The Tax Office in Australia made an announcement today. The body will start using its powers to pursue multinational companies to pay liabilities. The liabilities according to the Tax Office, are caused by deals which are allegedly engineered to evade tax.
Experts said such a move may create ruckus as multinationals may take the agency to court. The ones who don’t want to enter into the legal framework may begin looking for offshore options.
The laws that give power to the Tax Commissioner to restyle company transactions, so tax bills could be increased, were introduced by the erstwhile labor government and retained by the coalition government.
Joe Hockey, the treasurer at Tax Office said big multinationals such as Apple moved profit offshore. It was important for the Tax Office to come to a unanimous agreement over how to deal with such activities. The consensus was to exercise the extraordinary power.
Mr. Hockey said “Companies should pay tax where they earn the income, no matter who they are or where they’re from.”
The crackdown is not only to be brought on big multinationals. The Australian Tax Office (ATO) in recent time has become very strict over tax return. In 2013, the then newly introduced e-tax payment system was used by approximately 3 million taxpayers. The ATO is currently receiving 20.7 million payments electronically and only 1.4 million payments manually.
Mixed responses were received from multinationals over ATO’s announcement. A KPMG representative said “The ruling offers little comfort to taxpayers that the ATO’s powers of reconstruction – which allow it to reprice, restructure or disregard a cross-border transaction – will be relevant in exceptional circumstances only, as the OECD’s own guidelines suggest.”
Others said the ruling may result in applying tax on transactions that didn’t really take place. So the ATO might put hypothetical transactions on its focal point and start reconstructing transactions accordingly.
A hypothetical transaction has been described by an economist as “In certain circumstances the ATO can replace the actual transaction, or specific elements of that transaction, for what they believe is the more appropriate arm’s length transaction, i.e. the hypothetical transaction.”
Pete Celleja, PwC tax partner said ATO can use its extraordinary power in exceptional circumstances, not in regular circumstances. Whether ATO pays any heed to his suggestion, is yet to be seen.