BUDGET 2018 >> DESPITE claims of taxpayers over-claiming work related expenses, the Federal Government has refrained from making any ad hoc changes to the eligibility rules -- a decision welcomed by the Institute of Public Accountants (IPA).

“We are pleased that the government has not taken away the right of individual taxpayers to claim legitimate work related expenses,” IPA chief executive officer, Andrew Conway said.

“Improving education and guidance materials in response to over claiming is also welcomed. 

“Taxpayers should consider themselves lucky indeed that that the government has retained the current framework for determining entitlement to claim expenses related to work.

“Tax professionals feared that the government would tighten the WRE eligibility rules or introduce a standard deduction regime to address the rising cost of taxpayer’s claims," Mr Conway said.

“Australia has one of most generous tax regimes when it comes to claiming work related deductions.

“Other countries have either removed this entitlement, or have stricter eligibility requirements or alternatively introduced a standard deduction regime.

“Australia’s tax system has developed a complex deductibility regime that taxpayers need to navigate under our self-assessment rules in order determine their entitlement," he said.

“The IPA does not support a standard deduction as it can lead to unfair tax treatment particularly for some employees who incur legitimate work related expenses which are not reimbursed by their employer whilst rewarding those who are fully compensated.

“Those skirting their obligations and deliberately over claiming should not rejoice as the ATO will be provided with an additional $130 million to increase compliance activities targeting individual taxpayers and their tax agents.

“The funding will go towards new compliance activities, including additional audits and prosecutions, improving education and guidance materials, pre-filling of income tax returns and improving real time messaging to tax agents and taxpayers to deter over-claiming of deductions,” Mr Conway said.

www.publicaccountants.org.au

ends

TRANSFER PRICING >>

Face it, business in Australia has rarely been about playing on level fields. The juggernauts of the big four banks and the supermarket duopoly, that run right over the top of enterprising small and medium businesses in Australia, seem manageable in comparison with the diabolical genius of the (mostly) multi-national organisations who ‘transfer price’ tens of billions of dollars out of the Australian economy. By doing so, they profit from all tax paying Australians.

IT IS DIABOLICAL that two generations of Federal Governments have, at best, miscalculated the scourge of transfer pricing. At worst, Federal Government taxation and trade policy has been blindsided by a problem partly of its own design.

Transfer pricing – the dark art of manipulating money flows so that little or no profit is taxed in the country in which that profit is generated – is alive and diabolically well in Australia. It has been turbocharged by digital transformation and new-era companies that are internet-central in operations.

One example is American Express, a company reported by Fairfax Media last year to have not paid tax on profits in Australia for more than seven years.

It is an example of how the key to minimising tax among these internet-centric companies is to be headquartered – and conduct billing – out of a low tax jurisdiction. One particularly popular low-tax jurisdiction for the Australian market is Singapore – used by multi-nationals such as American Express and several major oil companies. That’s right, Australian American Express financial payments are directed to Singapore.

If you were sceptical, you would wonder what the real advantage to Australia could possibly be from linking our petrol prices to the Singapore and Tapis crude oil markets, for the oil refined in this country. The issues of what happens to prices – and transfer pricing of oil profits – as Australian refineries steadily close and are modified as storage depots (which has happened recently at the giant Botany Bay site) are disturbing to consider both economically and in terms of national security.

The most emotive transfer pricing outcry example in Australia right now concerns ride share group Uber, which has not only disrupted thousands of family taxi companies day-to-day, but for some it has helped bring about their rapid financial demise.

In Queensland, where the State Government was selling operating licences for up to $500,000 just a few years ago and still legislates taxi fares and charges, the impact of Uber and other ride-share companies has seen those licences become comparatively worthless.

Many owners who planned to use the value of their (often multiple) licences as ‘superannuation’ will instead only receive a $20,000 compensation from the Queensland Government – per licence and for a maximum of two licences. This is a regulated industry that has been totally transparent for decades and been forced to pay its fees and taxes accordingly. Its devastation will have a corresponding effect on taxable incomes of those (largely) family businesses.

Some family taxi businesses in Queensland have reported to ABC Brisbane talkback radio host Steve Austin that they are most likely headed for bankruptcy – and some have already lost their family homes.

