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T O W A R D S

BUDGET UPDATE:

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The Federal Treasurer, Scott Morrison is sending a clear message to multinational corporations (MNCs) that now is the time to get their global tax affairs in order.

The Australian government is ramping up its tax legislations to be in line with the Organisation for Economic Co-operation and Development (OECD) transfer pricing and Base Erosion and Profit Shifting (BEPS) guidelines. The legislation coupled with heightened enforcement by the Australian Taxation Office (ATO), will be given significant funding to address perceived issues with the way global businesses pay tax in Australia.

INTRODUCTION

Budget update: towards transparency

What else has changed in 2016 and what should businesses be putting in place to remain compliant?

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Budget update: towards transparency

RULES TIGHTENED AND EXTENDEDThe budget introduced a number of measures to strengthen the integrity of Australia’s tax system.

Last year, the government introduced the Multinational Anti-Avoidance Law (MAAL), which applies to more than 1,000 MNCs. Of these, the ATO is pursuing 170 MNCs currently executing potentially contrived tax structures to ensure they are paying the right amount of tax in Australia.

Following the MAAL introduction, the ATO published the “MAAL client experience roadmap” as a means to encourage multinationals to come forward to restructure their arrangements in response to the MAAL within the first three months of MAAL taking effect. The benefit for multinationals that came forward would be a discounted penalty.

The MAAL and the ATO’s practice mirrors a similar regime and practice in the UK, which has prompted action in the UK by large companies. For instance, Amazon announced it would pay tax on UK sales, rather than divert them through Luxembourg, to avoid paying their “fair share” of tax.

This year’s budget built on the MAAL legislation and introduces the Diverted Profits Tax (DPT) – the second limb of the UK’s “Google Tax”. The DPT is aimed at preventing entities operating in Australia from avoiding Australian taxation by transferring profits, assets or risks offshore through related party transactions that lack economic substance. A penalty tax rate of 40% on profits transferred offshore through the abovementioned arrangements will be imposed, with an upfront payment expected when the ATO issues its assessment.

In addition to the new tax introduced, the Australian government will amend Australia’s transfer pricing law to give effect to the 2015 OECD transfer pricing recommendations. This will update the current transfer pricing legislation to be in line with OECD’s Guidelines, specifically on the consideration of intangible property, contractual allocation of risks and low value-adding intragroup services arrangement.

The Australian government has also announced it is adopting the OECD’s hybrid mismatch arrangement rules to reduce the opportunity for companies to exploit differences in the tax treatment of an entity or instrument, which resulted in tax that is either deferred or not paid at all.

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Budget update: towards transparency

TRANSPARENCY IS KEYEarlier this year, the Coalition, supported by recommendations from the Board of Taxation working group, is encouraging global businesses to adopt the Tax Transparency Code (TTC). The TTC applies to businesses with annual Australian revenues of $500 million or more, and to a lesser extent to businesses with Australian revenues of between $100 million and $500 million a year. As yet this code is not mandatory, but the Government is actively lobbying affected organisations to adopt the code as soon as possible.

This drive to increase transparency does not stop with the corporations themselves. Budget announcements introduced new arrangements to better protect individuals who disclose information to the ATO on tax avoidance behaviour and other tax issues. The Government is consulting on new rules in relation to this proposal, but the announcement itself provides a clear indication of additional measures that may be in store to ensure compliance from MNCs.

ALL ABOUT THE ENFORCEMENTThe federal government has given the ATO real firepower to address multinational tax avoidance. The budget includes funding of AUD$679m over four years to resource the newly formed Tax Avoidance Task Force, which will comprise of over 1,000 specialist personnel.

This taskforce will be mandated to pursue, test and prosecute public and private companies suspected of avoiding tax obligations, and will also be empowered to scrutinise the taxation affairs of high net worth individuals. Further to this, a panel of judges will be formed to provide expert guidance on all matters pertaining to the actions of the taskforce.

The government also announced a new penalty regime to be imposed on companies with global revenue of $1 billion or more who fail to adhere to tax disclosure obligations, raising the maximum penalty from $4,500 to $450,000, hence making it pricey for multinational companies to opt out of their reporting obligations.

In addition, penalties will double for large companies found to have made false and misleading statements to the ATO. This will hit hard on multinational companies that are being reckless or careless in their tax affairs.

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Budget update: towards transparency

WHAT SHOULD MNC’S AND THEIR ADVISORS BE DOING?The Government has indicated the extended powers of the ATO and the Tax Avoidance Task Force will net AUD$3.7b by 2020. With years of continued budget deficit forecast, the will is high on all sides of the political fence to recoup revenue losses.

This unprecedented focus on the international BEPS issue by the Government suggests the often debated line between tax minimisation and avoidance is erased. The onus is on MNCs to be prepared to abide by new tax rules and that means it is time to review the global value chain, its operational substance and the value creation mechanism, as well as the way revenues recognised around the world.

With larger “sticks” in place to enforce the new and coming rules and regulations, and the heightened level of scrutiny by the media and the public, leadership teams should act soon to address their transparency requirements.

The faster that internal teams can review the potential impact to business of newly introduced laws and impending regulatory changes, the more proactively the business can respond with the resources needed to address identified issues in a timely manner.

This is especially important given the ATO is encouraging large businesses to take the transparency path and publish the full details of their tax and transfer pricing affairs.

WHERE ARE YOU IN ADOPTING THE NEW RULES IN RESPONSE TO BEPS? Do you know that there is technology available to streamline multiple data collection, automate accurate report preparation and conduct advance analytics and planning exercises to ensure you have the first hand understanding of your “story” worldwide?

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