Facilitating government agencies to collect corporate tax and protect
Within the Australian Government, a number of agencies are involved in
the collection of tax revenue, monitoring of company behaviour, and development
of corporate tax policy. This chapter explores the performance and capability
in relation to the corporate tax system of the Australian Taxation Office (ATO)
and the Australian Securities and Investments Commission (ASIC).
Australian Taxation Office
The ATO is the government agency responsible for collecting Commonwealth
tax revenue and monitoring the compliance of companies with their tax
obligations. It considers itself to be an active and visible regulator with a
well-educated and experienced workforce administering internationally respected
law. It works cooperatively with other revenue authorities and makes risk-based
decisions about how resources are managed to administer the tax system.
As the ATO's overall approach to administering the corporate tax system is
based on cooperative compliance to support willing participation, it assists
corporations to meet their tax obligations.
The ATO is attempting to mitigate international and profit shifting risks
through a range of activities, including:
differentiated compliance approaches, such as risk reviews and
audits for larger taxpayers and leveraged approaches (for example, project
management) for smaller taxpayers;
marketing and communications activities to provide guidance on
the operation of the law to promote voluntary compliance;
identifying and analysing new, emerging and evolving trends using
intelligence from cases, other external sources and other jurisdictions; and,
providing empirical evidence to government and Treasury when
current laws are found to be ineffective or are producing an unintended policy
These efforts are being supplemented by programs that focus on specific
areas of risk. For example, the ATO's International Structuring and Profit
Shifting (ISAPS) compliance program is investigating corporations that have
undertaken international restructures or have significant cross-border
The risk differentiation framework
In order to fulfil its objectives efficiently and effectively, the ATO
uses a risk differentiation framework (RDF) to assess the likelihood of each
company not meeting its tax obligations and the consequence of potential
non-compliance. This approach is consistent with international best practice
and ensures that resources and efforts are focused on those taxpayers and
issues posing the greatest risk to the tax system.
The ATO provided the committee with a table of the number of companies
assigned to each risk rating over the last 4 years (Table 6.1).
Table 6.1: RDF risk ratings for
public and foreign owned corporations
The number of corporations in the higher risk category has been
declining as the ATO increasingly focuses on a 'prevention before correction'
approach which seeks to increase early engagement and identify and address risk
pre-lodgement. According to Mr Jeremy Hirschhorn, Deputy Commissioner of Public
We view the movement of 12 of those taxpayers from Q1 [higher
risk] to Q2 [key taxpayer] as a positive, because it was actually a behavioural
change from those companies. They started coming to us before the event and
talking to us about what they were doing rather than us working out what they
had done after the event and trying to investigate.
In relation to the sole remaining taxpayer considered to be higher risk
in 2014, Mr Chris Jordan, Commissioner of Taxation, noted that:
Historically, this particular taxpayer has made it quite
clear that they have not had an interest in being open with us and discussing
any of their tax affairs with us prior to doing transactions. I understand that
that attitude may be changing and there have been approaches to us recently to
work with us to get out of that Q1 [higher risk].
In general, the ATO continually engages with higher risk and key
taxpayers to review their tax affairs and seeks to provide certainty on issues
and risks as they arise and resolve issues where uncertainty exists.
For lower and medium risk corporate taxpayers, the ATO's strategy is to
influence taxpayers pre-lodgement and to target certain segments of the lower
consequence population through guidance, alerts and workshops; monitor
taxpayers through macro and micro level analysis; and undertake post-lodgement
review and audit activities as required.
A similar RDF is applied to private companies to provide an initial risk
assessment on them to inform the ATO's assurance strategies. Similar to public
companies, higher consequence taxpayers and higher risk taxpayers in this group
are likely to be subject to increased scrutiny and assurance activities.
Capability and resourcing
Within the ATO, there are two main business lines that manage income tax
issues for corporates. The Public Groups and International (PG&I) business
line has responsibility for all publicly listed and international entities. The
Private Groups and High Wealth Individuals (PGH) business line has
responsibility for private groups with a turnover of greater than
Around 2,700 ATO officers are engaged in work with corporates across
these two business lines with PG&I employing around 45 per cent and PGH
employing around 55 per cent.
It is anticipated that the relative allocation of staffing will change as the
operation of specific projects, such as ISAPS compliance program and Project
run their course.
