The Australian Taxation Office (ATO) has defended its approach to how it is cracking down on multinationals operating in Australia that may be avoiding paying tax, saying that due to certain policy choices, it often looks at the reason behind why a company's cash tax does not align with the accounting profit.
During a Senate Committee hearing on corporate tax avoidance, Jeremy Hirschhorn, deputy commissioner of public groups at the ATO, outlined that under the existing international framework model Australia does not have the right to tax the entire profit of an international organisation from its sales in Australia, which he said at the same time protects Australian companies from being slogged with high tax rates by other countries on profits they earn from offshore operations.
"We can only apply the transfer pricing rules that we have, which says Australia doesn't get to tax the entire supply chain, we only get to tax the bits that are due to function, assets, and risks in Australia," he said on Thursday.
However, under the circumstances of the framework, Hirschhorn admitted some multinationals have developed "very aggressive supply chains where it happens that a whole lot of value sits in low tax jurisdictions", and as a result the ATO is now "testing where companies have gone too far".
Hirschhorn reiterated that if tax avoidance is taking place, the ATO will be looking very closely into those companies.
"When we see tax avoidance and mistransfer of pricing we act very strongly," he said.
The ATO's comments were provided in response to a report released by GetUp on Wednesday that detailed how foreign multinational technology companies and large private Australian technology companies were getting away with paying an effective corporate tax rate of 7.6 percent.
The report, written by University of Technology Sydney academics Ross McClure, Roman Lanis, and Brett Govendir, stated that in 2013 and 2014, Australia lost AU$5.36 billion in corporate tax revenue from just 76 multinational corporations.
From the industry categories examined, technology companies were the second-worst offenders, paying an effective tax rate of 7.6 percent, following pharmaceutical firms that paid only 5.7 percent.
In efforts to stamp out tax avoidance by multinationals operating in Australia, the Australian Greens Party unveiled an 18-point policy plan last week, claiming it will raise at least AU$1.69 billion in additional revenue.
The policy proposed for changes to be made to tax law, public disclosure, enforcement, and global diplomacy.
"Whether you are Google or Chevron or Glencore, the time for paying your fair share starts now," said Greens spokesperson for Finance, Senator Peter Whish-Wilson. "When businesses don't pay their fair share of tax then governments can't provide the services we all rely upon."
Some of the suggested changes included reversing the Australian Taxation Office's staffing cuts in order to ensure there is a sufficient staff level to assure multinationals are paying what they owe, as well as establish a high-level tax recovery unit made up of the top 20 tax accountants and legal specialists working in the private sector.
The Greens also believes the tax disclosure thresholds need to be lowered for both private and publicly listed companies, so that companies that make AU$50 million of income in a year will disclose their tax activities.
At the end of last year, the Greens voted with the Coalition to pass legislation that resulted in multinational companies with annual revenue above AU$1 billion report income, tax, and transfer pricing arrangements to the Australian Taxation Office (ATO), and the penalties for tax evasion increased.
The new legislation, which came into effect at the start of the year, means multinationals need to provide the commissioner of taxation with information of transactions between each Australian-based subsidiary and its associated overseas enterprises, along with the amount transferred and the business' reasoning for its transfer pricing determinations.
The implementation of the new laws by the Australian government was part of recommendations that were made by the Organisation for Economic Cooperation and Development (OECD) from its G20-commissioned base erosion and profit-shifting (BEPS) project. Under BEPS, the OECD expects to be able to retrieve as much as $240 billion in lost revenue each year through dodgy tax practices across the globe, which it claims represents up to 10 percent of global corporate income tax revenues.
The Australian government has been working on cracking down on multinational companies operating in Australia that are avoiding paying tax.
Last August, it was revealed that AU$31 billion was funnelled from Australia to Singapore in a year by 10 multinational companies.
Prior to that, Apple, Google, and Microsoft admitted they were being audited by the ATO for tax avoidance, with Apple and Google having previously being called out by the federal government for employing the so-called Double Irish Dutch Sandwich method.