Uber, created in San Francisco, has effectively been domiciled in the Netherlands (a low tax jurisdiction that has, in the past, been utilised by former Australian companies such as James Hardie) since 2013 according to Forbes magazine and – most likely, but it is opaque – pays tax on its global profits there. Uber bills Australians from the Netherlands and the driver’s share, usually about 75 percent of the fare, is repatriated back to the driver’s Australian account.

This means that about 25 percent of each ride share fare that goes to Uber remains in the Netherlands and therefore is not subject to profits tax in Australia. The driver is responsible for their own tax affairs.

How much of that 25 percent ride income actually is profit is irrelevant as is it ‘earned’ offshore, beyond the ATO’s jurisdiction. The Australian Government certainly does not know. It has no way of knowing what ‘profit’ Uber has actually earned in Australia, based on current legislation, because it is regarded as being Australian dollars earned in the Netherlands

Not so long ago, a process like Uber’s would have been regarded as an ‘import’ of a product or service. Today it is being treated like an export, where GST is also being argued by Uber as not being applicable.

Yes, these are customers in Australia being serviced by an Australia-based tax-paying driver in a vehicle sold and maintained in Australia, on Australian roads paid for by Australian taxpayers. So, while about 75 percent of the fare generated ends up being taxable in Australia the other 25 percent of this service definitely happened in cyberspace, so there’s no taxable income on that component.

The Australian Government is nodding its head remorsefully that this is the case, for now at least. Thankfully, they have refused to keep nodding in the case of ride share services avoiding GST – that’s Goods and SERVICES Tax, for those in the government who may have overlooked the entire acronym – although Uber is again contesting this through the courts.

Yet, in Uber’s case and others, what seems a straightforward case of transfer pricing ‘sleight-of-hand’ is actually complicated by a whole range of international trade conventions and agreements entered into by the Australian Government as part of its free trade mantra over the past 30 years.

In practical terms, you cannot blame Uber, or other multi-nationals, for playing the game their way, on the playing field Australia has cultivated.

TPP: TRANSFER PRICING PARTNERSHIP?

Uber is a highly visible example right now of the problems facing Australian taxation revenues – but there are many, many more flying well under the radar.

In fact, as Australian business at large comes to understand the insidious workings of transfer pricing, it could help to alert the Australian Government to similar threats.

One potential threat may ironically have been averted by the election of Donald Trump as President of the United States: the Trans Pacific Partnership (TPP).

The TPP on the surface would seem to be a very progressive agreement, effectively establishing a free trade zone around much of the Pacific Rim – although the way it had excluded China was questionable.

Countries involved in the TPP were the United States (under President Barack Obama) Australia, New Zealand, Malaysia, Vietnam, Singapore, Brunei, Canada, Mexico, Chile and Peru. Together, they contributed about 40 percent of the world’s annual economic output.

Australia has been instrumental in TPP negotiations, most recently through Foreign Minister Julie Bishop. Australian business in general seemed to be too busy to bother to get its head around details on the TPP, and paled to insignificance against the contributions and lobbying of the big US multi-nationals.

Some concerns that emerged included fears that US multi-nationals would have the ‘right’ to challenge and possibly sue governments whose legislation changes negatively impacted their business in that country.

The flashpoint on this issue in Australia was likely to be pharmaceuticals. It was argued by some sectors that the TPP would promote complaints and financial claims by US drug companies in issues such as the availability of generic competition under Australia’s Pharmaceutical Benefits Scheme (PBS).

But among the accounting and legal organisations who manage transfer pricing for international companies – and in the main this is a complicated and legitimate practice for these multi-nationals – there has certainly been an undercurrent of a re-focus on transfer pricing under the proposed TPP.

For example, a report from The International Tax Policy Forum suggested “potential tax effects from the Trans-Pacific Partnership to highlight the link between aggressive upstream transfer pricing and downstream earnings stripping”. 

Indeed, BDO Australia’s Transfer Pricing Practice is happy to point out that it “helps groups navigate this fast changing transfer pricing environment”. BDO’s online promotion for its expertise in the field says: “Aided by dedicated transfer pricing practitioners around the BDO network, we provide a range of planning, compliance, audit defence and benchmarking services. We can work with you to develop transfer pricing policies that are defensible, flexible and in line with your overall tax planning strategies.”

