How the ATO and big business work together

Garreth Hanley:
This is With Interest, a business finance and accounting news podcast, brought to you by CPA Australia.

Jenny Wong:
Welcome to With Interest. I'm Jenny Wong, and in today's show, we're speaking with Rebecca Saint, Deputy Commissioner of Public Groups and Client Experience at the Australian Taxation Office. Rebecca also plays a key role in the Tax Avoidance Taskforce where she leads the large market strategy along with the compliance and assurance programs for public and multinational groups.

We'll be talking about the state of the large business market, and in particular, unpacking some of the themes from a recent speech at the CPA Tax Forum in August. Rebecca, thanks for joining us.

Rebecca Saint:
Hi, Jenny. Thanks very much for having me here today.

Jenny Wong:
To start off, how would you describe the current state of the large business market in Australia? From the ATO's perspectives, what are the key trends you're seeing in terms of compliance, engagement and the overall relationship between large businesses and the tax system?

Rebecca Saint:
Great timing for this question. If we step back and we look at the compliance of large business over the last decade, we have seen steady improvements in voluntary compliance over the 10 years. That does coincide, of course, with when the Tax Avoidance Taskforce commenced and I think there is a very strong correlation between that increase in performance and also the activities of the Taskforce. We are now seeing for the '22-'23 year that 94.1% of taxes paid on lodgment of returns by large corporate, that then closes to 96.3% after ATO compliance activity.

That means that the gross gap, so how much we're missing out on lodgment is 5.9%. That is the first time that we've cracked into the 5s, making it the best result on lodgment that we've seen since we've been estimating those gap results. So we're really happy about that. Once you look at the net gap, the net gap's 3.7%, which also is one of the best results we've had since estimating gap. So of course, you've got to look at the trend of tax gap. You can't just look at one year as a standalone, but we're very pleased by the results that have been announced for that year.

So we see the top 100 ratings continue to improve. 64% of taxpayers have now achieved high assurance and then a further 19% have achieved medium assurance. This is really important because this provides us assurance over 88% of the tax paid by the top 100 population, so we've got high levels of coverage and high levels of confidence about the tax paid by that population. We're also seeing the top 1,000 taxpayers, their assurance ratings are increasing. 26% are achieving high. 63% are achieving medium. That gives us assurance over 94% of tax paid by this population. Again, when you've got a population paying $29 billion, those results are really good.

We're continuing to see a small number of disputes with taxpayers, including in the top 100 and top 1,000 populations. Profit shifting continues to be a key feature in that audit process, again reflecting about 70% of our audits. So I think, Jenny, if I step back and look, I think, overall, the vast majority of businesses or large businesses are actually doing a lot in terms of meeting their compliance obligations, but also in demonstrating that they're meeting those obligations to the ATO and these are very positive outcomes. We do continue to see some disputes, but that can be expected and I'm sure we'll touch on that a bit later.

Jenny Wong:
Rebecca, you highlighted an ambition to improve the large market gap. Given the substantial investment in the Tax Avoidance Taskforce and law changes of the past decade, what new strategic initiatives are anticipated to further reduce the remaining tax gap and achieve these ambitious targets beyond the current trajectory of improvements?

Rebecca Saint:
Yeah, look, we're pretty happy with the improvements that we have seen. Obviously, we've had steady improvements over the last decade. We're not expecting any major strategic shift over the next 12 to 24 months. We did just reshape and reframe our justified trust programs. We're really focused on embedding those now over the coming period and seeing whether that can help us achieve the closing of those gap figures.

The reshaping of the top 1,000 program where we've been able to provide greater tailoring based on earlier assurance ratings and also focusing predominantly on the new big stuff will allow us to redeploy resources to other areas to deal with other challenges.

Similarly, the top 100 changes that we've made focusing on real-time engagement, bringing forward those conversations to provide tax certainty before lodgment, really good feature for both the ATO and taxpayers, should minimise compliance investment from both parties and also make sure that both taxpayers and the ATO have a level of confidence before those returns are lodged.