Many of the staff working in the two main corporate business lines have
extensive tax experience across a range of public and private sector
environments. In response to concerns about staffing in the international area,
Mr Jordan contended:
We have more staff in our international area than ever before
who have, on average, more than 12 years' experience, are better qualified and
are more engaged. Our international teams are well rounded, with experts who
understand the complexity of international dealings and can deal with various
aspects of international tax...
I am very proud of the ability, expertise and integrity of
the people we have working on our large corporate cases and I am extremely
confident of our capability moving forward.
In light of recent budget reductions and associated staffing
redundancies, the committee was concerned about a potential reduction in the
capability and performance of the ATO to identify and litigate corporate tax
avoidance. For example, the Community and Public Sector Union (CPSU) submitted
The audit team has been hit particularly hard by job losses.
The ATO Assistant Commissioner Geoff Leeper told a recent Senate estimates
hearing that nearly a quarter of the redundancies so far had come from the
CPSU members report that this has significantly impacted the
ability of the ATO to investigate matters. Quite simply, they report that fewer
audits are being conducted (impacting negatively on revenue), and there is
reluctance to review and/or audit larger and more complex entities.
In its submission, the ATO responded by saying:
While our recent redundancy program reduced staff numbers we
have retained high levels of experience and expertise and continue working to
develop critical expertise in our staff...It is important to note that
redundancies were offered only after assessment of the criticality of positions
and in nearly all cases the staff member, their supervisor, and a panel of
Senior Executives agreed that the officer had capabilities that were classified
as 'non-essential' for business delivery.
Noting that budget cuts had led to staff reductions, Mr Jordan indicated
that the ATO is appropriately targeting risks and allocating resources
What we have done is make sure that we are allocating staff
to the areas of the highest interest...So we have got more senior people, we have
got more private sector expertise brought in, and we have moved significant
senior resources within the ATO into that internationals area, because that is
really an area of focus.
Specifically in relation to the effect of redundancies on the
international group, Mr Jordan contended that:
...any talk that our redundancy program has had an adverse
impact on our capability, in our area dealing with public groups, large
corporations and internationals, is simply not true.
Mr Mark Konza, Deputy Commissioner, International, ATO, noted that the
significant focus on improving and streamlining internal processes had not
compromised the ability of the ATO to carry out its role as an assurer of the
corporate tax base:
We have flattened structures, we have consolidated our teams
so that we are more efficient, we have changed our processes. All in all, we
have improved the management of our processes so we can stay as effective as we
While staffing has been reduced, including in the international and
public groups area, the ATO considered the impact of this had been off-set by
the introduction of the 'smarter data' project.
...we are doing a lot of work in our analytics area because we
think that has got a huge leverage potential. They are highly specialised
people: they are typically not with a tax background, but a lot of engineering,
computer science, software development backgrounds.
In addition, the ATO has:
recruited an additional 80 audit, accounting and tax law
ensured succession plans are in place for senior roles; and
focused on building international tax skills to ensure that its
capability is not compromised.
KPMG highlighted that staff numbers are only a part of the capability
and resourcing debate:
The ATO's staffing numbers are only part of the equation.
What is equally important is how the ATO uses its resources. Can early
engagement with taxpayers make litigation unnecessary? Could better use of data
mining and analytics deliver better outcomes at a lower cost? Are the right
cases being selected for investigation and/or litigation? Should a matter
proceed to court, or would another dispute resolution process be more
The committee notes the decline in ATO staffing and resourcing levels in
recent Budgets, and the pressure this has put on consolidated revenues, audits
and dispute settlements to identify, investigate and prosecute, where
necessary, instances of corporate tax avoidance in Australia.
The committee acknowledges that the ATO has undergone significant
structural reorganisation to make the best use of available resources and is
currently devoting its efforts into areas likely to prove most beneficial.
Nonetheless, the committee considers that it is in the interest of the
government and the wider community to ensure that the ATO has sufficient funds
to fully and effectively combat tax avoidance.
The committee recommends an independent audit of ATO resourcing, funding
The committee recommends the ATO report to parliament, at least annually
the number of audits or disputes launched concerning
the number of cases settled with multinational corporations;
the number of successful legal proceedings concluded against
multinational corporations; and
the staff resources allocated to tax compliance of multinational
Willingness to undertake litigation
Some stakeholders accused the ATO of seeking to avoid litigation and
settle with large corporates. For example, reflecting the experiences of
members working in the ATO, the CPSU submitted that:
Members advised that funding available to litigate matters
has been cut, with case officers forced to settle matters that would otherwise
see important issues tested in court. Members suggested that, due to the costs
involved, there was reluctance within the ATO to prosecute large companies
suspected of engaging in tax avoidance because of the duration and complexity
of these matters. Members were concerned that settlements potentially cost the
ATO significant revenue.
