Back 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 claims 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.
Now, the Australian Taxation Office (ATO) has 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, said it is confident of raising a significant amount of extra tax in the wake of the new guidelines. From The AFR:
Foreign multinationals currently have $420 billion in loans to their Australian subsidiaries, and they charge the local arms $20 billion a year interest on these loans, which becomes an immediate tax deduction.
That’s an interest rate of just under 5 per cent, while the ATO seems to be saying an arms-length rate would usually be below 3 per cent. That suggests the ATO will be looking to cut some $6-8 billion from interest deductions.
It never works out quite as neatly as that, but Deputy Commissioner Jeremy Hirschhorn confirmed the ATO was expecting to raise hundreds of millions of dollars in extra tax from the new approach…
Three companies account for a quarter of the total related-party debt: the partners in the huge Gorgon LNP development on the North West Shelf, Chevron, ExxonMobil and Shell, together owe $US77.3 billion ($104 billion) to their offshore parents, who charge them a massive $US3.9 billion ($5.2 billion) a year…
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.