Jenny Wong:
Rebecca, you mentioned in the speech the concept of backslide risks, which suggests a potential deterioration of compliance if resources were reduced. With projections indicating a return to 2013, '14 levels of voluntary compliance, you noted in your space absent a change in the structural settings that incentivize tax minimization for large business and multinational groups, we can expect the level of investment in resourcing of large market compliance to remain. Are you seeing evidence where this backslide risk has occurred, and can you further elaborate?

Rebecca Saint:
Well, I think the best place to look is, "Well, what are we observing now?" We've already touched on the improvements in tax compliance and the reduction in the gap. That's largely through the efforts of the Tax Avoidance Taskforce and the uptick in monitoring and coverage that's been undertaken through those activities. Of course, corporates have had to respond to those ATO activities and really invest heavily in their tax functions and demonstrating that they're meeting their tax obligations. It's that connection and responsiveness to ATO activity that really grounds some of the thinking behind this backslide risk.

So whilst we've seen improvements because of ATO activity, we actually think that the reverse would be true too. That would be that, "If the ATO were to do less monitoring, what would be the response of corporates?" Now, that could really depend of course on the particular corporates, but I think, in some corporates, you potentially see a de-investment in tax functions in response to less ATO engagement.

Now, this could lead to more errors and possibly also changes in the tax profile or posture of the corporation. A small number of companies may actually choose deliberately to take greater tax risks, and if we were to decrease monitoring, the risk with this is then, if a few start to take more risks around their tax profile and the fact that they might not get detected by the ATO, it does run the risk that tax then starts to become a bit of a competitive edge and proliferation becomes much more of a problem again. So it's those reasons that we think, "Well, if we were to move away our resourcing, you would see this decline over time in tax performance."

During COVID, we did see a very small number of large business exploit some of the administrative tax settings that the ATO was offering to help businesses stay afloat at the time. We did see a small number actually take advantage of those settings for their financial gain, not because they actually needed them for financial survival. So I think that combined with the broader conceptual thinking around the way their tax gap works makes us think that there would potentially be a small number that would take advantage of the decrease in monitoring if that were to occur.

Jenny Wong:
The strategic pivot in the top 100 program towards real-time engagement and pre-lodgment certainty aims to build a stronger more collaborative relationship and reduce unnecessary compliance burden. How would the ATO measure the success of this shift, particularly in demonstrating tangible benefits for businesses in terms of reduced retrospective adjustments or faster resolution of complex tax matters?

Rebecca Saint:
Look, I don't think there's one measure here at all. I think the first and most important one is, can we actually maintain the high levels of confidence we have in tax compliance of large corporates, even though we're stepping back and refocusing on only those new and significant events during the year? I think other measures that I'd be looking to, are we looking at the right things and at the right intensity? How many issues are actually being resolved pre-lodgment? How many are getting escalated into specific reviews? I think, how much time our post-lodgment reviews are taking will also be an important one. Of course, this is about trying to reduce the effort after post-lodgment, so I'd really want to see a decline in the time taken to be able to close those out.

There will be some upside for business, of course. I think with agreed disclosure frameworks, knowing what you need to provide the ATO and when is critical for business, provides them certainty and helps them plan throughout the year. I think being able to understand ATO views prior to lodgment of the return, means there's no surprises, and also knowing what additional information you might be required to lodge around the time of your return as well will be helpful for that planning perspective.

I think the currency of the interactions has to help both organisations as well. We all know how difficult it is to do those audits or reviews of transactions that happened five, six years ago. Well, under the real time approach, that really shouldn't be happening anymore. It should be very much close to the time of the event. We would hope and expect that information then is much more available as the people that are involved in those changes or transactions should still be in the organisation. Information should be readily accessible. Hopefully, that means that we can get what we need much sooner and also it causes a lot less pain for taxpayers having to dig things out of their archives and systems.

