Global tax shake-up

Increased attention on international transactions will be top of mind for board members in 2015, says Brett Cox.

As we approach 2015, the big tax items on the minds of board members around corporate Australia relate to the ever increasing focus on the taxation of international transactions, and the potential for reputational damage from upcoming tax transparency measures.

Shifting tax landscape
The international tax landscape is changing. Newspapers are full of reports on how Google, Apple and others are able to operate globally yet pay little or no tax on business activities. The tax systems of the world, originally flustered by the rise of the digital economy operating on cloud-based servers with automated processes, are beginning to deal with the challenge.

In the wake of the global financial crisis, the pressure on tax authorities to find more tax revenue to fill the holes in government coffers has led to the Organisation for Economic Co-operation and Development (OECD) being called upon to deliver a solution.
Recently, Ireland responded to international pressures by announcing the closing of a popular tax loophole used by multinationals, known as the “Double Irish Sandwich”.

The scheme involved having two Irish subsidiary companies, with one being tax resident in a tax haven country and the other routing money to the tax haven to avoid withholding tax.

From 1 January 2015, all new companies incorporated in Ireland will need to be tax resident in Ireland, with existing arrangements phased out by 2020.

The Base Erosion and Profit Shifting (BEPS) project is well underway, subjecting multinationals suspected of engaging in these behaviours to increasing scrutiny, both domestically and internationally.

The entire global BEPS initiative brings with it ongoing legislative risk as the OECD brings new tax concepts forward, and countries introduce new laws or sign into multi-jurisdictional treaties to amend current bilateral treaty networks.

Focus on transfer pricing
Locally, Australia has already re-written its transfer pricing rules. Unlike the old rules, the new legislation does not require the commissioner to invoke the provisions by making a determination to cause a transfer pricing adjustment.

The new rules, which came into effect on 1 July 2013, require companies to self-assess their own transfer pricing compliance and have documentation in place before lodgement of their annual tax return to substantiate their position. Failure to have the documentation in place by the time of lodging their 2014 tax returns will mean that a company cannot satisfy that it has an arguable case, and harsh tax penalties can apply.

The new legislation specifically refers to the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as approved by the Council of the OECD” as the standard for documentation preparation. 

The Australian Taxation Office (ATO) has also received extra funding to focus on the transfer pricing area in its compliance program, so expect to see additional risk profiling, questionnaires and audit activity. Companies need to ensure that they have their ducks lined up, and all documentation in place and updated.

Of course, the ATO’s use of their risk differentiation framework to classify corporate groups as high, medium or low risk taxpayers, will impact on the level of scrutiny and verification procedures. Boards should be aware of their risk profile and ensure active corporate governance to monitor and manage their tax strategy.  
public disclosure measures

On top of the increased scrutiny of international dealings and higher compliance effort required, boards should also be concerned with the ATO’s new public disclosure measures.

For companies with total income over $100 million for the 2014 tax year, the ATO will publish tax data such as the company’s Australian Business Number, total income, taxable income, and income tax payable.This information will feed media interest and advocacy groups, potentially bringing a new level of public attention and reputational risk to the boardroom.

Misuse and out-of-context reporting of this information in the media is likely to be a major headache for boards. It will require active public relations management to ensure an appropriate context is provided around the information to avoid brand and reputational damage.

In 2015, boards need to expect and plan for life in a more transparent world characterised by greater tax scrutiny and global information sharing.

In particular, boards of multinationals or companies operating in the digital economy in Australia will need to consider their tax risk management and planning in the light of this shifting tax landscape.