Australia: New Commissioner's focus on profit shifting

Chris Bowman, BTTP Consulting Pty Ltd, Sydney

Chris Bowman is a Director

On February 12, 2013, the OECD released a paper on “Addressing Base Erosion and Profit Shifting” in response to growing concerns in member countries and the G20 about real and perceived abusive international tax practices. The report is to be followed by the OECD developing an action plan, and by discussion between Tax Commissioners at the Forum of Tax Administration in Moscow in May 2013. The new Australian Commissioner of Taxation, Chris Jordan, will attend this forum and his recent public statements are of particular interest about how Australia is addressing the issue.

In Australia, the Federal government had already announced actions it proposed to address a perceived reduction in company tax paid by multinational companies trading with Australia. On December 10, 2012, the government announced the formation of a specialist reference group to assist in Treasury's examination of multinational tax minimisation strategies and its risks to the sustainability of Australia's corporate tax base. On February 4, 2013, the government announced its intention to develop rules requiring large and multinational companies to disclose to the public details of federal taxes paid. Moving down this path, the Assistant Treasurer, David Bradbury MP, released on April 3, 2013, a discussion paper “Improving the transparency of Australia's business tax system” seeking public submission by April 24.

In the middle of all this activity, the new Commissioner of Taxation, Chris Jordan, addressed the Tax Institute 28th Annual Convention on March 14, 2013. New to the role, and the first external appointment at this level, the Commissioner set out his agenda for working closely with Treasury and the business community to improve the law and its administration. Part of his address to the Convention focused on the events unfolding in February - “A current example of an area where I want the ATO to take a more active role is in the community debate around profit shifting and the threat to the tax base”. He views this as a “significant issue” on which “business people have approached me” in the context of “less tax paid by multinationals creating a greater burden on Australian businesses”. In the Commissioner's view Australian businesses expect “our laws should be sophisticated enough to handle such challenges posed by the increasingly global and digitised world”.

The Commissioner questions if it is legitimate for international businesses to be “left alone to adopt very aggressive structures” and states that part of his role is “to ensure businesses operate within the law”. “I want business to clearly know, if they choose questionable or very aggressive practices there will be consequences. The ATO has compliance tools to discourage inappropriate practices and I'll direct my officers to continue to make full use of the toolkit”.

Part of the “toolkit” (which Commissioner Jordan did not further address) is the new law on transfer pricing profit shifting which has already seen the introduction of a first tranche of amending legislation inserting Division 815-A to address profit shifting where the non-Australian counterparty to a transaction or series of transactions is resident in a country with which Australia has concluded a Tax Treaty for the Avoidance of Double Taxation (and which generally contains at Article 9, an Associated Enterprises provision). Division 815-A has been controversial as it is backdated to 2004 on the basis that the Commissioner's view on the conduct of transfer pricing practices and their audit has been well published via Taxation Rulings and the Explanatory Memorandum to the existing transfer pricing provision in Division 13. A Parliamentary Senate Committee was happy with this view and recommended the passing of the legislation as presented to Parliament.

The ATO has been quite clear that the new Division supports its existing Large Business audit programme and allows more focused review of transfer pricing practice by specifically inserting wording into Division 815-A that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the OECD Commentary on Model Tax Convention on Income and Capital, are to be used as primary guidance on best practice.

Given the events unfolding at the OECD, this part of the toolkit could well be “future-proof” and multinationals need to take notice that practices back to 2004 could potentially be reviewed and adjusted.

Another part of the “toolkit” is the ATO's involvement with the Joint International Tax Shelter Information Centre (JITSIC) which allows collaboration with Canada, Japan, United Kingdom, USA, South Korea, China, France and Germany via ATO representatives based in London, UK, and Washington DC, USA, interacting with their counterpart members on a regular basis.

The former Commissioner of Taxation, Michael D'Ascenzo, issued the ATO Compliance Programme 2012-13, in July 2012, and stated under the section headed “Global co-operation the key to international compliance work”:

The JITSIC aims to assist in the identification, understanding and mitigation of risk arising from those who promote or take part in abusive tax schemes.

Key achievements to date have been:

• deterring abusive tax arrangements on an international scale

• intelligence sharing and joint audits between member countries (the ATO has commenced two joint audits with the USA)

• exchanges of information (last year each delegate had in excess of 100 exchange of information requests)

• building international relationships.

In some cases, we carry out joint audits with other tax administrations.”

In would seem this part of the “toolkit” is gaining momentum and multinationals involved in profit shifting practices could expect Australia to audit their arrangements in co-operation with, at the very least, the member tax administrations of JITSIC. In other cases the exchange of information provisions in the tax treaties will probably be used.

The second tranche of the new transfer pricing law is under review by a Parliamentary Senate Committee and most likely will be enacted into law after any changes recommended by that committee are dealt with by the Government; expect June 2013 at the earliest. This tranche addresses all countries so that any perceived advantage of using a non-treaty country or tax haven will be short lived.

In the light of Commissioner Jordan's views, it could be broadly assumed that any practice which indicates “less tax” is paid in Australia will most probably be viewed by the ATO as an “abusive tax arrangement” and attract a review. Exactly what “less tax” means is yet to be advised.

The May meeting of Tax Commissioners in Moscow could indeed be interesting.

Chris Bowman is Lead Director at BTTP Consulting Pty Ltd, Transfer Pricing Consultants, in Australia. He may be contacted at: