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The ATO has put multinationals and other large companies on notice that it will be furthering its investigations into tax avoidance.
Arrangements that allow companies to avoid their tax obligations are set to be reviewed, including those covering offshore permanent establishments, incorrect calculations of debt capital, and GST.
Deputy commissioner Jeremy Hirschhorn said the first alert concerned arrangements where consolidated groups use offshore permanent establishments that have entered into intra-group transactions.
“Through these arrangements groups may be understating their true Australian income and claiming deductions incorrectly. The end result is double non-taxation, and in some cases, groups are even claiming further tax relief they’re not entitled to,” Mr Hirschhorn said.
“Taxpayers need to ensure the taxable income returned properly reflects the economic substance and significance of operations carried on, consistent with the arm’s length principle.”
The ATO has strengthened its efforts to closely monitor tax avoidance since the introduction of the Multinational Anti-Avoidance Law (MAAL) in December last year to combat tax avoidance by Australia’s multinationals.
The tax office revealed it has already begun investigating some cases of companies using these arrangements, and is reviewing structures developed by companies to minimise the amount of GST payable.
“We’re concerned some of these structures have been set up to avoid GST, which is clearly inconsistent with the underlying policy intent of MAAL and the GST Act,” deputy commissioner Mark Konza said.
“Companies found to have established these types of contrived arrangements will have to pay back liabilities and may face penalties of up to 75 per cent of tax owed.
“We’re also looking closely at intermediaries who encouraged these arrangements and may consider them promoters of tax exploitation schemes,” he added.
Mr Konza said the ATO is cautioning against the intentional miscalculation of debt capital for the purposes of thin capitalisation rules in a third taxpayer alert released today.
“In some cases, taxpayers are failing to include the value of a debt interest that’s been treated as equity for accounting purposes in their debt capital. As a result, the taxpayer’s adjusted average debt is understated, allowing them to claim more debt deductions than they’re entitled to,” he explained.
“Taxpayers need to consider the debt capital values used in thin capitalisation calculations carefully. If we think a taxpayer has undervalued debt capital then we will pursue compliance action. Taxpayers may be liable to penalties in addition to paying back any tax owed.”
“While most large companies and multinationals do the right thing, some are sailing too close to the wind with these manufactured arrangements. Taxpayers need to ensure they meet the spirit and intent of the law and pay the right amount of tax on income they earn here,” Mr Konza said.