Mr Jordan spoke of the resources tied up in pursuing just one of the
complex tax avoidance allegations that was prosecuted:
If I could just take one thing that is on the public record
it would be the Chevron case, which is very recent, from the end of last year.
Not to oversimplify it, basically, there was a borrowing at two per cent by the
United States parent and an on-lending at nine per cent. As I understand it,
there were something like over 30 expert reports. There were 11 barristers in
the case. It took years to get up, and, in my view—maybe I am just too simple
here—that looked like a pretty straightforward issue.
Even so, in response to concerns raised in submissions, he noted in his
opening statement to the committee on 8 April 2015 that:
Whilst we do look to engage earlier and solve issues more
quickly, we will continue to use litigation where there is a need for law
clarification or if a message needs to be sent that certain behaviours are
simply not acceptable. We will not hesitate to pass on information to the
Commonwealth Director of Public Prosecutions and law enforcement agencies,
According to the ATO, it seeks to identify and resolve potential issues
early by offering a range of opportunities for significant (or potentially
contentious) corporate tax planning and major transactions to be disclosed. By
taking a more collaborative approach and shifting efforts towards early engagement,
the ATO has seen a reduction in the number of audit and review cases.
Other stakeholders, such as PricewaterhouseCoopers, KPMG and the Tax
Institute, supported the position of the ATO. For example, KPMG submitted that
...agrees with the many other submissions to the inquiry, which
observe that the ATO has long been, and continues to be, a highly regarded tax
administrator when it comes to investigating and commencing litigation.
The committee understands that significant effort is required to develop
and prosecute cases involving corporate tax avoidance and acknowledges that,
even then, the result may still be uncertain. While the committee realises the
ATO is doing what it can with the resources it has available, corporate tax
avoidance and aggressive minimisation is potentially the most important risk to
Australia's tax base.
Maintaining the integrity of the tax base is essential and it needs to
be done well. Accordingly, the committee considers that sufficient resources
need to be provided to enable the ATO to undertake the litigation it deems
Ensuring access to relevant
While the committee considers that public transparency is vital to
maintain confidence in the tax system, it is equally important that tax
administrators are able to access the relevant information they require,
particularly in relation to the activities of multinational corporations.
Professor Vann provided the most succinct reason for strengthening
transparency—'You cannot tax what you cannot see....'
Accessing relevant information is an essential component of identifying
and investigating aggressive tax planning, avoidance and evasion. The ATO
explained that it has difficulties obtaining the information that it needs to
undertake its duties in identifying and addressing aggressive minimisation
Particularly when you are dealing with international
companies, getting information, which often has to be got from their parent or
from other jurisdictions using treaty powers, is a frustratingly slow process.
Strict privacy laws in relation to the use of this information and the
need for the ATO to maintain an ongoing relationship with its clients should
allay any concerns about the likelihood of confidential information being
released into the public domain without authorisation.
Indeed, the ATO has refused the committee's request to disclose confidential
taxpayer information. In this regard, Mr Jordan highlighted that:
...all taxpayers need to have confidence that confidentiality
will be maintained over their taxation and commercial information. Disclosing
confidential taxpayer information raises issues for the future for all
taxpayers in terms of our ability to facilitate transparency, cooperation and
productive relationships with them.
In addition, the limitations placed on the ability of relevant
government agencies to share or exchange information also hinder the ability of
the tax office to identify and act on tax avoidance. The success of Project
Wickenby—a cross-agency collaboration of 8 agencies to fight against tax
avoidance, evasion and crime—illustrates the potential of having similar information
sharing agreements on a more permanent basis.
The committee considers that the ATO should have the capacity to request
and receive any useful information that can enable it to identify and
investigate corporate tax avoidance and evasion. Where necessary, the ATO
should be able to access any further information that it requires from the
companies themselves, relevant government and non-government entities (such as
ASIC, AUSTRAC, law enforcement agencies, accountants, lawyers and financial
institutions) and relevant international jurisdictions.