Jenny Wong:
Rebecca, you mentioned that disputes are a feature of a good tax system and noted that profit shifting still dominates 70% of the audit activities and also minimisation of double tax exposure is an increasing focus area internationally. However, some may suggest there is a perceived increased use of anti-avoidance provisions in most large audits, noting that they are no longer considered provisions of last resort and make certain dispute resolution mechanisms like independent reviews and treaty relief unavailable. How does the ATO reconcile its view of disputes as a positive feature with concerns that its current application of anti-avoidance provisions may be hindering effective and accessible dispute resolution for taxpayers?

Rebecca Saint:
Tax is complex. I think certainly some of the transactions and business models that we see are complex as well. I think when considered against that backdrop, I don't think it is surprising that from time to time, we have different views of the way the provisions operate than what business might. I do agree that the number of arrangements that we see that we have concerns involve profit shifting or tax avoidance. I do agree that those numbers could potentially undermine the system or confidence in the system, I should say. However, with all parts of the tax act, reasonable minds can differ about the application of these provisions and I think we need to bear that in mind.

When it comes to deciding whether Part IVA or the general anti-avoidance rules should be considered a case. We don't make those decisions lightly. Certainly, teams are led by where the evidence takes them. They'll have a risk hypothesis. There'll be many provisions in the act that they might be considering and the general anti-avoidance rules are one of those elements that they'll be considering.

Ultimately, it will come down to what they think the evidence tells them and whether they've made the elements of the provisions out. I do think the ATO has definitely shifted in terms of when we might consider Part IVA. Historically, if we thought it was a transfer pricing issue, we would just look at transfer pricing provisions. I think though if you look at some of the cases that have gone through the courts, maybe we've rethought that approach and actually looked at all the provisions equally in terms of what might be relevant rather than doing a bit of a hierarchy of them in terms of selection.

The other thing that's worth noting, and this goes to your question around resolution, Jenny, a couple of things that are probably worth calling out there, there is quite the process to apply Part IVA in an audit case. Case teams have to go to the GAAR panel. They get advice from the GAAR panel about whether the case is one to which Part IVA could apply. Now this panel is made up of some very preeminent tax experts including former federal court judges, so this is quite an intensive exercise for case teams to actually have to go through. It's typical in our cases as well that taxpayers present to the GAAR panel, and often, with the benefit of their senior counsellors. So it is quite an intense exercise and we don't take the application of Part IVA lightly because of that.

It's because of this intensive engagement that happens in deciding to apply Part IVA, why these cases don't go through processes like independent review. It'd be really odd just to have a case officer in our review area challenging some advice that had been given by a GAAR panel given the process of what I've just described to you and who makes up that panel. So just the independent review process is the panel. You don't really need to have that separate standalone independent review that other matters might be eligible for. Of course, taxpayers still get their objection rights as well, so they get an independent review through that objection process ultimately in any event.

Similarly, Part IVA doesn't stop us from resolving cases. We settle cases when Part IVA might be in play. That is possible. You are very true that although the cases can still go into MAP, CAs are unable to compromise in the MAP process where Part IVA is in play, but that's not all of our cases. We've got many cases that go through MAP, which suggests that Part IVA actually isn't really inhibiting our ability to run MAP cases. And there is, of course, a domestic pathway that allows taxpayers to dispute their Part IVA assessments if and when they receive those.

Jenny Wong:
Rebecca, some in the large business community feel there's a disconnect between the ATO support for APAs and MAPs and the way these mechanisms are applied in practice. Concerns have been raised that the ATO seems reluctant to pursue outcomes, particularly arbitration and that its approach to expanding the scope of Australian source income such as redefining what constitutes a royalty risk, unsettling the balance of taxing rights agreed under the treaties. How do you respond to these perceptions and how is the ATO working to maintain trust and alignment with international partners in this space?

