The proposal to publish limited tax information of large corporate entities will only raise more questions than it answers.
The push by the OECD and other globally based organisations for more tax transparency has meant that information a taxpayer may have provided to its relevant tax authority is becoming increasingly shared. Though there is a debate about the efficacy and security of automatic information exchanges (AIE), many would say that sharing and cross-checking information at a governmental level is a sensible approach to enforcing the tax rules as they apply to multinational enterprises. However, Australia has taken this a step further by suggesting that for certain taxpayers, information should be shared with the world. That is a very significant and highly political leap.
On April 3 2013, the Australian Government's Assistant Treasurer, David Bradbury released a discussion paper "Improving the transparency of Australia's business tax system". The paper is an extremely brief document – totalling some 12 pages, or if one ignores the contents, the foreword, the summary and the background – it is four pages of "discussion"). It proposes three initiatives:
- Transparency of tax payable by "large and multinational business";
- Publishing aggregate collections for each Commonwealth tax; and
- Enhanced information sharing between government agencies.
The second and third proposals seem unexceptional – indeed it would come as a surprise to most people that the aggregate tax collections aren't in fact already published. Which leaves us with the first proposal (and two pages of "discussion" in the paper). The proposal is that the Commissioner of Taxation would be "required" to publish limited tax return information of corporate entities (basically companies and some trusts and partnerships treated as companies for tax purposes) with total income over A$100 million. This compulsion would mean that the confidentiality restrictions on officers of the Australian Taxation Office (ATO) would not inhibit disclosure. The Commissioner would publish total income, taxable income and income tax payable. Total income refers to total gross income for accounting purposes. There are some significant benefits which are claimed by the Assistant Treasurer from the proposed disclosure. For example he says:
"Increasing the transparency of tax payable will enable the public to better understand the corporate tax system and engage in policy debates, as well as discourage aggressive tax minimisation practices by large corporate entities."
There is no explanation as to how the mere publishing of tax payable assists in the understanding of the corporate tax system in any meaningful way. In any event, information on this basic level is available now, certainly in the case of listed entities, through accounting disclosures. There seems little value to be had from the proposed disclosure other than making a political point.
The Assistant Treasurer goes on to state:
"There is a strange circularity in the argument that large and multinational companies should be allowed to do what the taw law allows, but public policy debate on the appropriateness of those laws should not be informed by describing what those taxpayers have been and are doing.
There is a similar inconsistency in demanding the Government produce evidence that base erosion and profit shifting is a significant problem in the tax law while at the same time opposing measures that would increase the transparency of the tax affairs of large and multinational enterprises".
It is difficult to understand how the proposed transparency measure will "inform" a public debate on tax policy. Of course, policy debate around international tax measures is to be encouraged. However, the level of detail that would be revealed should the new proposals be adopted is so minimal that it would hardly form the basis of any sort of sophisticated discussion around international tax practices. Again, much of the information is already in the public arena in any event. The only conclusion one can draw is that the transparency measure is designed to "name and shame". However, it is a very blunt weapon which may well shame more innocent than guilty. There are a number of reasons why companies may have a relatively low taxable income. Many of these are entirely legitimate, for example, use of carry forward losses, heavy capital expenditure resulting in substantial capital allowances, significant investment in research and development and so on.
Companies with significant foreign operations may have high levels of income which is exempt from tax either in the form of dividends or branch profits (Australia exempts such foreign income where certain conditions are met). None of this information will be evident from the proposed disclosures. There is certainly no limitation to companies with international operations – even though it seems the changes have particular relevance to the base erosion/profit shifting (BEPS) debate. Perhaps the idea is that companies that do have legitimate reasons for low taxable income should, in order to placate public opinion formed on the basis of threadbare information, be obliged to give further information to justify their position. This hardly seems just.
This proposal does nothing to increase the level of information available to the taxing authority (except in relation to the third aspect, enhanced information sharing between government agencies, referred to above). Even though Australia has a self-assessment based system, there is in fact a heavy disclosure requirement especially where foreign operations are involved. Further, the ATO has very powerful information gathering powers and benefits from a reversal of the onus of proof. The burden falls on a taxpayer to prove that the ATO's assessment is excessive. So, under existing rules, the ATO has access to detailed information, has wide and powerful information gathering rights and has a very active compliance and enforcement regime. This transparency proposal has nothing to do with the efficacy of those operations. Is the subtext even if taxpayers are paying the amount of tax is required by the law, this isn't enough? It's difficult to see how publishing a taxpayer's bare tax payable number indicates that the tax payable has in some way been illegitimately reduced. The Assistant Treasurer seemed to concede as much in a recent radio interview:
"Well, if you are a company that is engaging in structuring that may not withstand the smell test, it may be legally correct in terms of what the law currently proscribes, but if you are a company engaged in activities that you can't publicly justify or defend, then you may have something to be concerned about when it comes to these transparency measures."
In other words, the proposals seem all about achieving an outcome other than the proper administration of the tax system and the rule of law.
There has been very little acknowledgment by the government of any policy support for the proposed erosion of taxpayer confidentiality – which is concerning. In the digital age where there is freely available personal information obtainable on the internet, governments are increasingly moving to shore up privacy rules. Except, perhaps where it suits a particular political objective. The Assistant Treasurer has stated:
"...one of the things that we're proposing to do is to ensure that these antiquated provisions within the Tax Administration Act that seek to impose privacy requirements upon corporate entities – some of the largest corporate entities in the word – are no longer relevant."
That is a statement that should be of concern to all taxpayers. The secrecy provisions of the tax law have evolved over decades. Though there are exceptions where taxpayer information may be disclosed, these exceptions are carefully circumscribed, generally allowing disclosure to be made to other government agencies in prescribed circumstances. I would suggest that disclosing information of a broadly identified range of taxpayers to the world at large in the way proposed is an unjustifiable erosion of taxpayer rights. Perhaps the content is largely otherwise available as noted above. It is perhaps more worrying that this might be the thin end of the wedge. There is no sensible elucidation in the discussion paper concerning the propriety of reversing the strict confidentiality obligations which hitherto have been imposed on tax officers. The discussion is scant and the purported justifications are thin. These rules which apply to accounting incomes over $100 million are certainly not confined to household name multinationals. It is estimated that there are some 2,000 taxpayers whose information would be disclosed under the new rules.
One wonders – if the precedent is established – where the disclosure will stop.
The point is that these proposals do not add at all to the tax authority's ability to enforce the tax laws. They add very little to the information already available to the public from listed company accounts. All the proposal really does is to put into high focus in the public arena some very basic information which will raise more questions than it answers.
This article was first published in the International Tax Review, 1 May 2013
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.