for the majority of that revenue being booked in
Google did not provide details of the revenue it sources from Australia.
Google's response indicated that:
Google Inc does not break out revenue by country source,
unless revenue from that country exceeds 10% of total revenue....Our current
reports don't break Australia's number out separately.
As such, the committee has not been able to verify media reports that
indicated that Google's revenue from Australia for advertisements was around
However, if these media reports are correct, Google Australia's operating
margin on revenue sourced from Australia would represent 2.3 per cent, almost a
tenth of the worldwide operating margin of 23 per cent in 2013.
Google and Microsoft, together with Apple, are part of a group of
12 companies in the 'e-commerce IT area' that the ATO has 'under review
either for using structures that do not declare sales or for using aggressive
pricing to shift profits out of Australia'.
The committee is concerned that the tax incentives afforded by overseas
jurisdictions to some multinational companies are facilitating aggressive tax
minimisation and the erosion of Australia's tax base.
The committee recommends that the Australian Government work with
governments of countries with significant marketing hub activity to improve the
transparency of information regarding taxation, monetary flows and inter‑related
Debt loading, complex financing
arrangements and international restructures
There are a number of other mechanisms by which multinationals can
aggressively minimise their tax obligations in one jurisdiction by shifting
profits and/or taxing rights to another jurisdiction.
Debt loading and complex financing
High levels of debt can be an important contributor to providing funding
for capital intensive projects, such as for financing infrastructure assets and
facilitating resource extraction. High debt levels alone are not an indicator
of aggressive minimisation but when combined with relatively high interest
rates to related subsidiaries questions may be asked as to whether these
arrangements are intended to shift profits.
Debt loading enables companies to claim excessive interest deductions on
earnings, which can then reduce assessable income, through artificially
increasing the amount of debt carried by an associated Australian entity.
A subsidiary of a multinational company in a low tax jurisdiction can
provide a loan to a subsidiary in high tax jurisdiction, thereby facilitating
profit shifting as the interest payments are deductible in the high tax
jurisdiction and the income received is taxed at a lower rate in the low tax
jurisdiction. Currently under the thin capitalisation rules in Australia,
companies can claim deductions for interest on debt up to a
60 per cent debt-equity ratio for their operations.
Complex financing structures are often used by multinational
corporations to transfer financial resources between subsidiaries in different
jurisdictions. Hybrid mismatch arrangements can arise when equivalent entities,
instruments or transfers are treated differently for tax purposes in different
jurisdictions. These arrangements can have beneficial tax implications and lead
to double non-taxation (or 'stateless' income) or a particular loss or
deduction being able to be claimed in both jurisdictions.
The committee is concerned that selective debt loading practices are
enabling some multinational organisations to continue to shift profits from
Australian operations to lower tax jurisdictions. Rather than continue with the
current thin capitalisation rules, a fairer way to determine an appropriate
debt deduction is to base the tax deduction on a company's entire global
The committee does not consider it appropriate that corporations can
exploit hybrid mismatches to avoid corporate tax. As such, it considers that Australia's
rules on hybrid entities and instruments be better aligned with tax laws in
other countries and be consistent with OECD guidelines.
There can be tax benefits from undertaking operational restructuring
which shifts activities and assets between high and low tax jurisdictions.
Restructuring is undertaken by some corporations, either independently or as a
result of takeovers, and the ATO sees risks here too in areas such as
consolidation, taxation of financial arrangements, capital gains tax, and
Although no specific claims were made in the course of the inquiry about
aggressive minimisation in relation to corporate restructuring, there have been
examples of tax disputes arising from these activities. The most high profile
case in recent years has been TPG Capital's privatisation and subsequent public
float of Myer where the ATO made an initial income tax claim of $678 million.
Ultimately, the ATO was not successful in its claim but this example
illustrates that there are opportunities for aggressive minimisation through
corporate restructuring which contribute to base erosion.
At the 2015–16 Budget Estimates hearing, Mr Rob Heferen,
Treasury Deputy Secretary, indicated that:
...if an issue comes up about taxpayer affairs, that is taken
into account [by the Foreign Investment Review Board]...There may be instances
where the issue about how much tax a firm paid and how much they might pay may
be relevant to the determination of the national interest.
According to Australia's Foreign Investment Policy, the
Australian Government 'considers the impact of a foreign investment proposal on
Australian tax revenues' as part of national interest considerations.
Comparing effective tax rates has limitations
Effective tax rates are a measure of tax paid compared to the underlying
profit before tax. According to the Business Council of Australia:
Accounting standards define the effective tax rate by
reference to current and deferred tax expense, divided by the accounting
However, the methods for determining effective tax rates are widely
debated in academic literature.
For example, there are a number of different methods available that reflect
different views on using an economic, compared to an accounting, perspective.
Indeed, the Business Council of Australia noted that:
There is no single measure of effective tax rates. It is
important to consider the precise nature of the measure to ensure meaningful
information can be drawn from it.