Nothing wrong with that. In fact, under the current rules of the game in Australia, companies would be crazy if they didn’t use transfer pricing to keep more of their profits.

The moral dilemma is that the same advantages are not available to most Australian businesses – who want to stay domiciled here – and the Federal Government has lately been coming down hard on companies that even look as if they may be re-structuring into international entities.

Of course, you could simply leave Australia and sell back to it, or set up your new Australian subsidiary from the Netherlands or Ireland … as former local iconic companies including James Hardie and BHP (now BHP Billiton) have done.

Such arrangements can work really well, unless that loan from head office to the Australian entity, which has to be repaid at levels remarkably similar to the levels of potential profit made in Australia, is called by the ATO for not being ‘at arms length’.

Of similar ilk  is the ATO’s $1.01 billion tax and penalty claim against BHP Billiton – which is being vigorously contested – at the moment targetting the Big Australian’s Singapore marketing base operations, which primarily conducts iron ore sales around the globe and enjoys a mark-up for doing so.

The dilemma for Australian tax authorities is that the iron ore has been bought in Australia by BHP Billiton’s Singapore marketing entity for a much lower price than it has been then sold to, say, Japanese and Chinese steel mills. It used to be a ‘clean’ transaction, in which overseas steel mills would buy direct from Australia. That’s what has the ATO miffed and seeking to tax the money in the middle.

BHP Billiton argues forcefully that it is operating with the law and is conducting its sales and marketing operations fairly. Rio Tinto, which has a similar Singapore marketing hub set-up, argues the same. What is for certain is that this is going to be a long drawn-out argument.

RUBBERY UNDER ARMS LENGTH

It was all so much simpler just a few decades ago when some of Australia’s big name organisations managed their transfer pricing – or as it was called back then, ‘profit shifting’— closer to home.

Back then, the game was about shifting profits offshore through a web of trusts and companies – sometimes based in the South Pacific, Asia or Europe – in a way that supposed they could not be found. But money was not so easily moved back then through ‘telegraphic transfers’, without today’s internet-fuelled secure financial transfer systems.

Some of Australia’s most successful companies and wealthiest families, who utilised this ‘offshore’ method, have since transitioned into much more savvy structures, often with the help of the Big Four accountancy firms and modern secure internet communications

It was often rumoured about time of the ATO’s Operation Wickenby, which started in the 1990s, that the web of offshore trusts and hidden offshore bank accounts that many Australian business moguls had would be exposed – and they would then be forced” to pay their fair share of tax” in Australia.

Take sharemarket guru the late Rene Rivkin, for example, who has since been shown to have secured his wealth in ‘untouchable’ Swiss banks and financial structures.

It’s a sentiment not dissimilar to what we hear today with regard to transfer pricing.

But it’s not really how it worked out, is it?

The original ‘offshore’ system was simple and so well known in accounting fraternities that it beggared belief that the ATO was not all over it. The owners of an Australian company would use local accountants to establish companies in a tax haven such as the British Virgin Islands. Often this was done through an intermediary marketer of such companies in a jurisdiction with strong financial services capability – say, Hong Kong, Singapore or Cyprus.

One such ‘deep cover’ company or trust would own another would own another, so that the secrecy of ownership increased layer by layer. Then the Australian company would take ‘loans’ from overseas ‘investor’ entities … which would have to be paid back at remarkably fluid levels of interest, of course.

It was ironic how these structures would almost invariably produce a result in which there was precious little profit to be taxed in Australia …

The end result, then as now, is that the gulf left by these transferred profits ends up being burdened upon income tax payers and small-and-medium enterprises.

Today, it’s a much more open card game in which one arm of a multi-national organisation simply bills another and another. All within the existing house rules.

The deck is stacked against the Australian Government as it shuffles around in court with the multi-nationals, their Big Four accountancy firm transfer pricing advisors and their combined armies of lawyers.

ends

TRANSFER PRICING >> 

MARTIN FEIL is probably the most knowledgeable person in Australia about transfer pricing, profit shifting and multi-national tax rorts. In fact, he wrote the book on it: The Great Multi-national Tax Rort – how we’re all being robbed.

Or, you could also say truthfully, he wrote both books on it. The first, also published by Scribe Publications, was named The Failure of Free Market Economics – and it was a mind-blower for Australian business people on its release in 2010. It seemed a shame its revelations did not appear to hit the mark in government circles.

