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Crackdown delivers tax windfall, but a third of big companies pay no tax

AUSTRALIAN BUSINESS REVIEW   December 13, 2018   Ben Butler

Taxation Commissioner Chris Jordan. Picture: Kym Smith

Surging commodity prices and a crackdown on foreign tech companies delivered the Morrison government bumper revenue last year, even though about a third of large companies paid no tax.

Data released by the Taxation Office on Thursday shows the big end of town paid about $45.7bn in company tax last year, up from $38.2bn the year before.

But of the 2109 large companies for which the ATO released data yesterday, 722, or 34.2 per cent, paid no tax — down only marginally from 35.8 per cent the previous year.

Companies that paid no tax included Gina Rinehart’s Roy Hill Holdings — although her Hancock Prospecting paid $407.8m — the Rockpool restaurant group fronted by celebrity chef Neil Perry, Perth oil and gas company Woodside and defence contractor BAE’s Australian arm.

Corporate tax, which is paid on profit, can be reduced for a number of reasons, including depreciation on assets or due to tax losses carried over from previous years. However, in a separate set of statistics also released yesterday, the ATO estimates large companies underpaid almost $3.8bn in tax in 2016, or more than 9 per cent of the tax paid by the big end of town, and dramatically increased estimates of how much tax fell short in previous years.

“The transparency report reflects a bounce-back in the energy and resources sector, which led to a strong increase in tax revenue from the large corporate sector overall,” the ATO’s second commissioner Jeremy Hirschhorn said yesterday.

The transparency figures show that last year Google Australia paid $33m in tax on a profit of $177.5m, while Facebook Australia paid $12.5m on profit of $41.9m.

Mr Hirschhorn said the data showed the government’s crackdown on tax-dodging global tech giants, the Multinational Anti-Avoidance Law, was working.

According to the ATO, the MAAL has prompted 44 companies to book Australian sales worth about $7bn a year here rather than in tax havens since it came in at the start of 2016. “In coming years the full effect of the MAAL will flow through as multinational companies book billions more in sales locally,” Mr Hirschhorn said.

The data released yesterday covered public companies and multinationals with revenue of more than $100m and privately held companies with revenue of more than $200m.

It shows Commonwealth Bank was the largest taxpayer, handing over $3.9bn, followed by BHP Billiton on $3.27bn. The other three big four banks rounded out the top five. Jason Ward, a spokesman for The Tax Justice Network, which tracks tax avoidance and minimisation schemes, said the fact that “Australian banks are very large taxpayers speaks to the integrity of the Australian tax system”.

He pointed to the US where banks generally pay minimal tax.

But he said Australia’s petroleum resource rent tax needed beefing up to capture more money from Australia’s booming oil and gas industry and multinational companies still weren’t paying their way. “When you have major multinationals generating billions of income and not paying tax for eight years, you have a problem,” Mr Ward said.

Business Council of Australia chief executive Jennifer Westacott said the data showed big business was paying its “fair share” of tax.

“More profitable businesses pay more tax, that’s exactly why we have to get the settings right to boost investment and grow the economy,” she said.

However, opposition assistant Treasury spokesman Andrew Leigh said the fact one-third of big companies didn’t pay tax showed “that the government’s priority on getting big business tax rates down is misplaced”.

“It’s certainly not going to have any effect on those one-third of firms,” he said, adding that MAAL had only a “modest impact”.

“In 2016-17 it’s to do with commodity prices,” he said.

While Roy Hill did not make a profit, two other Rinehart-linked entities — Consolidated Distributions and 150 Investments — each made a profit of about $350m last year and also paid no tax. A spokeswoman for Mrs Rinehart could not be reached last night.

Rockpool Dining Group, fronted by celebrity chef Neil Perry and owned by private equity group Quadrant, paid no tax after failing to make a profit on more than $220m in revenue. In October, the company said it would pay $1.8m to staff who claimed it had underpaid them.

Woodside, which paid no tax on a profit of $944m, said it was entitled to claim “certain rebates, tax offsets and credits … against income tax payable (including franking and R & D tax offsets)”.

Two Woodside subsidiaries paid a total of $509 million in tax during the year, and this generated franking credits at the group level, reducing the net tax payable by the top company in the group to zero and ensuring against double taxation.

BAE subsidiary BAE Systems Australia Holdings paid no tax last year after booking a profit of $39.6m on more than $1bn in revenue. “We have not paid income tax due to losses carried forward and tax credits accumulated from ongoing investment in R & D,” a BAE spokeswoman said.

The ATO has also dramatically revised upwards its estimate of the tax gap in previous years, and now says large corporates dodged more than 11 per cent of tax obligations in 2013 and 14 — significantly more than 8.1 per cent figure it previously provided.

However, the ATO also says it is getting better at making big companies pay full freight, and expects to reduce the 2016 gap to just $1.8bn, or 4.4 per cent, after taking enforcement action.

The ATO said the tax gap for large corporates “primarily reflects differences in the interpretation of complex areas of tax law” including profit shifting through transfer pricing and abuse of Australian “thin capitalisation” rules that prohibit multinationals sucking profit out of the country by overloading local subsidiaries with debt.