In order to stimulate discussion about corporate tax in Australia, the
Tax Justice Network undertook a detailed examination of the effective tax rates
of Australia's top 200 publicly listed companies (ASX 200) and other data
relating to all taxpayers. The research undertaken by the Tax Justice Network
Australia indicated that Australian companies of all sizes were not paying the
statutory tax rate of 30 per cent and, based on this assumption, the potential
tax foregone was $9.3 billion. The majority of this loss
comes from companies earning an income over $10 million.
While acknowledging the limitations of its analysis, the Tax Justice
Network Australia considered that this research was important to:
...open up opportunities for deeper analysis and enable
stakeholders to meaningfully engage with companies about responsible tax
practices. Australians need to hold corporations and governments to account by
addressing corporate tax avoidance and its consequences.
The committee asked ASX 200 companies to clarify their effective tax
rates and to respond to the claims made by the Tax Justice Network Australia.
The companies that responded highlighted the limitations of that analysis and
sought to correct the record. In the main, they highlighted that effective tax
rates should be calculated on taxable income, not accounting profits.
Other companies, peak bodies and government agencies also contested the
analysis presented by the Tax Justice Network Australia and criticised the
methodology used for not incorporating the subtle complexities of the tax
system. Consistent with ASX 200 companies, these stakeholders brought to the
committee's attention the distinction between assessable (or taxable) income
and other commonly used measures, such as accounting profits and earnings before
allowable deductions. For example, the Business Council of Australia explained
The calculation of taxable income and accounting profits
differ due to permanent and timing differences. The tax system deliberately
departs in many areas from the use of accounting principles in determining
taxable income. Some of these key differences...include the treatment of carry
forward losses, depreciation, foreign income, dividend imputation, research and
development, and property trusts.
This sentiment was echoed by Mr Heferen:
A fundamental feature of our tax system is that we do not tax
companies on their accounting profit. Companies are taxed on their taxable
income. [That] This differs from accounting profit in many ways reflects the
clear policy choices of governments over time. Losses, foreign income, capital
gains, accelerated depreciation, and research and development are all areas
where, for a range of legitimate reasons, governments have decided to tax
companies on a different basis than their accounting treatment. So an
observation that a company has an effective tax rate of less than 30 per cent
is merely that—an observation of fact. It gives no insight as to whether the
tax paid is appropriate or not.
Further, Mr Heferen explained that the effective tax rate is generally
not intended to be equal to the statutory rate:
With accounting profit and taxable income for some businesses
some of the time there could be a degree of similarity, and, in fact, a recent
report said that if you used accounting profit a lot of firms are earning 26
per cent rather than 30. I must confess I was surprised it was so high. But
when you get right down to it, there are intended significant differences.
Research and development tax concessions are a classic. Accelerated depreciation
is another standard. The carried forward loss is another one...The other one is
Income from foreign sources can also distort the calculation of
effective tax rates, depending on its tax treatment both overseas and when it
In addition, corporate structures that are taxed on a flow-through
basis, such as property trusts, do not pay corporate tax but transfer the tax
obligations to their owners (which may be individuals or other corporations).
So while effective tax rates might superficially appear to be an
indicator of tax avoidance or aggressive minimisation, there may be legitimate
reasons why they differ from the statutory corporate tax rate.
While the committee accepts that the research presented by the Tax Justice
Network Australia has limitations, it considers that this work has provided a
valuable platform for opening up the discussion about the extent to which both
public and private companies should provide information on their financial and
taxation affairs to the community. As the Tax Justice Network Australia noted:
Disclosure and transparency of corporate tax practices needs
to be increased. Greater public awareness of aggressive tax planning will
provide an incentive to Australian corporations to be less tax aggressive. Tax
dodging practices, when exposed, will damage corporate reputations and may
increase regulatory and financial risks. Responsible companies should not wait
for inevitable changes to the rules before deciding to act.
The committee also asked a number of foreign based multinationals—such
as leading technology and pharmaceutical corporations—to provide details of
their effective tax rates for their Australian operations. The responses
received noted that these companies generally paid relatively high effective
tax rates on Australian profits, close to the statutory rate of 30 per cent.
But, as discussed earlier, the level of profit from Australian
operations appeared to be low compared to the level of revenue and global
profitability of these companies. This raises concerns about whether these
companies are engaging in aggressive tax planning practices to shift profits
Where a standardised approach to calculating effective tax rates is
employed, the results can be used to compare the relative tax paid by
corporations and may be useful in identifying tax avoidance and aggressive
minimisation, particularly in multinational corporations.
The committee notes that the ATO is developing an 'effective tax borne'
formula which is intended to 'assess the global tax performance of
multinationals in relation to Australian-linked business operations'.
It is aimed at encouraging a broader discussion about the need for, and
appropriateness of, a standardised approach to calculating effective tax borne.
A detailed explanation of the effective tax borne formula and underlying
methodology can be found in appendix 1. According to the ATO:
This metric deliberately includes the profits of the economic
group which may not be taxable in Australia under Australia's source, residency
and anti-profit shifting rules or the OECD/Double Tax Agreement principles
intended to avoid double taxation. The metric seeks to reflect all of the
channel profit derived from business activities involving Australia and the
Australian and global tax paid on that channel profit.