Mr Feil’s latest work ratchets up the commentary and the huge weight of evidence to a nuclear fission-level anger point. 

He has been gently described as a poacher turned game keeper, for he has worked both sides of the fence: advising companies on strategies to minimise tax and tariffs, while with Ernst and Young (now EY), and also working for the Australian Customs Office and the Tariff Board, then later as an investigator for the Australian Taxation Office. Mr Feil had been chairman of the Institute of Chartered Accountants customs committee and the institute’s representative on the ATO’s transfer-pricing sub-committee before his recent retirement.

While his work has been illuminating, it has also suffered the fate of being overlooked by authorities in Australia for far too long. He has offered up how it started in the Australian context, how the Big Four accounting firms globally have made a sinister art form of it, how successive Australian Governments have ignored the warnings in favour of a ‘free trade at any cost, for the greater good’ agenda, and what can be done about it now.

On that last point, Mr Feil gently adds the ominous phrase “before it’s too late” for Australia.

How Australia is being burgled by multi-nationals

FOR MOST Australians, the issue of transfer pricing is up there in the ‘cloud’ so vigorously promoted by the US-developed tech companies who want us all to live there. While increasingly a ‘child’ of the cloud-centric world in which Australians drift, the sinister effects of this artfully created profits transfer system are hitting home.

When the Federal Government is telling Australians that it is actually ‘good news’ that the deficit has reduced to $45 billion a year – about the same as the major multi-national tech. companies allegedly short-changed Australia in profits taxes last year – the maths seem brutally simple.

Then you look at what numbers of Australian dollars are permanently leaving Australia in other sectors such as finance and oil – while in other reports Australia has a shortfall in funding for education, medical care, aged care and infrastructure, so taxation may have to be re-set – and you realise why there is a simmering anger among Australian business people.

Many business people are livid at being hounded by government regulatory authorities like clockwork for GST payments, BAS statements and superannuation deposits at the same time as multi-national profit shifters are seemingly left alone in a luxurious too-hard basket.

Martin Feil knows all about. He has been talking frankly about these problems for decades, followed up in recent years by two detailed and critical books about the rorts of multi-nationals on the Australian economy. 

The amount of money exiting the Australian economy forever is unprecedented and, you’d have to think, unsustainable. Here is an infuriating tidbit:

“In 2013-14, Apple Australia paid around $80 million in income tax on revenue of over $6 billion.”

And another: “In 2011, Amazon paid an effective tax rate of 0.5 percent on its UK earnings of £3.35 billion.”

That Amazon fact was one of the catalysts for the UK bringing in what is often called its ‘Google tax’ on turnover to help stem the flow of revenues through transfer pricing and it has also energised the OECD. The Australian Government, perhaps because of the complexity of these issues and the complications of international trade agreements, is working within the OECD framework to find a way forward.

It has recently been announced that Amazon is about to establish logistics facilities to step into Australia proper. The media has general been enthusiastic about the prospect. Australia’s retail sector has been mute, so far.

PAPER SHUFFLING

The Panama Papers revelations shocked the world, but as Mr Feil points out, it should have energised governments to look long and hard at what is a much bigger problem – predatory transfer pricing.

“The 11.5 million pages released in the first tranche of those (Panama-based firm Mossack Fonseca) documents revealed truly shocking global tax avoidance and tax evasion – but they dealt with the behaviour of wealthy individuals and their tax advisers. They did not deal with similar behaviour by multinational corporations and their very highly paid tax advisers. The latter is a much bigger problem …

“Transfer pricing is a completely different matter. This technique, developed by multinational corporations, has been out in the open for at least the last 25 years, with more and more devastating consequences for governments and their citizens around the world.

“The multinationals have perfected the practice of selling to their global affiliates at prices that would send the affiliates bankrupt if they were left on their own, trying to recover their inflated import costs in the marketplace. The affiliates survive only because the banks of the world lend them money based on the surety letters from their parent companies or regional head offices.”

So Australia’s big banks are privy to this global sleight of hand too.

“This process has allowed multinational firms to dominate the markets for goods and services in around 180 countries, or to operate without permanent establishments and have no tax obligations anywhere. This trick relates principally to internet operators such as Google, Amazon, Apple etc, and to ‘sharing economy’ companies such as Uber and Airbnb.”

