The Federal government has announced it intends to lift the "veil of secrecy" that surrounds the alleged "complex arrangements and contrived corporate structures" used by large and multinational corporations "to avoid paying their fair share of tax".
The government also wants to ramp up the sharing of information between the ATO and other corporate regulators.
Treasury will work with the Specialist Reference Group on Ways to Address Tax Minimisation of Multinational Enterprises (SRG) to propose changes which may force some businesses operating in Australia to publicly disclose the federal taxes they pay.
Setting up the SRG in December last year was the government's first step towards examining the tax affairs of multinational enterprises (MNEs) and any risks posed to Australia's tax revenue. Chaired by Rob Heferen, the head of Treasury's revenue group, it includes tax professionals, business and community representatives and academics.
Treasury and the SRG will consider how to best design the proposed transparency policy to cover large businesses and MNEs and whether a threshold test would be appropriate. They will also contemplate which federal taxes should be disclosed and how the tax information should be made public.
The government is saying it only wants to obtain greater transparency around the tax activities of large businesses and MNEs. However, the suspicion is that this is largely about increasing tax collections to fulfil the government's budget objectives, particularly as the government comes under pressure to show how it will fund its election promises in the run up to the September election.
This pressure will only intensify now the ATO has disclosed that MRRT receipts for the first two quarters of the 2013 financial year were $126 million compared to the full year forecast of $2 billion in the government's Mid-Year Economic and Fiscal Outlook.
On another level, the proposals could be a first step in addressing structural deficiencies in Australia's tax system. Like many Western countries, Australia's taxing rules have not kept pace with the way business is conducted in the modern, global economy, particularly in relation to e-commerce.
Tax is still imposed by reference to a taxpayer's residency and the source of its income. In the digital age, the ability to conduct business over the internet to and from anywhere in the world has highlighted the inadequacy of the residency and source rules.
The Australian government is clearly suspicious that it's missing out on tax revenue that it ought to be getting. The proposed disclosure measures may help diagnose deficiencies in the tax system and pave the way to reshaping and aligning it to a digital and global economy.
Treasurer Wayne Swan suggested that one of the issues he will pursue at this week's G20 in Moscow is the Australian government's commitment to improving the transparency of corporate taxpayers and increasing cooperation between nations to close tax loopholes. According to Swan, some taxpayers undertake business activity in one country and then shift their profits to another country to pay no tax. Swan is raising this as a concern for all G20 members which must be addressed through international cooperation.
Many taxpayers may fear that the government's transparency reforms are simply a precursor to it "naming and shaming" large businesses and MNEs that it believes do not pay their fair share of tax in Australia. There is precedent for such concerns. In Britain, Starbucks agreed to voluntarily pay an additional £20 million tax over the next two years after it was revealed that, despite having generated over £3 billion in sales since 1998, it had only paid £8.6 million in income tax (see Reuters Special Report: How Starbucks avoids UK taxes).
A further fear for large businesses and MNEs is that mandatory disclosure of tax information may adversely affect consumers buying behaviour (similar to the recent protests directed at Starbucks in Britain). In addition, governments themselves are large consumers of goods and services and may take information on tax contribution into account when making purchasing decisions. There have also been reports about "ethical investors" ignoring shares in companies viewed as not paying their fair share of tax.
If the disclosure obligation falls directly on the MNE (as opposed to being on the ATO to disclose information contained in taxation returns) then a likely, immediate impact of the proposals is an increase in regulatory costs for those businesses affected. Such costs, if significant, may influence the investment decisions of entities currently operating here and those considering establishing a business in Australia.
In addition, legal costs of large businesses and MNEs will rise if they need to take advice on whether disclosure under the proposals breaches any legal and commercial confidentiality obligations.
There have been few independent studies on the impact of disclosure obligations on tax compliance behaviour. One 2012 US study reported that MNEs that engaged in tax avoidance activity were more likely to avoid making taxation disclosures under US voluntary disclosure rules and to take steps to reduce transparency of their geographic earnings.
The government may view this type of finding as supporting the need for a mandatory disclosure regime. However, it has also been suggested that more onerous disclosure obligations could trigger a "race to the bottom" as enterprises discover they are paying more tax than their competitors.
Some large businesses and MNEs already publicly disclose the taxes they pay and it is unlikely the proposed changes will significantly impact these companies. Rio Tinto voluntarily produces an annual report on all taxes it has paid in its major operating jurisdictions. With Australia and other countries increasing pressure for more disclosure, it would not be surprising to see more MNEs adopt the Rio Tinto approach.
While the specific disclosure measures that will flow from the government's announcement are not yet known, there is a prospect that the measures may impose higher compliance and regulatory costs on large business and MNE taxpayers as well as advisory costs. These organisations are also likely to be subjected to more scrutiny from lobby groups and consumers (both public and private).
Large businesses and MNEs may wish to take steps now to prepare for the era of greater disclosure ahead, including:
- considering whether to adopt the Rio Tinto approach of proactive, voluntary disclosure of taxes paid; and
- reviewing the appropriateness of business and entity structures and transfer pricing policies, and whether such structures and policies could expose the organisations to legitimate criticism in any country that they are not paying their fair share of taxes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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