Rebecca Saint:
Maybe I would deal with MAPs first. So you're right, many of Australia's treaties now include a mandatory arbitration clause. I actually don't see that as being a negative for Australia. Like I just mentioned, we have many cases in MAP and we see MAP as a great way to resolve double taxation issues relating to disputes. We've actually even got a really good track record of resolving disputes that go into MAP, both outbound and inbound without recourse to arbitration. I think the introduction of the arbitration clause, what it's really done has focused the minds of tax administrators to try and actually jointly resolve MAP without the need to go to arbitration.

From the conversations I've had with colleagues around the world that have had experience doing arbitration, it's costly, it can be time-consuming, and of course, it brings a whole lot of uncertainty into the process for tax administrators as well. So you really actually are quite motivated to come to a mutual resolution of the issue rather than go through this lengthy process and neither of you sure about what the outcome is that's going to be delivered. And of course, even after that outcome is delivered, it's not clear that the taxpayers actually even got to accept the outcome anyway.

So I think arbitration clause, although we've yet to use it in Australia, I think it has had a really positive effect on really bringing the tax administrators together to be able to resolve things very quickly and I think that's a win for taxpayers there as well. It's probably worth noting as well, Jenny, that Australia is actually pretty good at resolving MAPs globally, and in 2023 we actually won an award for MAP timeframe. So that just further supports the comments that I've made around wanting to resolve things efficiently without the need to further the processes.

If I turn then to the APA programme, following the review couple of years ago, we've really refocused that program on bilateral and multilateral APAs rather than unilaterals. That's really consistent with what we've seen globally and also what we're hearing from business about what they actually want. They want the double tax certainty. Typically, they want both jurisdictions to be part of that agreement. Now, we have experienced some challenges when we rolled out some of the recommendations from that review. Really around the collateral issues is probably where we've seen most of the tension and what the ATO would do in response to unidentified collateral issues.

The ones that we found trickiest are the ones that you've mentioned, that are structural issues in an arrangement. So that could be where we've got concerns that there's an embedded royalty. That could be where it might be that there might be a permanent establishment in Australia in some cases. It's how we deal with those structural issues, I think, is the bit of noise that we hear in the market.

Not everybody has those issues. We're still seeing APAs go through, get accepted into the program and be successfully resolved, but I think there is a minority where we're saying, "Well, actually there's some real structural issues here that we can't just price in an APA, right? We're not going to be able to agree with the other jurisdiction if we have a different view over what the structure should or could be," and that's really the pocket that was saying, "Well, we don't think it's beneficial or appropriate to let you into the APA program at that point in time until those structuring concerns have been addressed."

Sometimes, taxpayers can address those themselves and change their structure or engage with us about their views. Sometimes, we'll go and review or conduct further investigations around those structures and provide a move through those processes. Like I said, don't think that's the vast majority though. We still do want to see the numbers tick up in that APA program. I think, as we've got better about making decisions faster about when we think a collateral issue can't be resolved through the program, we're hoping to see that their flow of arrangements back into the program will increase again.

Jenny Wong:
I understand the ATO is significantly investing in managing dissipation risks through its private capital strategy and focusing on exploitation of multiple entry consolidated rules, having obtained $1.4 billion in security in a handful of cases. What specific trends or characteristics of these arrangements make them particularly challenging to investigate and what guidance can be provided to the market regarding acceptable commercial rationales versus tax motivated structures?

Rebecca Saint:
Yeah, look, we've been looking at MEC groups for some time. We've got taxpayer alerts out there that actually detail the types of structures or issues that concern us. So there's certainly a lot of advice out there for taxpayers already on MECs about where ATO attention might get attracted. I think when we're really investigating these issues, they're really about getting to the heart of the facts, really about understanding the commercial rationale. Typically, when you step back and you think about, "Well, what's that issue here?" it's like we are trying to understand whether there is a genuine commercial rationale underlying the transaction or whether the transaction's really about achieving a tax outcome such as avoiding capital gains in the context of a MEC group.