If there is a bright side to the brazen nature of this unprecedented vacuuming up of wealth it is that the governments of major world economies are working together co-operatively, like never before, on tax rulings that attempt to combat transfer pricing. But they are a long way behind.

Perhaps one of the reasons they are a long way behind is that the people who create these transfer pricing structures, processes and arrangements – named by Mr Feil as the world’s Big Four business advisory services PricewaterhouseCoopers, EY (formerly Ernst and Young), Deloitte and KPMG – are also the same firms who supply a lot of the advice to governments on such issues. Australia included.

Mr Feil cites the 2013 report, Tax Avoidance: the role of the large accountancy firms, by the UK House of Commons Committee of Public Accounts, which gathered evidence form the Big Four accounting firms:

“HM Revenue and Customs (HMRC) appears to be fighting a battle it cannot win in tackling tax avoidance. Companies can devote considerable resources to ensure that they minimise their tax liability. There is a large market for advising companies on how to take advantage of international tax law and on the tax implications of different global structures. The four firms employ 9,000 people and earn £2 billion from their tax work in the UK, and earn around US$125 billion from this work globally. HMRC has far fewer resources. In the area of transfer pricing alone there are four times as many staff working for the four firms than for the HMRC.”

How bad is it? Well, Mr Feil noted that in 2015 UK firm AstraZeneca was found to have paid no tax on £3 billion of profits, facilitated by channelling funds through a subsidiary in The Netherlands.

What major Australian operating companies also utilise The Netherlands? James Hardie Industries domiciled there in 2001 but later relocated to Ireland; although dual global headquarters are in Melbourne and London, BHP Billiton has a marketing division in The Netherlands as it does in Singapore; and, of course, Royal Dutch Shell is based in The Hague and has a dual London headquarters.

Here are some insightful core observations by Mr Feil …

OFFSHORE BIG GUYS MUSCLE OUR BIG GUYS TOO

“Multinationals not paying a fair share of tax is a core social problem for the people of Australia and the rest of the world.” He uses the case of Coles as an example – with Coles, as part of the great Australian so-called ‘supermarket duopoly’ often being accused of not being a ‘fair player’ in the Australian economy in relation to its handling of smaller suppliers. For example, the ‘dollar-a-litre’ milk instigated by Coles has often been publicly blamed for the demise of parts of Australia’s dairy industry.

But consider this … “Richard Goyder, the chief executive of Wesfarmers (the owner of Coles and Bunnings), commented in an address to the National Press Club on 5 August 2014 that Wesfarmers paid $1.5 billion in tax in 2013-14 while Aldi and Costco paid nothing. Why should that be so? The answer is that transfer pricing by multinationals has created a market and profit advantage for them that, ultimately, will destroy their competitors. Coles, along with Woolworths, is one of the largest employers in Australia. Most of its hundreds of thousands of employees are women trying to earn enough money working part time to keep the family afloat.”

It is ironic that some of the world’s most publicly admired brands – and most have solid community help and support programs – nevertheless are leaders in this transfer pricing process that threatens to undermine the economic fabric of their own major markets.

Ikea gets a mention in this company, which surprises many people, given its progressive and ‘responsible’ brand appeal.

The Australian journalist Eli Greenblat laid it out in plain terms in his report in December 2016:

“Accounts lodged by Ikea’s Australian arm show that for the 12 months to August 31, it posted sales of $969.5 million, up from $827.4m a year earlier. Gross profit jumped to $356.6m from $300.5m in the previous year.

“The usual costs of doing business — advertising, depreciation and wages — quickly whittled down that gross profit, as was the case in 2015, and Ikea booked $31.9m in “franchise fees” for the year and another $82.16m in “other expenses”.

“This reduced Ikea’s pre-tax profit to $37.5m from which $10.7m was paid in tax. This left Ikea with a profit for the year of $26.8m.

“In 2015 it was much the same story. Ikea then had combined “franchise fees” and “other expenses” of $89m that reduced its pre-tax profit to $25.5m and once $10.4m of income tax was paid Ikea had a profit of just $15.1m.

“At a time when Ikea’s sales increased by $142m, or 17 percent, and its profit jumped 77 percent, income tax recorded in its annual accounts lifted by less than $400,000.