“The large corporate groups income tax gap has been decreasing in recent years,” the ATO said.

ATO deputy commissioner Will Day says the new international body would pursue cyber-related identity theft, tax evasion using cryptocurrencies, corporate ‘phoenixing’ and international tax evasion using tax havens. Picture: AAP

The Australian Taxation Office will launch an unprecedented international blitz on tax criminals that is being compared to the intelligence community’s “Five Eyes” alliance.

The five-nation tax intelligence-sharing operation is being described by experts as “Project Wickenby on steroids”, a reference to the ATO’s much-debated, nine-year war on tax evasion that ended in 2015, and which claims to have resulted in nearly 50 criminal convictions.

In an exclusive interview with The Australian, ATO deputy commissioner Will Day revealed that a $182 million grant in the federal government’s mid-year economic and fiscal outlook this month would be used from early next year to “supercharge” Australia’s involvement in the new body, known as the Joint Chiefs of Global Tax Enforcement (or J5 for short).

Mr Day said the new international body would pursue cyber-related identity theft, tax evasion using cryptocurrencies, corporate “phoenixing” and international tax evasion using tax havens.

He said J5 applied similar principles to that of Five Eyes, one of the most far-reaching espionage pacts ever signed.

“The fact we are relying on longstanding relationships with these other countries with a history of an alliance with us, and the fact that they also face similar threats, means it is analogous to the Five Eyes,” Mr Day said.

“It is pretty similar from a tax point of view.”

The intelligence-sharing organisation, quietly established five months ago, includes the heads of tax crime and senior officials from Australia, the US, Britain, The Netherlands and Canada.

Its composition closely resembles Five Eyes, the only difference being that The Netherlands is a member instead of New Zealand.

So far, the joint efforts have involved identifying targets.

“A number of operations have been identified, and a number are to be commenced,” Mr Day said. “We’ll be starting to initiate them in the first half of next year.”

Mr Day said a key realisation from the body’s work had been the need to target “enablers” of tax evasion, who he declined to identify. He described them as “shadowy characters who sit behind websites that encourage people to hide income and assets offshore to avoid tax”.

“The focus is to track down the internationally located enablers of that tax crime, even when they’re sitting offshore,” he said.

“Bringing together the five countries is a large part of that, and we’ve made significant progress in identifying operational targets, utilising the improved partnerships.”

Mr Day said at a meeting in Utrecht in The Netherlands in November, each of the J5 members had identified one huge international criminal target acting as an enabler.

“We actually all agreed on an enabler of international tax crime who was rated the highest level of threat for all of the J5 countries,” he said.

This revelation has echoes of Wickenby, in which the primary focus was Swiss accountant Phillip Egglishaw, whose firm Strachans, based in the tax haven of Jersey, was linked to hundreds of Australians.

He remains on an Interpol most-wanted list.

The ATO alleged he set up a $300 million network of tax-avoidance schemes and said it had recouped nearly $1 billion in cash collections through the Wickenby investigation.

Pressed for more details on who the ATO was targeting, Mr Day would not reveal whether the enabler was an individual, a firm or a company.

He said the details were “very operationally sensitive”.

An industry source who did not wish to be named said the new program was likely to be targeted against tax advisers who promoted offshore tax-evasion schemes.

The source said that the J5 appeared to be less about recouping money and more about creating an effective deterrent against future tax crime.

“If they put a tax adviser in jail, it will send an earthquake through the shadowy world of people who create and promote these schemes,” the source said.

Mr Day said the “Five Eyes of tax” was not setting specific financial targets, but its success would be measured by the number of criminals it caught. “We do a lot of it to ensure the ongoing confidence in the Australian tax system,” he said. “We’ve taken a lot of corrective action already, and we want to maintain that confidence going forward.”

PwC’s Australian head of tax, Pete Calleja, said the new international pact between the five countries looked set to become a much larger version of Wickenby, the ATO-led cross-agency taskforce that became one of the country’s biggest tax investigations. “This seems to me like a supercharged, new-age version of Wickenby,” he said.

Mr Day conceded that “in a way, the mischief hasn’t changed” since Wickenby. “It’s about the use of secrecy or low-tax jurisdictions to channel funds that have been illegally held through other entities, such as trusts,” he said.

Another major emerging problem area, Mr Day said, was “cyber-enabled identity crime”.

“It’s about using identity theft as a way of evading tax, or of committing refund fraud,” he said.

“Phoenixing”, or the practice of using a new company to rebirth failed businesses of a previous company, was also being targeted by the J5. “It is domestically facilitated, but we would certainly see the laundering of the proceeds of illegal phoenix activity offshore, in tax havens,” he said.

Mr Day also said the body was particularly interested in “cryptocurrencies on the dark net”.

Mr Calleja believes the new international tax pact will be primarily targeted at the international black economy.

“If we know the Australian share of the black economy is $50 billion, the ‘Five Eyes’ black economy has to be hundreds of billions of dollars,” he said.

The Netherlands is seen as crucial to the co-operation agreement, after research last year found the country was a channel for nearly one-quarter of corporate investments around the world that finally ended up in a tax haven.

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