Corporate tax compliance expectations post-COVID: ATO speech

The ATO has reminded company executives to consider the potential reputational impact from their tax decisions in a post-COVID world.

Speaking at a CFO Live event on 29 October 2020, Jeremy Hirschhorn, ATO Second Commissioner, Client Engagement, said community expectations in relation to corporate tax compliance have been sharpened during COVID-19. In particular, Mr Hirschhorn said companies that have accessed Government economic support measures need to be mindful that the community increasingly expects large corporates to improve their approach to tax.

The line “we follow the tax laws in every country in which we operate” will play even less well when aggressive tax behaviour spills into the public domain, particularly in times of budget deficit, Mr Hirschhorn said. “Yes, follow the tax law, but also follow the spirit of the law”, he added.

By way of example, Mr Hirschhorn said there was nothing explicit in the rules for the stimulus measures that required companies to stop paying executive bonuses or increasing dividends. However, there was a quick community backlash for those companies that appeared to be exploiting the spirit of those measures.

Loss carry-back and outright deductions: ATO warning on schemes

The ATO also warned CFOs not to use artificial mechanisms to take advantage of the 2020-21 Budget measures that provide for the carry back of losses and outright deductions for capital assets. Mr Hirschhorn said these measures should be embraced, but for the purpose for which they were introduced. Invest in new plant, upgrade facilities, claim a tax offset and reinvest the money into the business and jobs, he said.

The ATO will be watching for structured transactions where the plant and equipment is not actually used in the business, intellectual property migration with no change in real activity; and asset swaps with related parties. Do not attempt to artificially shift profits (and losses) around a group to access the loss carry back, Mr  Hirschhorn said. Similarly, accessing the loss carry back to support executive bonuses, increased dividends or to repatriate cash to offshore related parties is likely to be viewed poorly by the community.

Areas for CFOs to improve tax compliance status

Mr Hirschhorn acknowledged that it has been hard in practice for CFOs to truly understand where their company sits in the tax behaviour spectrum. However, he suggested some practical ways for CFOs to understand where their company stands. For example:

  • KPIs for tax team – ensure the KPIs for the tax team are driving desirable behaviours. Mr Hirschhorn said “achieving/maintaining a high ATO assurance rating” is increasingly used as the KPI instead of the historical focus on “tax savings” or “low effective tax rates”;
  • tax governance framework – ensure there is a board-endorsed tax governance framework that is “lived” in practice. ATO reviews show that most organisations have a tax governance framework but the ability to demonstrate that these frameworks operate effectively in practice has been varied. Governance and systems failures are the single greatest reason for significant GST audit collections in the large market. Accordingly, the ATO has also published a best practice governance guide testing and assessing GST governance, systems and controls;
  • reconciliation of financial statements – embed processes that allow the easy reconciliation of financial statements and tax. For global supply chains it is important to understand where profit is booked around the world for tax purposes. The ATO says that using a tool like the effective tax borne allows the identification of the economic group’s worldwide profit from Australian-linked business activities and the Australian and offshore tax paid on that profit. This is particularly relevant to substantiate that the entity is not engaged in transfer mis-pricing;
  • GST reconciliation with financial statements – the ATO’s GST Analytic Tool (GAT) allows financial statements to be reconciled to the BAS, and identify and test the appropriateness of variations or differences. The ATO notes that GST systems are often “bottom up” and prone to omissions or double counts when links break or underlying systems change. The ATO considers that companies without a “top down” sense check have little protection against this sort of error, often with very large impacts when identified years down the track;
  • peer comparisons – understand where the company sits relative to its peers. Each year the ATO writes to the Top 100 largest groups to advise them how the ATO perceives their tax risk profile relative to their peers. The ATO also publishes data that allows a comparison against peers, both top 100 and top 1,000;
  • reportable disclosures – understand reportable disclosures and how they stack up against expected norms for systemic corporate tax risks. The ATO has observed that organisations with high risk disclosures will often downplay the significance of these disclosures by assuming that everyone is just like them. Typically, Mr Hirschhorn said this is the result of the personal experience of key tax personnel being narrower than they (or their organisation) appreciate. The ATO said it will shortly publish the Reportable Tax Position Insights Report which will allow companies to better understand their ratings relative to their peers. The report will show that it is not normal or ordinary practice for large corporates to have high risk arrangements, or to be involved in arrangements of concern;
  • tax infrastructure – get a proper level of assurance on the company’s tax “infrastructure”. In most groups, the ATO says there are some tax consequences which are so material, they should be viewed as part of the entity’s corporate “infrastructure” (see below);
  • resolving disputes (including legacy disputes) – tax is complicated and the ATO accepts that there will be disputes. Open communication, engagement and transparency creates space for the parties to work better together to resolve differences. Even in circumstances where resolution is not achieved, the ATO says the issues in dispute can be refined and narrowed. Tricky delay or obfuscation tactics by taxpayers and advisors will generally only lead to a more intense and uncomfortable experience, Mr Hirschhorn said. The ATO notes that legacy disputes are often the result of disputes being “captured” by the process and key personnel being reputationally locked into positions. The ATO considers that CFOs can provide a circuit breaker to settle these disputes and provide certainty for both past and future years;
  • legal professional privilege – the ATO says it supports the principle of LPP but it has seen too many instances where privilege has been claimed for obviously non-privileged documents. The ATO is developing an LPP protocol to help provide an objective benchmark for the conduct of tax disputes;
  • opt for a wise adviser, not a “clever” one – the ATO says alarm bells should ring loudest when a “clever” adviser tells you that your tax manager is too conservative. Even more dangerous is where an adviser promotes a tax driven transaction that is claimed to be supported by a suite of potential commercial rationales. Instead, the ATO suggests looking for a “wise” adviser to help make fully informed decisions having regard to more than just technical or legal risk; and
  • transparency – the ATO says companies which have achieved a “high assurance” rating from the ATO should tell their investors and employees to show that they are doing “the right things” and a “good corporate tax citizen”. For groups with complicated Australian operations (particularly where there is limited requirement to prepare general purpose financial statements (GPFS), and hence there is an obligation to lodge GPFS with the ATO), the ATO encourages companies to prepare notional Australian stand alone GPFS and provide them to the ATO for on-provision and publication by ASIC.

In terms of a company’s tax “infrastructure”, Mr Hirschhorn said it still surprises him how many large companies rely on an advisor’s “more likely than not”, “reasonably arguable” or “should” opinion which at most only provides penalty protection if it all goes wrong. Rather, Mr Hirschhorn recommends obtaining assurance commensurate with importance, for example, through a private binding ruling. And if an advisor says that it is too dangerous to expose the issue through a private binding ruling process, this is probably even more of a warning sign. It is an unambiguously bad idea to rely on non-detection by the ATO, Mr Hirschhorn said.

This article was originally published in Thomson Reuters’ Weekly Tax Bulletin.

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Stuart Jones is a Senior Tax Writer with Thomson Reuters and a respected commentator on all matters superannuation. Stuart is the author of the Australian Superannuation Handbook and contributes extensively to other Thomson Reuters’ services, including the Australian Tax Handbook.

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