“In 2014 franchise and other expenses totalled $70.9m while a line item titled “payment under risk agreement’’ swiped another $37.06m from Ikea’s pre-tax profit that year.

“It is believed these annual payments are charged by entities based in lower-tax jurisdictions. There is no suggestion Ikea has engaged in wrongdoing and the 2016 accounts were signed off by auditor Ernst & Young.

“The Swedish furniture juggernaut, known for its flatpack kits and hip interior designs, has long intrigued tax experts and rival retailers. Its inner workings are highly secretive. One document among the “Luxembourg leaks” reportedly showed that Ikea’s profit growth in Australia between 2004 and 2014 trailed sales growth — or sometimes went in the opposite direction — because the company reduced its taxable income by paying more than $2 billion in franchise fees, licence fees and royalties to its European parent.”

ARMAGEDDON TRANSFER PRICED TO DEATH

Martin Feil characterises the ever-expanding resort to transfer pricing by multinationals – or base erosion profit shifting as the OECD prefers to call it – as a global threat to the very societies that have borne them.

“We are talking about a deliberate and broad-based assault by the multinationals upon national tax collections, combined with their growing control of national markets for goods and services. If this strategy continues unchecked, it will (ultimately) destroy the foundations of the global industrial society while enriching a small percentage of the population.

“The law has not developed as it should have, because tax authorities and governments in general have not been prepared to tackle the increasingly predatory tax strategies and artificial arrangements the multinationals have adopted.”

The happenstance of how this race began in Australia is charted by Mr Feil. He cites the ironic fact that when high tariffs, based on the percentage of import value, were reduced in the 1980s and 1990s then, amazingly, import prices rose.

“High customs duties had previously been a deterrent for multinational parent companies charging prices that, together with duties and marketing on-costs, could be recovered in the consumer market by their subsidiaries.”

This is the time, just as more multinational brands were emerging, when the off-shoring and transfer pricing pundits had their revelation.

“The multinationals’ light bulb moment was to recognise that subsidiaries did not need to make a profit in every national market. In fact, foreign governments want to collect taxes on any such profits. The multinationals’ solution was to impose charges on their subsidiaries for royalties, manufacturing knowhow, and technical service fees. These parent-company imposts ensured that the subsidiaries never made a profit and so never paid company tax. In some cases, the subsidiaries incurred losses for decades.”

The more ironic aspect of that process is, while the ATO is expected to understand that, in such extreme cases only losses have been generated from the Australian market over many years — sometimes from hundreds of millions of dollars in annual turnover — but our banks are comfortable to lend to these ‘Australian’ entities.

“The global banks have been a great help to the multinationals,” Mr Feil wrote. “They are the conduits and facilitators of the multinationals’ transfer-pricing tax-minimisation strategies. And they provide financial facilities to companies that, to go by their balance sheets, have not made a profit for decades.”

Later in the book, Mr Feil sums up the apparent madness of continuing to go down this Base Erosion Profit Shifting (BEPS) path.

“Why do multinationals use transfer pricing? I suppose it is like the short-term madness and hubris on Wall Street that created the global financial crisis. There seems to be no end to greed, even if it is ultimately terminally destructive for the greedy. The owners and senior executives of the great global brands have already made an enormous amount of money. Yet they seem to want more. The Big Four accountants and economists involved in transfer pricing are also, even by their standards, making a great deal of money.”

COME OFF IT, MAN UP AUSTRALIA

Mr Feil knows the territory as he has seen it from both sides of the fence. He also sees solutions that governments and tax enforcers seem to find too energetic.

“The ATO has been substantially involved in transfer-pricing reviews, audits, advance-pricing arrangements, and other tax-review products for more than 25 years. It seeks fairly simple, initial levels of participation in the processes from multinational affiliates in Australia. The ATO is aware that parent companies and regional offices have bene managing the transfer-pricing issue on a worldwide basis for decades. Yet initial probes by the ATO often result in an Australian subsidiary client producing documentation that is out of date, does not represent the present functions, assets and risks of the affiliate, and does not indicate any awareness of the Australian rulings and legislation …

“The taxpayer documentation review and negotiation process is like watching cold oil drip. No one in Australia will take responsibility for documentation, and no one will make much effort to explain how and why a company’s functions, assets and risks paradigm have altered during decades of product change, divestment of subsidiaries, acquisitions of new business, the impact of new government policies, or any other change that may impact upon transfer-pricing analysis. Often the documentation is badly out of date and does not accurately represent the subsidiary’s functions, assets, and risks at the time of the audit – and certainly not at the time of judicial review,” he wrote.