OECD initiatives, such as the introduction of common Country-by-Country
reporting standards and automatic exchange of information, are important and
necessary for tax administrators to enable them identify and act on aggressive
Country-by-Country reporting, Action 13 of the BEPS agenda, is intended
to provide tax administrators with sufficient information to assess high-level
transfer pricing and other BEPS-related risks.
Multinational enterprises with consolidated group revenue of greater
than €750 million
(or equivalent in domestic currency) in the previous fiscal year will be
required to provide Country-by-Country reports of their activities, including
data on revenue, profit and tax paid in each jurisdiction. The OECD considers that this balances the
regulatory burden of reporting with the potential benefit to tax administrators
as the approximately 15 per cent of multinationals that will be required
to report control approximately 90 per cent of corporate revenues.
Australia will be one of the first adopters of Country-by-Country
reporting when it comes into effect on 1 January 2016.
The committee fully supports the initiatives of the OECD to facilitate
the exchange of information between jurisdictions and the early adoption of
Country-by-Country reporting. However, the extent to which these measures are
effective largely depends on their implementation which is yet to come into
Using international forums to
In addition to the OECD and its work on base erosion and profit
shifting, the ATO is leading a number of international forums to promote
greater international collaboration to address multinational tax avoidance. Mr
Jordan informed the committee that he had:
...taken on a role as vice-chair of the OECD Forum of Tax
Administration with responsibility for revitalising the JITSIC network, which
is the Joint International Tax Shelter Information and Collaboration project.
The JITSIC network focuses specifically on tackling cross-border tax avoidance
He explained further:
... At Australia's instigation, we now have 38 member countries
authorities worldwide. We are also cooperating within our own region. Late last
year, I established a permanent taskforce with the tax commissioners of 17
jurisdictions from the Asia-Pacific region to actively share compliance tactics
and intelligence, and these are very practical steps we can take now while we
wait for the OECD to deliver their reform.
Global collaborations and initiatives to share the detailed information
required to identify aggressive tax planning practices operating across
jurisdictions should be an imperative for countries, such as Australia, seeking
to address harmful tax practices and more appropriately tax revenue at the
source of its activity.
The committee supports the ATO's efforts to work with tax administrators
in other jurisdictions to improve collaboration and information sharing between
Australian Securities and Investments Commission (ASIC)
The Australian Securities and Investment Commission (ASIC) is
Australia's corporate, markets and financial services regulator. ASIC's
fundamental objective is to allow markets to allocate capital efficiently to
fund the real economy and, in turn, economic growth.
ASIC seeks to share information with the ATO to help identify tax
avoidance and aggressive minimisation, where permitted by law. Public financial
reports filed with ASIC can also provide public information to indicate that a
corporation is involved in tax avoidance or has adopted aggressive minimisation
ASIC assists the ATO in its role of collecting tax through:
sharing information that each agency is permitted to share under
their respective legislative arrangements;
cooperating to address issues that are relevant to both agencies
through collaborative means, such as working parties; and
having relationship managers responsible for maintaining the
relationship between agencies and dealing with ad hoc issues and requests for
While information is not generally provided proactively, the exchange of
information occurs relatively frequently between the two agencies and can
facilitate meeting the regulatory mandates of each agency.
However, there are limitations on ASIC providing information to the ATO. This
is particularly so if the ATO has not sought the information under a Memorandum
of Understanding or if the information has been compulsorily acquired by ASIC
for another purpose (in which case ASIC may be required to afford procedural
fairness and hence defeat the purpose of the release of information).
Legislative amendments proposed by
In its submission to the inquiry, ASIC provided the committee with a
number of possible legislative amendments to provide more public transparency
of information and facilitate greater information sharing between ASIC and the
ATO to assist in identifying possible tax avoidance and aggressive
The committee notes that ASIC has not proposed any changes to a
director's duty to act in the best interests of shareholders.
ASIC considers that it would be impractical and inappropriate to attempt to
address tax minimisation by modifying this general duty which is important to
protect shareholder interests.
Disclosure of related party
information in financial reports
Currently, the accounting standards contain disclosure requirements for
related party relationships and transactions. These disclosures could help the
public identify non-arm's length arrangements that might be used to minimise
tax payments in Australia. However, the requirements do not apply to
ASIC proposes that taxation legislation could be amended so that non‑reporting
entities would be required to make these disclosures in financial reports under
the Corporations Act if the ATO requires them to do so.
