The regulatory spotlight is now on corporate tax avoidance following news of a global investigation into tax deals negotiated by Australian and foreign companies through Luxembourg and the leaking of more than 300 tax agreements by a group of investigative journalists.
This also follows the announcement of a Senate inquiry into tax avoidance due to start next year, and the issue having been identified as a key one at the upcoming G20 summit in Brisbane.
There has been widespread media attention on leaked documents and the mechanisms by which certain companies reduced their tax liabilities. The Commissioner of Taxation Chris Jordan has stated that the Australian Taxation Office (ATO) will examine the leaked documents “and if we see discrepancies from what we have been told, we will take audit action”.
The ATO has been collecting increasing data on corporate taxpayers for a number of years through additional disclosures in corporate income tax returns, including in relation to complex offshore debt and equity structuring. It is therefore highly likely the ATO already has a good sense of which taxpayers they will be pursuing through risk review or audit.
Who will this affect?
ATO investigations of these matters could be far reaching and affect domestic and foreign companies, and third party advisors (such as accountants, tax advisors and legal advisors). The involvement of both senior management and directors might also come under scrutiny.
There are also potential non-legal consequences of this additional scrutiny, such as reputational risk where taxpayers’ affairs become widely reported in the press.
What investigative powers does the ATO have?
The ATO has general powers to audit taxpayers to ensure compliance with the taxation laws.
To this end, the ATO has broad investigative and information gathering powers under the Income Tax Assessment Act 1936 (Cth) (ITAA) and other legislation. These include the power to compel the production of information and documents and require any person to attend and give evidence before the Commissioner (section 264 of the ITAA), and powers of access including to enter premises (section 263 of the ITAA).
The ATO also has the power to issue “offshore information notices” under section 264A of the ITAA requesting that a taxpayer give to the ATO information within the knowledge of a person outside Australia or produce documents located outside Australia. This section empowers the ATO to request documents that a taxpayer does not have or hold.
In order to exercise this power, that information or material must be relevant to the assessment of the taxpayer. The ATO must also have a reasonable belief that:
(a) the information is within the knowledge of a person outside of Australia;
(b) the information is recorded in a document outside of Australia;
(c) the information is kept by means of mechanical, electronic or other device outside of Australia; or
(d) the documents are located outside Australia.
Whilst there are no penalties for non-compliance with a request under section 264A, a failure to provide information or documents may result in that information or document being inadmissible in later court or tribunal proceedings disputing a tax assessment. In exercising certain powers under section 264A, the Commissioner is required to ignore the consequences of an obligation arising under a foreign law insofar as that obligation relates to the secrecy of information or documents.
Are there any limits on the ATO's powers?
Notices to produce documents and offshore information notices must be issued in writing. The ATO has said that it will only use its powers of access without giving prior notice in exceptional circumstances.
These powers must be exercised for the purpose of administering the taxation laws, and are subject to limitations such as legal professional privilege (which can protect certain lawyer-client communications from disclosure).
The ATO has stated that it will give an “administrative concession” and will not seek access to the following types of documents, unless exceptional circumstances apply:
(a) documents of advice prepared by an external professional accounting advisor (known as the “accountant’s concession”); and
(b) documents created by advisors (suitably qualified in-house or independent advisors) created for advising a board of directors on tax compliance risks.
If you receive a notice from the ATO, consideration should be given to whether any privilege or concession arises.