“For smaller Australian multinational affiliates, the entire issue is outside their control, beyond their budget, and not in their interest. The managing director of a major company recently told me that he would be poorly regarded if he brought the issue up with his European head office. I know that whenever a matter blows up, the global transfer-pricing people form the United States and Asia come to Australia for the discussion with the ATO. This would obviously be the case for European multinationals as well. Local executives generally have a minor role, and cannot make final settlement decisions.”

If you think this is hyper-critical of multinational subsidiaries in Australia, take a look at the Senate Enquiry into Corporate Tax Avoidance that quizzed the Australian CEOs of some of these multinationals.

http://www.abc.net.au/lateline/content/2015/s4212940.htm             

http://www.abc.net.au/7.30/content/2015/s4212931.htm

https://www.youtube.com/watch?v=OAJMlBExD4w

ATO MAKES SOME MOVES

The ATO does have access to one potentially powerful new tool: the Sub-Division 815-A and –B additions to the Income Tax Assessment Act 1936 (ITAA). This sub-section allows the ATO to look seriously at transfer-pricing cross dealing back to 2004-05 – and it has been applied already to the ATO’s Federal Court case against oil giant Chevron Australia, as a deterrent.

The power behind 815-A is its retrospectivity, given that the parent company loans to the Australian subsidiary, which came about ostensibly because of Chevron’s global purchase of Texaco in 2000, caused a restructure in Australia. Essentially the loan interest payments were under question for their alleged non-commercial nature, which permitted Chevron to reduce profits in Australia through higher interest payments.

The ATO’s case for a 25 percent penalty, which it finally won in a decision in 2015 (but which has drawn appeals from Chevron, so Australia has so far won no money from the decision) was complex and relied on testimony from oil and gas industry experts, a banking industry expert, a transfer pricing economist, three (credit) ratings experts and an accounting expert. Federal Court Judge Alan Robertson’s judgement ran to 118 pages in this complex case and looked like costing Chevron more than $300 million.

Mr Feil has some prescient advice for the ATO and the OECD, shaped from first-hand experience when he worked there as the authority on transfer pricing practices: Get Moving Fast.

“It has taken the OECD over 20 years to move aggressively against transfer pricing and identify the fundamental threat it has become to the global economy. The pace is simply too slow.

“The damage to national tax collections has been immense. If the Big Four (PwC, EY, KPMG and Deloitte) have been paid US$500 billion in 25 years, how much tax have their multinational clients avoided globally? It must be in the trillions of dollars …”

Australia’s approach of working within the OECD does make sense as, if any money is to be recovered from decades of transfer pricing ‘cup shuffling’ it will require the cooperation of the offending multinational’s home market – and in so many cases that is the US.

Of course, it becomes academic if the real profits have ended up in a tax haven or, in modern parlance, ‘disappeared into the cloud’.

As Mr Feil laments, “Correlative relief is obviously morally correct, but it often takes a long time for the home tax authority to give some of the money back.”

His other idea, of forgetting the past and, from this point onwards, setting ‘new rules’ for how the money can be counted by multinationals operating in Australia – eliminating predatory transfer pricing from now on – may be the smartest way to go.

That might take public knowledge of what their favourite brands are doing and induce public pressure.

That is what these Business Acumen reports are all about.

ends

TRANSFER PRICING >>

While the challenges of overcoming transfer pricing structures are hardly diminishing, the Federal Government is no longer idle on the subject. This is a very good thing as, up until about 18 months ago, Federal Governments of both persuasions had been glacially slow is combatting the bleeding obvious. Here are some recent initiatives.

Govt opens windows on beneficial ownership of companies

THE Federal Government has released a public consultation paper on Increasing Transparency of the Beneficial Ownership of Companies.

This is an early step in pegging back international tax rorts and the offshore escape of what would otherwise be taxable profits.

Revenue and Financial Services Minister Kelly O'Dwyer said the consultation paper “delivers on the government’s commitment in Australia's first Open Government National Action Plan, released on December 7, 2016”. 

