After recently recovering some $5 billion in unpaid taxes from multinational firms in just 18 months, the Australian Taxation Office (ATO) is now investigating 27 multinationals over $78 billion in potentially dodgy revaluations used to get around anti-tax avoidance rules. From The AFR:
In a submission to a senate inquiry, the ATO warns that companies are revaluing assets to skirt 2014 changes to thin capitalisation rules designed to stop companies loading debt into their Australian operations to avoid paying tax here.
“Taxpayers have responded to the reduction of the safe harbour thresholds in a variety of ways,” it says in a new submission to the long-standing senate inquiry into corporate tax avoidance.
“One in particular was to increase the value of their total assets by undertaking revaluations of certain assets either for accounting purposes or for thin capitalisation purposes only.
“This has had the effect of limiting the impacts of the reductions in the safe harbour thresholds.”In 2015, 184 companies made thin capitalisation-only revaluations worth $56 billion, the submission says. In 2016, the figure more than doubled to $122 billion for 33 fewer companies.
This was “significant year-on-year growth and the thin capitalisation arrangements of 27 companies are being reviewed, with $78 billion in revaluations under scrutiny…
The ATO submission also reveals that multinationals with related-party loans will be denied $1.4 billion in interest deductions in 2018 and $13.7 billion over the next decade.
The thin capitalisation rules aim to prevent deduction of “excessive” interest expenses using a benchmark of debt-to-asset ratio. So if multinational companies inflate the value of their assets, they can load their companies up with related-party debt and shift profits from Australia.
Interestingly, the OECD has previously concluded that the debt-to-asset ratio used for thin capitalisation purposes is ripe for manipulation, primarily due to the difficulty in identifying and valuing assets. The OECD has, therefore, recommended a benchmark ratio of interest expense to earnings, which the OECD believes is less vulnerable to manipulation.
