The 2015 budget took a swing at large enterprises. With bigger penalties for tax avoidance, what can businesses with international dealings do to prepare?
As far as the winners and losers of the 2015 Federal Budget go, large organisations with international business operations are among those most negatively impacted. As a whole, the budget put a number of international measures in place to crack down on big companies with foreign dealings.
So, what does the budget say about multinational companies, foreign entities and enterprises with international transactions? And what can they do to best avoid getting into deep water with the ATO?
Multinationals: Australia cracks down on profit shifting
The first significant development for large enterprises with international affairs has to do with multinational companies. The press has been quite vocal about the issue in recent months, with the government coming under criticism for its lack of action on strategies that prevent the country from collecting taxes. This measure is a response to those concerns.
"Everyday Australians rightly believe that if a dollar of profit is earned here, then you should pay tax here. Unfortunately this is not always the case for some multinationals. Many have the capacity to aggressively minimise their tax," Joe Hockey explained in his budget night speech.
Although profit shifting is a serious concern for Australia - A number of large multinational companies in the resources, media and retail sectors are currently in the spotlight for diverting Australian based profits to lower tax countries - this measure appears to be a bit for show. The Organisation for Economic Cooperation and Development (OECD) is already working on a process to address the problem. As it stands, Australia's changes won't come into effect until 2016-17, at which point they may very well be superceded by the international rules.
What's the takeaway for large multinationals? Even if the policies outlined in Australia's budget and in the draft law don't end up taking force, now is still the time for these enterprises to consider the coming reforms and address their operations accordingly. Whether from Australia or the OECD, changes are on the horizon.
Bigger teeth: Stronger penalties for all large companies
Although the multinational profit shifting measures are aimed at about 30 organisations suspected of these activities, the bigger penalties for tax avoidance could actually apply to a broader base of enterprises.
That's because the information provided thus far specifies businesses with an annual turnover of at least $1 billion. Therefore, all large companies that have turnover of more than $1 Billion will have to take more care they are paying the appropriate amount of tax as they could come under greater scrutiny from the tax office. Specifically, the fines will increase from 50 per cent of the underpaid amount to 100 per cent - doubling the penalty.
Even though the law targets those who enter into schemes to avoid paying tax, large businesses should keep in mind that falling short on taxes can also result from errors or misunderstandings. Given the higher stakes, which will come into effect for income years starting on or after July 1 2015, companies will want to be even more vigilant about keeping their affairs in order and taking a very proactive approach to international business and accounting.
What organisations can do now?
While waiting for additional clarification on these rules, what can large enterprises with international dealings do to ensure they remain within the law and steer clear of any penalties?
If the ATO does come knocking, the first port of call is to get professional tax advice from accountants specialising in international business. However, it's much better to take a proactive approach and ensure affairs are in order from the start. In addition to preventing inadvertent tax avoidance, this assistance could help enterprises make more strategic decisions with how they structure their international dealings.
In the end, the vast majority of companies want to be responsible citizens and pay what they fairly owe. Given the complexity of taxation for foreign dealings and the increased scrutiny, however, businesses may benefit greatly from taking a more tactical approach to how they structure their deals. The goal is to pay what is owed under the law - no more, no less. And with the right strategy, they can avoid penalties and pay what's fair while also doing the best for their businesses.