“It also reaffirms the government’s announcement at the UK Anti-Corruption Summit in May 2016 to consult on options for a beneficial ownership register for companies,” Ms O’Dwyer said.

“Australia is playing a leading role in global efforts to crack down on tax evasion, and combatting money laundering, bribery, corruption and terrorism financing. Today’s announcement demonstrates the government’s commitment to this important objective.”

If the law and certain international treaties can be shaped effectively out of that public consultation, which is expected to include information from whistleblowers, it would boost transparency around who owns, controls and benefits from companies.

Ms O’Dwyer said it would “assist with preventing the misuse of company structures for illicit purposes”.

“The consultation paper seeks views on increasing the transparency of the beneficial ownership of companies for relevant authorities, to better assist these authorities to combat illicit activities,” she said.

“The government is seeking feedback on what information needs to be collected in order to achieve this objective and how it should be collected, stored and kept up to date. We also seek feedback on the expected compliance costs for affected parties.”

Submissions on the consultation paper can be made online, closing March 13, via the Treasury website.

Turnbull Government continues crackdown on multinational tax avoiders

THE Australian Government has introduced legislation into the Parliament to implement the new Diverted Profits Tax, which will prevent multinationals shifting profits made in Australia offshore to avoid paying tax.

The Diverted Profits Tax will start on July 1, 2017, and is expected to raise $100 million in revenue a year from 2018-19.

Prime Minister Malcolm Turnbull said it would provide “a powerful new tool to the Australian Taxation Office to tackle contrived arrangements and uncooperative taxpayers, and will reinforce Australia’s position as having some of the toughest laws in the world to combat multinational tax avoidance”.

Mr Turnbull said it represented “a significant step” as his government “continues to deliver on its commitment to ensure the integrity of our tax system”. 

The Diverted Profits Tax, announced in the 2016-17 Budget, targets multinationals that enter into arrangements to divert their Australian profits to offshore related parties in order to avoid paying Australian tax.

The Commissioner of Taxation will be provided with extra powers to achieve this.

The move will make it easier to apply Australia’s anti‑avoidance provisions and then order a 40 percent rate of tax, which will need to be paid immediately.

Mr Turnbuill said the Diverted Profits Tax would complement the application of the existing anti‑avoidance rules; encourage greater compliance by large multinational enterprises with their tax obligations in Australia, including with Australia's transfer pricing rules; and encourage “greater openness with the Commissioner, and allow for quicker resolution of disputes”.

“The government has consulted extensively to ensure that the legislation appropriately targets multinational tax avoidance," Mr Turnbull said.

“The Diverted Profits Tax will not apply to managed investment trusts or similar foreign entities, sovereign wealth funds and foreign pension funds. These entities have been excluded as they are low risk from an integrity perspective, are widely held and undertake passive activities.

“This exclusion also ensures that such entities do not face an unnecessary compliance burden as a result of the introduction of the Diverted Profits Tax. Similarly, the DPT will only apply to multinationals that have global income of more than $1 billion and Australian income of more than $25 million.”

In addition to the Diverted Profits Tax, the Combating Multinational Tax Avoidance Bill 2017 introduced into Parliament recently includes two further measures to ensure that multinationals pay the right amount of Australian tax and comply with their tax disclosure obligations.

The first is to increase the maximum penalty 100-times for large multinationals where they fail to lodge tax documents on time.

“This means that the maximum administrative penalty for significant global entities that fail to comply with their tax reporting obligations will increase to $525,000,” Mr Turnbull said.

“The Government is also doubling the penalties for large multinationals when they make false or misleading statements to the ATO.

“This will make penalties more commensurate with the turnover of large multinationals and provide greater incentive for them to lodge tax documents on time and take reasonable care when making statements to the ATO.

“The second is to amend Australia’s transfer pricing law to give effect to the 2015 OECD transfer pricing recommendations,” he said. “These recommendations provide greater clarity on how intellectual property and other intangibles should be priced, and ensure the transfer pricing analysis reflects the economic substance of the transaction rather than just the contractual form.

“Adopting these changes will keep our transfer pricing rules in line with international best practice and help ensure that profits made in Australia are taxed in Australia.”

www.ato.gov.au

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