Multinational corporations dispute billions in tax bills as ATO profit shifting crackdown ramps up
Almost 200 companies have been hit with $2.5 billion in tax bills over the past financial year alone, after using tactics including mispricing loans and channelling income into low-tax jurisdictions such as Singapore.
The Australian Taxation Office (ATO) has been using its suite of powers to fight multinational profit shifting, worried that more large companies are imitating aggressive tax structures used by American tech giants.
Data exclusively provided to ABC News shows 181 companies were hit with $2.5 billion worth of tax bills during the 2020 financial year.
These include major Australian firms across the resources, e-commerce, pharmaceutical, health and science sectors.
ATO deputy commissioner Rebecca Saint said about $1.5 billion of the $2.5 billion was being disputed by 26 different taxpayers.
“There’s still a strong focus on disputes related to profit shifting,'” Ms Saint said.
Some of the $1.5 billion had already been paid to the ATO under what is called a 50:50 arrangement.
When tax bills are in dispute, the ATO allows companies to pay at least 50 per cent of the disputed primary tax amount plus any other outstanding undisputed tax debts.
Another $1.3b under dispute from FY19
In addition to the $2.5 billion in assessments raised in financial year 2020, there is still outstanding tax disputes from the prior financial year.
Ms Saint said $1.3 billion worth of tax bills from the 2019 financial year remain in dispute.
Companies that operate in Australia often have hundreds of millions of dollars flowing to subsidiaries offshore, mostly commonly via low-tax jurisdiction Singapore.
Hundreds of billions of dollars of revenue are flowing into and out of Australia due to cross-border transactions and, while most are legitimate, the ATO has taken issue with companies that try to push the boundaries.
Ms Saint said there were several issues the Tax Office had witnessed with multinationals using aggressive tax structures, which related to sales or value not being booked in Australia and thereby lowering the local tax take.
“That could be disputes where we’ve got issues around transfer mispricing and also questions around anti-avoidance,” she said.
“Related party finance tends to be one of core areas of dispute, particularly related party loans between related entities.
“We’re also seeing a number of assessments issued in relation to marketing hub arrangements.”
She said related party disputes were common among companies across all different types of sectors, but marketing hub arrangements were typical among energy and mining companies.
She noted that following the ATO’s win against Chevron in 2018, the agency was not seeing less issues in the oil and gas sectors than it had previously.
How companies play tricks to avoid paying tax
Ms Saint said another key focus over the past financial year, and this financial year, was how multinationals treat intangibles and intellectual property.
She said the biggest concern was when they witnessed a company had developed their intellectual property in Australia, but then to avoid paying tax on the value created, they would book the profits in low-tax or tax-exempt jurisdictions.
“Prior to commercialisation of that intellectual property they transfer it offshore to a related party,” Ms Saint said.
She said every company would have some sort of intangibles — whether it was goodwill, or IP [intellectual property], or knowhow.
“It’s how they exploit that intellectual property and intangibles that interests us the most,” Ms Saint said.
“Equally, we would be concerned with other arrangements where it might be royalties — so payments for the use of intangibles.”
She said companies tried to play tricks such as embedding that royalty payment cost within another cost stream so that it does not attract withholding tax of up to 30 per cent.
Powers the ATO uses to hunt multinationals
The bulk of recent tax audits have come about thanks to stronger transfer pricing powers introduced under the former Labor government.
But the ATO said more recent powers — introduced under the Coalition — such as the Multinational Anti-Avoidance Law [MAAL] and the Diverted Profits Tax (DPT) — were also of help.
Most companies restructured their tax affairs before the laws could be applied against them.
In financial year 2019 more than 44 companies, including Facebook and Google, restructured their affairs — and this number is expected to rise in FY2020.
However, MAAL had served its purpose in getting companies to book sales onshore, Ms Saint said.
The ATO’s other main tool, the DPT, also informally known as the ‘Google tax’, allows the agency to hit the company with a 40 per cent tax on all profits.
No tax bills have yet been raised under the DPT, but Ms Saint there are a number of cases the agency is “actively considering” where that power could apply.
“We are yet to issue an assessment [under DPT]; we are getting very close though,” Ms Saint said.
“Similar to MAAL, the DPT will have a preventative effect. So, we would expect and observe that taxpayers review their position so that DPT would not be applied.”
Prior to the federal election the Labor Party had proposed a suite of other measures to tax multinationals shifting profits out of Australia into low-tax or no-tax jurisdictions.
ATO often settles tax disputes, rather than fight in court
History shows that the ATO and taxpayers often prefer to settle tax disputes rather than fight it out in court.
In the public group and multinational business line, the tax man settled with 98 companies in 2018-19.
It had originally hit these companies with $3.5 billion worth of tax bills. But it ended up collecting about $1.9 billion.
Asked whether the ATO would be settling the current tax disputes underway, Ms Saint said: “It’s difficult to know at this point”.
“It’s still open for taxpayers to object against those assessments, even if they have been through [an] independent review,” she said.
“Quite often what we see [during the] objection process, is taxpayers put forward further information that was not provided in the audit.
“We also find that in some situations taxpayers may have an increased appetite to actually settle their matters in objection [phase] when maybe they weren’t so inclined in that pre assessment phase.”
Ms Saint said those companies objecting an ATO decision would have “fresh eyes reviewing these decisions”.
“It’s appropriate for us to be settling matters — we can’t take all matters to court,” she said.
She said they had retired court judges reviewing all their settlements to ensure that they were “fair and reasonable”.
Companies lock-in deals on future tax payments
The tax disputes are also in context of many corporates that are not under ATO audit.
There are about 1,620 large corporate groups with a turnover of more than $250 million in Australia.
As with prior years, many companies opt to lock in confidential deals with the ATO that give them certainty about their tax payment requirements in Australia in future years.
Taxpayers can lock in their tax payment for a period of about three or five years via an “advanced pricing agreement”, or APA.
As of June 30, there were 117 companies with active APAs.
As the OECD continues contemplating how to come up the final tranche of its plan to collect more tax from digital giants, several countries have taken tough measures to prevent multinationals from profit shifting.
Countries such as France and the UK have already imposed taxes on revenue rather than profit, and there are worldwide discussions about a global minimum tax.
But taxing companies’ sales, rather than their profits, is a huge departure from long-standing tax principles, and there are fears it could create greater cross-border disputes.
The Australian Government had considered a digital tax on tech giants’ revenue but then opted to wait for the OECD to come up with a global solution to the problem.
This global solution has been stalled because of the COVID-19 pandemic, but discussions remain underway.