Base Erosion Profit Shifting

Analysis

Base Erosion and Profit Shifting (BEPS)

ATO action plan as Australia assumes G20 Chair

In 2014, Australia will become Chair of the G20 group of nations. A key area of focus for the G20 is achieving reform of the global corporate taxation system, and Australia in its chairmanship role wishes to play a leading role in driving this reform.

As the ATO steps up its local enforcement actions, it was timely for Deloitte and Macquarie University to co-host a session on BEPS with Mark Konza, Deputy Commissioner, Corporate Tax Erosion, as keynote speaker.

Central to Mr Konza's presentation was Australia's commitment to address the Base Erosion and Profit Shifting (BEPS) issue, and an outline of what the ATO is doing to support this work. 

The G20 Finance Ministers - including Australia's - have endorsed the July 2013 OECD BEPS action plan, and an improvement in the integrity of the global taxation system has been identified by the Australian Government as a key objective of its chairmanship. Mr Konza sees the role of the ATO as supporting the Treasury in its policy development role for the Government, and in particular:

  • Addressing BEPS within existing laws
  • Understanding the impact of digitalisation of the economy
  • Supporting policy development and
  • Supporting the re-design of the OECD's Exchange of Information (EOI) Common Reporting Standard.

Key elements of the ATO's current work and issues of concern

  • Corporate Tax Erosion - The ATO's studies have indicated that, in its view, some global models used by some MNEs are resulting in minimisation or elimination of tax from a source and residency perspective
  • Increased digitalisation is a concern - the ATO has observed that taxpayers are increasingly adopting e-commerce and digital solutions that are shifting part of the tax base from Australia. Mr Konza noted that it is the digitalisation of the economy, rather than the development of a separate 'digital economy' that is of the greatest concern to the ATO
  • Examination of e-commerce - The ATO is building intelligence on MNEs operating in the digital economy. The ATO has initiated a small number of audits focussed on e-commerce structures and transactions, with a plan to add more should they prove insightful into BEPS issues. The ATO is engaging with a number of Joint International Tax Shelter Information Centre (JITSIC) countries with the aim of developing more cooperative compliance approaches to better understand and address this issue
  • Participation in OECD discussions - Treasury and the ATO are active participants in a number of OECD working party groups focussed on BEPS-related issues, including those dealing with: the digital economy; tax conventions; tax analysis and statistics; the taxation of multinational enterprises; consumption taxes; exchange of information/compliance; and, aggressive tax planning
  • Launch of the International Structuring and Profit Shifting (ISAPS) program – ISAPS is a four-year compliance program that renews the Strategic Compliance Initiative from 2008, and that focusses on transfer pricing and "offshore marketing hubs" and "business restructures". The ATO has based its case selection for ISAPS on the 2012 International Dealings Schedule (IDS). Out of a potential pool of 170 cases, 66 cases have been identified for immediate review, including those with the following tax profiles:

    ◦Sale/migration of Intangibles (i.e. IP) offshore

    ◦Creation of offshore marketing hubs

    ◦Debt push down/excessive interest arrangements

    ◦Tax arbitrage via hybrid entities/instruments

    ◦Tax-effective supply chains

    ◦Base erosion via related-party leveraging

    ◦Transfer pricing outcomes that are inconsistent with arm's length outcomes

  • Interconnected strategies to better manage risks and opportunities - The BEPS compliance strategy will be improved by better data collated via reportable tax positions, pre-lodgement compliance reviews and International Dealing Schedules (IDS). The ATO is engaging with stakeholders to understand the position of taxpayers and advisers, industry and community groups, partner agencies and Government, and revising its consultation processes to achieve effective relationships with stakeholders
  • ATO's approach to existing compliance products - The ATO is renewing its active compliance program and building new approaches into audits and review products. This includes identifying new and current cases, reviewing Advance Pricing Arrangements (APAs), real-time products (e.g. pre-lodgement compliance reviews), and improving case selection. The ATO is reviewing its APA processes to reduce the cost of compliance, provide practical certainty and reduce the risk of double taxation. However, Mr Konza noted that if taxpayers enter into aggressive structures, their APA application may need to be suspended while other compliance actions are undertaken
  • Transfer Pricing Rulings - The ATO is stocktaking previous rulings advice to identify BEPS issues (e.g. permanent establishments, source, residency). The ATO is giving priority to the project renewing public rulings to support the introduction of Division 815, especially as regards documentation, penalties and re-characterisation
  • International engagement and transparency - The ATO is party to numerous international forums, including  the Study Group on Asian Tax Administration and Research, JITSIC, and the Global Exchange of Information Forum
  • Exchange of information and international cooperation - The OECD has been tasked with introducing a new global standard for the automatic exchange of information by mid-2014. In parallel, the G20 expects to share tax information automatically by the end of 2015. The ATO and Treasury have consulted with stakeholders on the new standard and intend to further consult on it and its implementation. Australia is exploring an intergovernmental agreement as part of the U.S.'s Foreign Account Tax Compliance Act (FATCA). FATCA is to be implemented by 1 July 2014, with exchanges occurring on 1 July 2015
  • Supporting policy development – The ATO is cooperating with Treasury on tax design and potential changes to treaties and taxation law.
Key areas of concern

Base Erosion Profit Shifting (BEPS)

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