The Australian Tax Office (ATO) has taken the fight to multinational corporations dodging tax, warning them not to load local subsidiaries with debt in a bid to minimise their tax bills. From The Australian:
The Australian Taxation Office has intensified its crackdown on foreign oil and gas companies by warning them against rorting rules that prohibit loading local subsidiaries with debt…
The ATO said it had seen companies using complex debt-equity hybrid instruments to claim tax deductions for annual repayments, while not including the total amount when working out how much debt the local vehicle carries…
ATO deputy commissioner Jeremy Hirschhorn said the rort was “highly correlated with people who have invested large amounts of money into Australia over the past five years”.
The crackdown follows 32-year veteran industry insider turned whistleblower, George Rozvany’s, claims that multinational tax avoidance is costing Australia up to $50 billion per year in lost revenue.
In particular, Rozvany, who is Australia’s most published author on transfer pricing, claimed that sham transfer pricing arrangements are now “out of control”:
“Transfer pricing behaviour clearly is the greatest concern because it’s very easy for a transfer pricing expert to dress up a sham transaction as a real commercial transaction”…
“I’m talking about service arrangements, intellectual property transfers, such as patents or use of patents, and perceived transfer of goods, sham loans between related parties, but in reality it’s all about providing services at too high a price which then shifts [income] to a lower tax jurisdiction.”
As explained recently by Antony Ting, Associate Professor at the University of Sydney, Australia’s current laws are ineffective in stopping these practices:
The current tax law lacks effective measures to prevent excessive interest deductions on intra-group debts. A multinational enterprise can create intra-group debt between an Australian subsidiary and another overseas subsidiary in a way that interest deductions are claimed in Australia, while the overseas group company may be subject to low or even no tax on the interest income. This tax avoidance tool is important for a couple of reasons.
The use of this mechanism is very simple for multinationals to implement. Multinationals don’t have to involve third parties, it often doesn’t require any movement of assets, functions or personnel within a corporate group, or any change in operations. In practice, this mechanism “can be created with the wave of a pen or keystroke”.
Intra-group debts provide significant flexibility for manipulation.This is because intra-group debts are not subject to the normal constraints applicable to third party loans, such as the credit rating of the borrower and security provided for the loan. Instead, multinationals can often decide freely not only the amount of the intra-group debt, but also the interest rate charged on the loan.
To make it even “better” for multinationals as a tax avoidance tool, intra-group debts in general are not recognised under accounting standards and therefore do not affect the financial statements of these companies…
Unless effective measures are introduced, multinationals are likely to be able to continue shift significant amount of profits from Australia using intra-group debts.
That the Coalition can even consider gifting foreign owners/shareholders a 5% company tax cut beggars belief in light of these developments.