Grandfathered large propriety
Currently, a 'grandfathered' large proprietary company is required to
prepare a financial report but is exempt from lodging it with ASIC if it meets
This reporting exemption means that certain companies are not subject to the
same level of public scrutiny as other similarly sized companies by virtue of
having an exemption because of when reporting requirements were introduced. The
lack of availability of public financial reports reduces transparency about
possible indicators of tax avoidance or tax minimisation.
ASIC proposes that the concept of 'grandfathered large proprietary companies'
could be removed from the Corporations Act and these companies required to
lodge financial reports with ASIC. This would remove any inequity with similar
companies that are required to lodge financial reports. Consideration may need
to be given to privacy concerns that may have contributed to the original
decision to provide the grandfathering exemption.
Confirmation whether a propriety
company is small
Currently, most of the more than 1.7 million Australian proprietary
companies are not required by the Corporations Act to lodge financial reports
with ASIC. Some of these companies may become large but fail to prepare and
lodge financial reports. There is no requirement for these companies to confirm
with ASIC annually that they are small, which, if required, would act as a
trigger for the companies and their directors to review the company's status.
ASIC proposes that proprietary companies could be required by the
Corporations Act to confirm with ASIC whether they remain small. However, this
would need to be balanced against the administrative cost and red tape imposed
on the vast majority of proprietary companies that are small for any given
year. There is also likely to be a cost to ASIC in following up companies that
do not confirm their status for any given year.
Limitations on information sharing
with the ATO
Currently, there are circumstances that sometimes require ASIC to
provide procedural fairness to a person affected by the provision of
information to the ATO that may help identify and address tax avoidance before the
information is provided. This requirement has the potential to alert the person
and defeats the purpose of the release of the information.
ASIC proposes that the confidentiality provisions in section 127 of the
ASIC Act could be amended to put beyond doubt that ASIC is able to freely share
information with the ATO without the need to provide procedural fairness to the
False identities of directors
Currently, ASIC has no authority to check the identity of individuals
who are notified as being the directors of a company to be registered with
ASIC. Such individuals could use false identities to form companies that are
used in tax avoidance activities.
ASIC proposes that it could be allowed to require evidence of the identities
of proposed directors of companies. The recommendation of the Financial System
Inquiry to develop a national strategy for a federated-style model of trusted
digital identities will assist with this.
The committee notes that Treasury is undertaking a consultation process
in relation to all of the recommendations proposed by the Financial System
Inquiry which will inform the government's response.
Reporting relief for foreign groups
operating through proprietary companies
According to ASIC, some proprietary companies controlled by foreign
groups may be relying on Class Order 98/98 to not report in Australian, and may
also be parts of groups that minimise tax on their business dealings with
Australians. However, the underlying basis for the relief afforded by Class
Order 98/98 is that the cost of preparing financial information significantly
outweighs the benefit to the users of the financial report and imposes
unreasonable burdens on the companies concerned.
As the ATO is a potential user of financial reports, it is well placed
to assess where, for individual companies, the costs of preparing such reports
do not significantly outweigh the benefits of public disclosure of matters such
as effective tax rates or related party arrangements.
ASIC proposes that it could amend Class Order 98/98 so that relief is
not available where the ATO notify that company (and ASIC) that the relief does
not apply to that company.
The committee welcomes the efforts of ASIC to put forward considered
proposals that will assist in identifying corporate tax avoidance and
aggressive minimisation. It considers that these legislative amendments should
be considered with other measures to promote greater transparency of a
corporation's activities and tax obligations, and enable better information
sharing between agencies that hold information which could be used to identify
and address corporate tax avoidance.
The committee recommends that taxation legislation be amended so that
non-reporting entities are required to disclose related party information in
financial reports under the Corporations Act if notified to do so by the ATO.
The committee recommends that the concept of 'grandfathered large
proprietary companies' be removed from the Corporations Act, and these
companies be required to lodge financial reports with the Australian Securities
and Investments Commission (ASIC).
The committee recommends that all proprietary companies are required to
review and confirm their size with ASIC annually.
The committee recommends that the confidentiality provisions in section 127
of the ASIC Act be amended to allow ASIC to share information with the ATO
without having to notify the affected person.
The committee recommends that people who propose to become directors of
companies be required to provide evidence of their identity to the ASIC.
The committee recommends that ASIC amend Class Order 98/98 so that a
company is not eligible for financial reporting relief, where the ATO notifies
the company and ASIC that the relief does not apply to that company.
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