In July last year, ABC’s The Business and Michael West featured an extraordinary raft of allegations from a 32-year veteran industry insider turned whistleblower, George Rozvany, who claimed that multinational tax avoidance was “out of control” and cost the Budget up to $50 billion dollars a year in lost revenue. Rozvany claimed the Big Four accounting firms – PwC, Deloitte, KPMG and Ernst & Young – were the key masterminds behind the tax dodging. He also cited sham transfer pricing arrangements as a key avenue by which multinational tax avoidance takes place.
Then in September, Michael West released another alarming report about multinational tax avoidance featuring Michael Hibbins – a former executive of a global oil major operating in Australia – who claimed that tax avoidance is “rife”, with tax avoidance taking place mostly via transferring profits offshore while accepting the transfer of group costs into Australia.
And in November, an Auditor-General’s investigation found that fossil fuel giants are using questionable deductions to reduce their tax bills by billions of dollars.
In may this year, the Australian Taxation Office (ATO) issued new guidelines governing loans made by multinationals to their local units in the wake of the Chevron tax case. The guidelines set out what the ATO expects is reasonable in terms of the interest rate foreign companies charge their subsidiaries, which in turn decides the level of tax deductions that are then claimed. ATO Deputy Commissioner, Jeremy Hirschhorn, at the time said it was confident of raising a significant amount of extra tax in the wake of the new guidelines.
Yesterday, The AFR reported that the ATO is understood to be instigating legal action against at least five companies over alleged breaches of thin capitalisation laws:
The Australian Tax Office is preparing to take several companies to court over abuse of thin capitalisation rules and will start a wave of audits of large multinationals with complex cross-border loans, as it continues to take a hardline approach in the wake of its win against Chevron.
The ATO is mounting legal action against at least five companies for breaching thin capitalisation rules, which prevent businesses loading up their Australian operations with debt to obtain a tax advantage. The companies involved have not yet been identified publicly.
At the same time, companies that fall into the highest-risk “red zone” for cross-border related-party financing face fast-tracked review and audit activity, a “tougher road” to resolving disputes and an increased prospect of litigation…
Cross-border loans between related companies are the latest frontier in the ATO’s action against multinational tax avoidance.
Buoyed by its transfer pricing victory over Chevron, it has issued draft guidance asks companies to self-assess their risk rating according to a series of loan features.
The guidance makes it clear the ATO views with suspicious features such as borrowing at interest rates in excess of 1 per cent of a parent company, borrowing from a related party in a low-tax jurisdiction and borrowing in a foreign currency…
At issue was whether the terms of the loan were at arm’s length, which is required under transfer pricing laws.
It’s good to see the ATO taking action against blatant multinational tax avoidance. Let’s hope it is merely the first in a raft of policy actions aimed at stamping this kind of behaviour out.