That is going to come down to the facts and the type of information and evidence we need to establish that can be really broad and hard to get, so we need to get to the substance of the arrangements. So we'll be looking for things beyond agreements, beyond transaction documents, beyond what somebody calls the transaction or says it's for, really trying to understand through things like emails, interviewing staff and sometimes the other parties involved in transactions to really understand why the transaction might have been done or why it might have been done in a particular way.

The breadth of that information can be thousands and tens of thousands of documents that we're looking for. So the scale can be large. Information nowadays, often offshore as well, typically global transactions, particularly when you're talking about MEC and private capital transactions, some of that information will always be offshore. In fact, a lot of it is. That means that, for us, that's a question about our offshore information notices being issued. They take longer to get the information back, and indeed, business don't even have to, not compel to provide the information under those notices, although there might be some implications for litigation down the track. So because of that, it can be much more difficult for us to get everything that we're seeking and indeed to get it all in a really timely fashion.

So I think, as I said, it's really the scale and breadth of what you're trying to do. It's being able to access the information and people who are often not in Australia that can make it really quite challenging.

Jenny Wong:
The ATO is consulting on exemptions for public country-by-country reporting with a high bar requiring businesses to demonstrate harm, outweighing the public interest in transparency. What specific types of harm or detriment would be considered sufficient to meet this high bar and what kind of evidence will businesses need to provide to substantiate such claims ensuring a fair and consistent application of these exemptions?

Rebecca Saint:
We are setting a high bar that's really clear from the practice statement that we've been consulting on. We are getting a lot of feedback around whether we've set that bar too high, which of course, we're considering very carefully. I think it really depends whether business is seeking full exemptions or partial exemptions. I think, getting a full exemption, that bar is much higher because remember, it's a permanent deferral. That means that that information will never be published and no information will be published for that particular year for that business. As opposed to a partial exemption where you might just get an exemption for a few data points, again, that's a permanent exemption for those data points, but at least, you're getting some transparency around the business for that particular year.

So I think it's going to be much harder to get full exemptions over partial exemptions. I think really what we want to see is we want to see taxpayers have to be able to tell us or show us really, not just tell us but show us, that there's going to be a significant commercial harm to them, that revealing the information could materially disadvantage them in the marketplace. It could be that there's potential threats or security of individuals. National security risk is another one that we've been looking at deeply as well. I think the most important message that I would say to your listeners though is just make sure that you've got the evidence supporting the claims and this really goes back to the show-us point. You really need to show us how particular data points can lead to the harm.

So you can't just say, "All of this is bad because somebody will be able to work out what our profit margins were," nobody's saying it that generically, by the way. I'm just using that as an extreme example. You can't just say, "People will be able to work that out. That's not good. I'll lose my competitive advantage." You actually need to take us through the data points and say, "Well, how could somebody actually use those data points and how does that actually give rise to the harm that you're purported to exist?" So it can't just be speculative. It has to be something that realistically could occur and it has to be really supported by the evidence that you put in front of us.

Assessments of legal opinions or third-party expert assessments are some things that businesses have provided us with, but it's really going to depend on what the particular harm is as to what the appropriate evidence at the time will be that we'll need.

Jenny Wong:
Rebecca, looking ahead, the ATO highlighted productivity improvements at NTLG, including modernising assurance programs and reporting obligations for large businesses to create a more tailored experience. Can you share what that modernisation might look like and how large businesses can expect their interactions with the ATO to change over the next few years?

Rebecca Saint:
This is a really good question. I think we're really just at the start of this for large business. We've seen the ATO over the years invest really heavily in the way that we interact with the individuals when they're lodging their returns and also with small business and we've got quite a lot of digital service offerings for both those sectors and we continue to see that improve going forward as well. I think large business though, we really haven't thought as deeply about, what does the future look like in terms of lodgment of returns and forms. And I think there's a real opportunity for us to come together with business about how we think about, one, the data that we obtain and that the ATO actually needs, but also how we might go about getting that data.

