Following the release of 2007-08 Compliance Program by the Australian Taxation Office (ATO) on 16 August 2007, KPMG has commented that ATO is taking initiatives to prevent tax erosion due to corporate restructure and global transactions.
According to KPMG, the ATO is responding to the ever growing increase in cross-border transactions by taking steps to ensure that they can more effectively review these transactions through an increased co-operation with offshore counterparts. Without this overseas co-operation, the ability of the ATO to properly review the overseas components of some transactions can be restricted.
One key area of focus for the 2007-08 Compliance Program is corporate restructures that result in shifting Australian based functions, assets and risks (and profits) offshore. These restructures are often critical for companies to remain commercially competitive, however, the ATO is concerned that they are conducted in a manner that is inconsistent with Australian transfer pricing rules.
With more and more companies moving parts of their supply chain offshore, the ATO is faced with a growing potential erosion in the Australian tax base. The focus on restructuring transactions represents an effort by the ATO to ensure that these transactions are handled appropriately.
In addition, the focus on this issue is not restricted to Australia. The impact of supply chain restructures is not just an issue for the ATO, but also for the OECD – many Western countries perceive this as a threat to their tax base.
The 2007-08 Compliance Program heralds the dawn of a new era in which the Australian Tax Administration is formally recognising that taxing business on a jurisdictional basis when business is operating globally reduces global tax revenues.
The ATO has recognised that tax arbitrage arrangements are leveraging inconsistencies between jurisdictions; this announcement acknowledges a responsibility to other jurisdictions when Australian tax treatment contributes to such arrangements.
The level of communication and co-operation between tax jurisdictions will increase to not only ensure Australia gets its fair share of the global tax revenue but also increase the size of the revenue to be shared through working co-operatively across jurisdictions.
Additional highlights from 2007-08 Compliance Program:
ATO illustrates complexity of government’s tax and corporate governance policy
The ATO is considering its capacity to become more current in its approach to company tax compliance, such as engaging in pre-lodgement discussions with large business and undertaking real-time dialogue with taxpayers.
This may be an acknowledgement that the laws are difficult to understand and apply. If the laws were clearer there ought to be no need for real-time or pre-lodgement discussion in a self-assessment system.
With the complexity surrounding company tax it is often the case that there is more than one view which could be taken on the same scenario. This move to open dialogue with business in real-time before tax returns are submitted is a reflection of the uncertainty in the tax law.
Businesses banking on utilising losses from 2007 beware:
KPMG issued a warning to any company that intends to utilise tax losses in the 2007 and following income years, and companies should not assume that they will be able to carry 2007 losses forward. The ATO saved AU$1.2bn in future tax revenue last year by applying the Continuity of Ownership and Same Business Tests with full force.
The original intent of Parliament in introducing these loss tests in the mid-sixties has been subordinated following the introduction of unlimited carry forward to aid the ATO to manage a growing book of unused tax losses.
While the Continuity of Ownership Test has been amended with the intention of making it easier to satisfy; the transitional provisions that allow 2002 and earlier year losses to be carried forward are complex and difficult to evidence retrospectively.
23-Aug-2007
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