...By including the entire economic group's profit from
Australian linked activities, international relative party dealings are
The committee welcomes the efforts of the ATO to bring clarity and
consistency to the debate on effective tax rates and fully supports the
continued work of the ATO in this area.
Australia has measures to address multinational tax avoidance
Australian tax administrators and policy advisors are vigilant in
identifying and proposing solutions to emerging problems. Recent attempts to
strengthen the corporate tax system reflect the willingness of these agencies
to confront problems directly. For example, the ATO has an important and
influential role in assisting Treasury and the government to design and
implement efficient and effective laws. According to the ATO:
We monitor the system closely and work with Government and
Treasury in relation to any changes required to ensure the health of the tax
system and its administration. Reforms have been implemented to improve
transfer pricing and thin capitalisation rules in Australia, as well as
globally the ATO is supporting the G20/OECD to drive 15 action items to address
base erosion and profit shifting.
And Mr Heferen, reinforced this statement:
The Treasury and the ATO are continually examining our tax
system to identify areas where taxpayers are engaged in egregious tax
avoidance, consider where new compliance initiatives might be best targeted and
also advise government on how our laws could be improved to deal with these
Stakeholders shared the view that the corporate tax system and its
administrators have the flexibility to respond appropriately to emerging issues
in a timely manner to address emerging problems. Professor Kerrie Sadiq noted
We currently have a robust and sophisticated international
tax regime and we have been proactive in amending law where needed, for example
updating the transfer pricing regime and thin capitalisation provisions.
While KPMG stated that:
...both the ATO and the government of the day respond quickly
and effectively to risks to the revenue base.
A number of stakeholders highlighted the specific initiatives undertaken
by the Australian Government to enhance the corporate tax system and address
specific base erosion issues. These initiatives and existing features of the
corporate tax system have created one of the strongest systems globally to
combat tax avoidance. These anti-avoidance features of the tax system were
described succinctly by KPMG:
Australia has what is widely
considered one of the most robust general anti-avoidance provisions of any tax
system in the world, in Part IVA of the 1936 [Income Tax Assessment] Act. Part
IVA was further strengthened in 2013 in response to a number of court decisions
viewed as contrary to the policy of the legislation.
Australia's thin capitalisation rules,
which limit the amount of debt on which interest can be deducted against Australian
assessable income, were amended and tightened in 2014.
Australia amended its transfer
pricing rules in 2012 and 2013, which seek to ensure that an appropriate amount
of taxation is attributed to Australian-based activities, giving the ATO the power
to 'reconstruct' commercial transactions.
The imputation and franking system
encourages Australian registered companies to pay Australian tax in preference
to foreign tax for the benefit of Australian resident shareholders. This
creates a systemic bias in favour of tax being paid in Australia.
Australia has a comprehensive 'controlled
foreign companies' (CFC) regime that seeks to tax certain types of income in
jurisdictions designated by Australian law as low tax jurisdictions. This means
that Australia's current law has a mechanism by which certain types of foreign
income derived by, or attributed to, Australian residents is taxed as it
accrues rather than when it is repatriated.
There is active oversight and review
of the Australian tax system by Parliament, Treasury, the Board of Taxation and
The ATO is held accountable by the
Joint Committee of Public Accounts and Audit and a number of oversight bodies,
including the Inspector General of Taxation.
A comprehensive regime exists that
governs tax advice and advisors generally. The registration regime introduced
by TASA [Tax Agent Services Act] requires that individuals be 'fit and proper'
persons to provide tax advice. This legislation supplements the existing
professional obligations for accountants under the Chartered Accountants regime
and the obligations of legal practitioners under the various state Legal
Profession Acts. This is augmented with specific provisions such as the
Promoter Penalty provisions in the Tax Administration Act 1953 (Cth). The
registration of tax agents and the enforcement of a legislative code of conduct
in TASA ensures that the standards required (and enforced by the Tax
Practitioners Board) of an Australian tax advisor are markedly more stringent
than in most comparable countries.
It is unclear, however, whether recent changes have achieved their
intended purpose. CPA Australia contended in relation to the 2013 amendments to
strengthen the general anti-avoidance provisions and modernise the transfer
pricing provisions that:
...neither of these pivotal amendments have been tested
judicially, and thus their potential scope and reach is not yet sufficiently
More recently, the government has announced additional unilateral
measures in the 2015–16 Budget to further combat base erosion and profit
shifting by multinational corporations. Specifically, it seeks to do this by
again strengthening the general anti-avoidance rules, and facilitating a more
level playing field for domestic corporations to compete with multinationals.
Nonetheless, evidence before the committee indicated that there is much scope
for further refinement of tax legislation to contain base erosion and profit
The committee is encouraged by these announcements and considers that
the actions arising from the OECD's BEPS initiative will provide opportunities
to further strengthen the system. These initiatives and unilateral alternatives
are further explored in chapters 4 and 5.
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