I know many businesses, if not, I would be surprised if it's not all businesses, really themselves thinking about how they automate and use AI themselves within their organisations and also within their tax functions. I think there's a real opportunity for us to understand, "Well, what is business itself doing and how can the ATO actually leverage those activities to get data much more seamlessly, much faster, much closer to the time of event?" So we'll be looking to work with our members of our large business stewardship group over the coming year to really start to think about and unpack some of these very difficult questions and hopefully be able to shape what that future looks like.

Jenny Wong:
Rebecca, large businesses and multinational groups consistently raise concerns about the red tape created by overlapping and duplicative tax obligations, so for example, multi-layers of transfer pricing documentation, private-public CbyCR, RTP schedules, IDS disclosures or requiring similar but slightly different data. At the same time, businesses are dealing with complex integrity rules, FBT costs, significant penalties. From a productivity and modernisation perspective, how is the ATO thinking about streamlining these obligations to reduce duplication, reward transparency, and deliver more risk-based or an efficient compliance experience for large corporates?

Rebecca Saint:
We started this session talking about the compliance of large business, the importance of us having an extensive coverage and monitoring program for large business. I talked about the important role that that plays in maintaining those high levels of compliance. So I think we do need those things to continue, but we also recognise the compliance impulse that many businesses are dealing with.

We see that through the assurance programmes and both through the form reporting that's required throughout the year. I think we've talked quite a bit today about the changes we've already made to our assurance programmes, really trying to maximise the benefits of those high assurance ratings, whilst also limiting the resource impulse on both organisations.

Now, whilst we've really tried to streamline that, so we look at what's most important and impactful, it starts to feel a bit like a risk program, but it's not a risk program. It is still very much an assurance program and it's still built around the pillars of justified trust. We're just achieving it in a way that really leverages those assurance ratings from taxpayers already. So as I've said a couple of times, we'll continue to embed that over the next year. I think the form reporting is really the big challenge for us to work with the LBSG and stakeholders such as the CPA going forward. We recognise that there is duplication across some of those forms.

We've already taken steps to try to take away some of that duplication. So many businesses would've seen in the RTP schedule this year, you don't need to answer questions if you've supplied the information in your IDS or your local files. So instead of having to redo it, you just merely cross-reference that you've already provided it. So we're really looking for those opportunities to decrease the level of duplication.

We've also got our large business stewardship group members. We've asked them to put together a bit of a list for us that really outlines where they're really seeing the highest level of compliance costs, where they're seeing duplication through the forms and to bring that back to us. We'll use that as a bit of a tool to help us scope out what our next steps might be early in the new year.

There's really fundamentally two things that we're looking at, "What data are we getting and what do we really need?" Some of it, we really need. The amount of international dealings that we observe, big business being involved, in particular related party dealings means that we've got this real strong need for lots of information around international transactions, but there might be other areas that perhaps we no longer see that same tax risk. So that's the type of assessment we need to have a look at next year, "What are we getting? What do we truly need in terms of what we see as tax risks in Australia today?" Of course, the second part is, "How are we’re actually getting the information and is there a better way for us to get the information?"

So I'm looking forward to those conversations next year. I think there's quite a bit of scope for us to really think about where we might be able to remove some impost, but then also to share understanding about where we still maintain and need information, helping business better understand why it is we actually need that information and what we're doing with it.

Jenny Wong:
Well, thank you, Rebecca, for sharing your insights into how the ATO is working with the larger business market.

Rebecca Saint:
Thanks, Jenny. Pleasure chatting to you.

Jenny Wong:
For our listeners, you'll find links to the relevant resources and more information about the ATO's large market strategy in the show notes and don't forget to subscribe to With Interest and share this episode with your colleagues and friends in the business community. Until next time, thanks for listening.

Garreth Hanley:
You've been listening to With Interest, the CPA Australia podcast. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. And we hope you can join us again for another episode of With Interest.