The undesirable consequences of tax anti-avoidance measures

30 September 2016

Anthony Hayley |

The recent plethora of tax anti-avoidance measures aimed at multinational enterprises not paying their fair share of Australian tax is to be broadly welcomed. The measures are designed to attack the most extreme cases of tax avoidance where artificial structures, very broad interpretation of accepted principles and paper thin legal agreements were, and still are, being used to ‘dodge’ tax obligations. Given the prevalence of this type of activity over a long period it was inevitable that the G20, Organisation for Economic Co-operation and Development (OECD) and domestic governments would take action.

What action has been taken?

The response by regulators has indeed been swift, ranging from the OECD's Base Erosion Profit Shifting (BEPS) Action Plan, to more unilateral domestic measures such as Australia’s Multinational Anti-Avoidance Law and Diverted Profits Tax, and more recently ATO guidance focus on the perceived abuse of offshore hubs in low tax jurisdictions.

Australia has been at the forefront of this crusade, adopting these measures with rigour. The objective of such action is clear - to bring the large multinationals to account. The Australian Taxation Office’s (ATO) recent legal case against Chevron and its offshore funding arrangements (with millions of dollars of interest deductions at stake) is a case in point. Indeed, earlier this month the ATO even raised a $1 billion assessment, plus penalties and interest, on BHP Billiton for its use of an offshore marketing and sales hub in Singapore.

The missing piece of the puzzle

Despite this action, there remains a vital question that has not been answered. What is the impact of these changes on the engine room of many local economies – the small to medium sized subsidiaries of large multinationals?

Many of these companies are blissfully unaware that the measures regulators have put in place to catch "significant global entities" (companies with turnover of greater than $1 billion) also apply to them, regardless of whether their parent company is subject to the rules.

What has started as a well-intentioned campaign against the ‘big fish’ has had a range of unexpected and undesirable consequences. It is not the big end of town, with its deep pockets that is (or will) feel the real impact of these measures the hardest. Instead it is the middle market, the entrepreneurs, the start-ups. These types of companies, who are eager to expand into new markets, access new skills, and lower their costs of doing business are the ‘little fish’ being swallowed up by measures designed for much larger players. The result is that companies already burdened by significant operational and compliance costs, now have additional concerns to face, including serious reputational risk.

What’s at stake?

Over recent weeks, we have been talking with many of these ‘little fish’ in Brisbane and Queensland and it is frightening how many clients are totally unaware of the current situation and the potential consequences. Put simply, many are completely unprepared and at risk of non-compliance.

The regulations applicable to Australian companies came to effect on 1 January 2016 and reporting compliance and associated documentation is due imminently. Failure to comply could potentially lead to fines of up to $450,000, regardless of a company’s size. In of itself, before considering the additional costs and time required for compliance, this fine is enough to significantly impact the growth potential of a ‘little fish’.

Learn more at BDO’s upcoming event series

BDO is committed to ensuring Australian companies are aware of their international tax and transfer pricing obligations. For this reason, we are hosting a series of events along the eastern seaboard to outline the new requirements and opportunities available for companies to leverage these changes to achieve tax and transfer pricing efficiencies.

Register for a session near you

If you think your company may be caught by these new regulations, we urge you to contact your international tax and transfer pricing advisor. BDO’s team has first-hand experience in ensuring company compliance with the new regulations. To find out more about how we can help, contact a member of our Transfer Pricing team.