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Sept. 20 — Tax advisory firms face potentially serious consequences if they allow partners to “run their own race” when providing advice to large companies, a top Australian tax official said.
Mark Konza, an Australian Taxation Office deputy commissioner, also expressed disappointment that more large businesses hadn't taken up the ATO's offer of early engagement on strategies to stay on the right side of the country's new multinational anti-avoidance law (MAAL).
The MAAL is designed to ensure that multinational entities don't use artificial and contrived arrangements to avoid the attribution of profits to a permanent establishment in Australia.
Konza, who heads public groups and international at the ATO, told Bloomberg BNA Sept. 20 that advisory firms that develop contrived restructuring arrangements with the aim of avoiding the MAAL are risking their reputation.
Australia has laws targeted at the promotion of tax exploitation schemes that aren't “reasonably arguable” and these can lead to the imposition of enforceable undertakings or other penalties, he said.
Legal and accounting firms “have an ethical duty to consider where they are on the spectrum of aggressiveness of advice,” Konza said. “And I think the most important thing is that they need to think as a firm where they are on that spectrum, not simply perhaps allow individual partners to run their own race.”
Advisory businesses need to “make sure they are happy to put their firm's name behind the suggestions that are coming from the different partners,” he said.
The ATO last week issued a taxpayer alert on a form of restructuring to avoid the MAAL that it said was artificial, and Konza said the advisory firm that came up with it had only two clients that had implemented it—a services company and a finance business.
“One of the companies that was in the scheme contacted me independently and asked could they work with us to repudiate the scheme, and we said, ‘Of course we will help you pay the right tax on a proper arrangement and we will do that in a cooperative way,' ” Konza said.
“And in the other case I rang the taxpayer myself and said, ‘Do you really want to attract this much attention, you are going to attract a great deal of grief of this,’ ” he said.
Konza said the companies were “surprised at our reaction and I think they really underestimated what they were doing. They didn't realize that they were directly subverting the will of our parliament here in Australia.”
The amount of revenue involved in the two cases wasn't particularly large, he noted.
However, if the ATO hadn't stopped the practice in its tracks it would “spread enormously quickly and would basically render the MAAL redundant and we couldn't allow that,” Konza said.
Konza said the MAAL potentially applied to about 175 companies in Australia that have a global turnover of at least A$1 billion ($755 million) and that work on an “operate here, bill overseas” model.
Early on, the ATO wrote to about 150 of those companies (not including about 25 or so that were already under audit) inviting them to work informally with the ATO on measures to ensure they complied with MAAL provisions, offering the enticement of penalty protection. Thirty-nine taxpayers accepted the offer and have engaged with the ATO on a voluntary basis about any restructuring plans they might be contemplating.
“That was a bit disappointing,” Konza said. “We thought that more would want to come in and work with us.”
There were two main reasons for the result, he said.
First, Australia is a very small part of the global market for many businesses, and some local operations “had trouble getting the attention of the senior people in their companies and so they just couldn't get the decision.”
“The other piece of intel we got was that some clients were told by some advisers, ‘Don't go in and work with the ATO, stay with us and work with us behind the scenes' ”—a strategy that backfired for the two companies involved in the adviser-prompted restructuring that led to last week's alert.
Konza said the ATO has so far conducted more than 150 interviews with a number of the 175 significant global entities potentially captured by the MAAL.
It has already told 40 taxpayers that the MAAL doesn't apply to them, and is reviewing advice from 20 others that it considers to have carried out an acceptable restructure as a result of the MAAL.
Another 20 are under audit, Konza said, and the remainder are still being reviewed.
The review process involves working with the cooperation of each taxpayer on a profile of their operation, which is then examined by an expert panel that signs off on whether MAAL should or shouldn't apply, he said.
Meanwhile, tax specialists told Bloomberg BNA that multinationals and those who advise them should be aware that the ATO will act quickly to stamp out aggressive practices.
“I think we are entering into a new era, the Australian Taxation Office is definitely shifting gears,” said Niv Tadmore, a Melbourne-based tax partner with law firm Clayton Utz. “Their expectations are much higher, they are much more forensic.”
Tadmore told Bloomberg BNA Sept. 19 that entities and advisers that come up with the types of structures that prompted the recent taxpayer alert and compliance action from the ATO have demonstrated a naivete about these changes.
He also warned that major tax advisory firms engaged by multinationals should be prepared to find themselves publicly called to account by the ATO for bad practices.
“I think the ATO may take it a step further,” Tadmore said, referring to the tax authority's capacity to seek penalties against those promoting tax exploitation schemes. “My view is that the ATO would not hesitate at all to use those powers.”
That kind of action by the ATO could result in an advisory firm having to make a public enforceable undertaking and “it's not a good look for any firm to go through that,” he said.
Joanne Dunne, a Melbourne-based tax partner with law firm MinterEllison, told Bloomberg BNA Sept. 20 that the ATO's taxpayer alerts don't necessarily tell the full story.
“The Tax Office writes those alerts in a conclusive way and they provide a general summary,” Dunne said in an e-mail.
“It's a good guide for entities considering such structures and encourages them to approach the ATO. But not every structure with similar elements in it is artificial and contrived,” she said.
“I am sure there is more to it than is described in the ATO taxpayer alerts,” Dunne said. “For example, there may well be a commercial function for any interposed entity. Simply interposing a partnership with the sole purpose of avoiding the MAAL would be clearly contrary to the tax law. I can understand the tax office's perspective, but all I am saying is that we don't know the full story from the taxpayer alerts alone.”
Both Tadmore and Dunne praised the ATO for providing guidance through taxpayer alerts on its interpretation of what constitutes compliance with MAAL provisions.
“It's expressing its concerns about particular structures quite openly,” Dunne said. “I think that is a good thing.”
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