This article by Ben Butler (The Guardian Australia 5 Dec 2019) tells about efforts in the Australian tax Office (ATO) to clamp down on the serious problem of multinational tax evasion failing to properly inform Australia about their taxable income, the taxes they pay, and how they use Australian entities to manipulate the system. It is based on an interview with Jeremy Hirschhorn, second commissioner of the ATO.
One of the Australian Taxation Office’s most senior officials has hit out at multinational corporations and other big companies for failing to properly inform the public about the tax positions of their Australian operations.
Speaking to Guardian Australia as the ATO prepares for its annual release of tax transparency data later this month, second commissioner Jeremy Hirschhorn said would be “wise” to improve the information contained in locally filed financial reports to include details of the operations of their Australian companies.
Hirschhorn also warned the big four accounting firms that the ATO was closely watching their behaviour, because it regarded them as systemically important because of their role in the tax system, as auditors of big companies and as suppliers to government.
Every year the ATO publishes revenue, taxable income and tax paid by large Australian subsidiaries of foreign multinational companies and big Australian companies.
However, the data is difficult to reconcile with accounting information published by some of the companies.
“The tax office is obliged to publish each year three numbers, which is of course a very limited perspective on a company’s tax performance,” Hirschhorn said.
He said a number of companies – generally those “with better Australian tax performance” – had also signed up to a voluntary tax transparency code that requires them to publish an annual report on the tax they have paid.
“Some disclosures under the VTTC are disappointing in that they have technically produced a report but do not meet the code’s intent,” he said.
“The warning signs are companies which focus on how much tax they pay on behalf of other people, how many excises or royalties they pay and how much they’ve invested in Australia, and down the back you might get a little aside about how much corporate tax they pay.”
He said other companies disappointed because they have signed up to the code but only published one report.
“The expectation was that companies would publish every year, and we are keen to see this,” he said.
A third set of very large companies, with worldwide turnover of $1bn or more, are required to file annual financial reports in Australia because they are regarded as “significant global entities”.
“The challenge with this measure is that if you’re a company that doesn’t want to shed too much light on your affairs, you can produce your global accounts, and of course they’re accounts which include your Australian operations, but they don’t tell the Australian community much about what you did in Australia,” Hirschhorn said.
“You meet all the requirements technically, but you’ve provided no insight into your Australian operations to the Australian community.
“What Australians are actually interested in is a full picture of your Australian operations at general purpose financial statement level, and the wise company would produce that.”
He said some multinationals were also struggling to deal with an ATO crackdown on inbound supply chains for products they sell in Australia.
The assault mirrors a successful one on the outbound version for Australia exports, so-called “marketing hubs” in Singapore used by the big miners.
“The industry was very happy with where things were, which in my view was systemic under booking of profits in Australia,” Hirschhorn said.
He said “push back” against the ATO’s new harder line was “entirely expected”.
“As the administrator, we’ve got to judge whether we’ve overstepped – at this stage we don’t think so and we’re confident that our supporting analysis holds true. It can’t be that large companies operate successfully in Australia over long periods, even decades, without making a profit here.”
Hirschhorn has also been tackling the big four accounting firms – Deloitte, KPMG, PwC and EY – by travelling to their offices with a blunt warning that they need to improve their behaviour.
For the past year, the ATO has been locked in battle with tax partners at the big four, especially over what it sees as the misuse of legal professional privilege to shield tax minimisation schemes from exposure.
Industry sources say the dispute is likely set to boil over into the courts in the new year in legal action the ATO is believed to be contemplating against a handful of practitioners with whom it has so far been unable to resolve its differences.
The ATO’s efforts have also come amid renewed scrutiny of the roles of the big four firms.
A parliamentary committee is currently inquiring into standards in financial audits, which have been consistently criticised by the corporate regulator and at the big end of town are dominated by the big four.
The role of the accounting giants has also been under scrutiny in large-scale corporate collapses and alleged frauds including UK outsourcing giant Carillion and Malaysia’s 1MDB scandal.
“If you are systemically important, in any of those but especially if you are systemic across multiple lenses, you must behave differently from being a boutique, which really can just live in a system rather than be an integral part of the system,” Hirschhorn said.
He said systemically important firms had to realise that they could not get away with the same actions as boutique firms because the system as a whole would respond to their movements.
“The corollary of that is that a systemically important firm brings great opportunities and strengths but must be more careful and wiser – some superficially successful businesses may fall outside the parameters of a systemically important firm,” he said.
He said it was difficult for big firms to realise this because of their roots “as amalgamations of smaller firms and add-on practices”.
“Traditionally each partner or small group of partners was given a high degree of autonomy and the firms were not necessarily very good at judging the risk-adjusted returns of those businesses,” he said.
He said the ATO’s message had resonated with managing partners.
“My impression is the senior leaders in the firms are thinking deeply on these issues, not just in their tax businesses, and it reinforces their efforts in managing their firms,” he said. “We are certainly seeing the senior leaders take concrete action.”