The ATO has provided a comprehensive update on its latest compliance projects and focus areas aimed at mitigating corporate tax avoidance.
Manipulation of thin cap rules
The ATO is investigating the possible manipulation of the thin capitalisation rules by 27 taxpayers in relation to asset revaluations totalling $78 billion.
The ATO had anticipated the amount of debt deductions disallowed would increase as a result of the safe harbour debt test thresholds reducing from 75% to 60% in 2014. However, it suspects that some taxpayers have responded by undertaking revaluations of certain assets to increase the value of their total assets. This has limited the impacts of the safe harbour thresholds reductions.
The ATO is investigating arrangements that result in the migration or artificial allocation of intangible assets, and rights in those assets, to offshore related parties by multinationals. These arrangements present a risk as multinationals implement non-arm's length arrangements that:
- migrate or artificially allocate Australian generated intangibles to offshore related parties;
- involve the use of intangible rights or assets, where the value of these rights and assets is derived from, or maintained by, the activities and operations of Australian entities – particularly research and development (R&D) activities; and/or
- dispose of or allocate Australian generated intangible assets to offshore related parties and subsequently grant rights in these assets back to Australian entities.
The ATO's main focus in the oil and gas industry is on the treatment of labour costs (revenue versus capital) associated with the construction of high-value assets. The ATO is seeing taxpayers challenge the capital treatment of these costs. It is also concerned about the treatment of other "general" indirect costs associated with the construction of assets.
The ATO will examine arrangements to determine whether Australian subsidiaries and their offshore related parties are operating under arm's length conditions, such that the income declared reflects the economic contribution of the Australian operation to the Australian and global value chain. The ATO has refined its tax risk concerns to reflect the intricacies of the Australian pharmaceuticals industry and its subdivisions; for example, patented pharmaceuticals, generic pharmaceuticals, medical devices and over-the-counter vitamins and supplements.
The ATO is also working to identify tax professionals and advisers who are promoting unacceptable tax planning. It is taking steps to deal with some advisers, including those who seek to cloak the promotion of unacceptable tax planning via inappropriate claims for legal professional privilege.
In the e-commerce industry, the ATO finalised 11 cases in 2017, issued amended assessments worth over $1 billion, collected tax of over $800 million and estimated future company tax revenue effects of over $500 million. It is still looking at another 20 major e-commerce players.