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ATO slated oil giant Chevron, now ramps up hunt for multinationals

Chris Jordan, Commissioner of Taxation at the ATO, at the 2016 Self Managed Super Funds Conference, Adelaide Convention Centre, Adelaide, South Australia, Australia. Wednesday 18th February 2016. World Copyright: Daniel Kalisz Photo: Daniel Kalisz
Nanjing Night Net

The Tax Office says the more than $10 million legal cost of fighting global oil giant Chevron in court was worth every cent – even if the company appeals to the High Court – since the agency feels it now has firepower to chase hundreds of millions of dollars in tax bills from other companies using dubious tax schemes.

On Tuesday the Australian Taxation Office will release new transfer pricing guidance. This is aimed at helping companies with cross-border financing – in 2015 worth about $420 billion across the economy – meet their obligations.

These cross-border transactions involve potentially worth hundreds of millions of dollars in tax each year.

Deputy commissioner Jeremy Hirschhorn said “everyone is excruciatingly aware of the Chevron case”, which had loaded up debt with its US parent company in a bid to reduce its Australian tax bill.

This strategy ultimately proved unsuccessful when the company last month lost its appeal against the $300 million tax bill issued by the ATO.

Chevron’s global vice-president and chief financial officer Patricia Yarrington has called the Federal Court tax ruling a ‘huge disappointment’ and said the company is considering a High Court challenge.

Notwithstanding that, the ATO wants multinationals to be transparent about whether they have similar tax arrangements. ‘Red zone’ taxpayers

Mr Hirschhorn said it was important that multinationals pay the right amount of tax, given the “astronomically large” size of Gorgon and other upcoming investments by oil and gas and resource giants.

Chevron has almost completed the $US60 billion Gorgon LNG plant in Western Australia. The company is now targeting first production from the $US34 billion Wheatstone project, also in WA, by mid-year.

The ATO guidance asks taxpayers to rank themselves within six colour-related risk ratings starting from green “low-risk” and moving through to red “very-high risk” categories.

If the interest Australian subsidiaries pay on an inter-company loan is within 1 per cent of any borrowings made by the parent, then they are unlikely to be targeted.

But as the Chevron case highlighted, not all taxpayers have low interest bills. Mr Hirschhorn said in 2015, about 50 taxpayers had related-party interest expense of over $50 million. Of those 50, about 25 taxpayers had $100 million or more in interest expense.

“You can work on the assumption that this guidance is aimed at that 50,” Mr Hirschhorn said. “At least one-third of these taxpayers have already been assessed as being in the red zone.”

He said the ATO expects the number of taxpayers in the red zone to increase slightly as it continues to assess them. Less likely to cut deals?

While the Tax Office has in previous years cut deals with large companies, Mr Hirschhorn said that this time around it was expecting it would recover most of the $4 billion of tax bills being issued to big companies.

Already $2.9 billion of that $4 billion has been attributed to seven large companies.

“I would say from where I sit I am expecting that we will collect a higher percentage of those [$4 billion worth of tax bills] than we have in previous years,” Mr Hirschhorn said.

“We are more focused on key issues and cases like Chevron strengthen our hand in transfer pricing cases.”

Mr Hirschhorn said some of the seven are transfer pricing-related cases. For example, SingTel is fighting a $330 million tax bill from its 2001 Optus purchase which also involved intra-company financing.

Apart from Chevron and Singtel other companies named during evidence at the Senate corporate tax avoidance inquiry or in ASX statements as fighting tax bills resulting from ATO audits include Apple, Google, Microsoft, BHP Billiton, Rio Tinto and Crown. Related-party deals on the rise

He said while the number of related party-deals is on the rise, “I would expect that as the gas starts coming on line some of those oil and gas companies will start repaying some of that debt”.

In a submission to the Senate inquiry into corporate tax avoidance the ATO said in the 2014-15 income year, total related party loans totalled about $420 billion.

Almost half of these related party loans were in the energy and resources sector (worth $202 million). About one quarter of related party loans were in the oil and gas industry (worth $97 million).

The Tax Justice Network’s Jason Ward said related party interest payments in the oil and gas industry were estimated at $3.9 billion in one year.

“These schemes are blatant efforts to avoid tax obligations in Australia where the profits are earned,” he said.

The ATO’s guidance was “very encouraging” and had the potential to bring in billions in additional tax revenues from the world’s largest multinationals, Mr Ward said.

Tax Institute senior tax counsel Bob Deutsch said the guidance gives taxpayers a deeper insight into how Tax Commissioner Chris Jordan might regard their financing transactions. Can’t be stooged

Mr Hirschhorn said the ATO wanted multinationals to be more transparent but expected that unfortunately not all companies would willingly admit that they were in the “red zone”.

If that was the case, the ATO would use its information-gathering powers to force them to, he said, reiterating Mr Jordan’s line to the 2015 Senate inquiry into corporate avoidance that some “believe we can be stooged”.

Aside from interest levels other indicators resulting in red zone risk include the use of “hybrid financial instruments” and/or “hybrid entity structures”.

The OECD plan against multinational tax avoidance includes anti-hybrid rules that aim to deny duplicate deductions or deny where an entity is able to claim a tax deduction in one jurisdiction but not include an income amount in the other tax jurisdiction.

Mr Hirschhorn said Europe and the US were typically jurisdictions where hybrids were used.

The government noted the OECD’s work on hybrids in the May federal budget.

This story Administrator ready to work first appeared on Nanjing Night Net.

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