The Australian Taxation Office (ATO) continues to lead the world in providing insights into the operation of the corporate tax system with the publication of the sixth annual report on corporate tax transparency. The report covers the tax affairs of the largest companies operating in Australia.
Deputy Commissioner Rebecca Saint said the report included tax information from 2,311 corporate entities with a combined total income tax paid of $56.1 billion in 2018-19.
“Over 60% of all corporate income tax in 2018-19 was paid by the companies included in this report,” Ms Saint said.
The report shows that since the first report in 2013-14, there has been growth in total income, taxable income, and income tax payable. In 2018-19, all three ownership segments reported growth in income tax payable with foreign-owned entities contributing the most to the increase ($2.09 billion), followed by Australian public entities ($1.33 billion) and Australian private entities ($341 million).
“Total income tax paid increased $3.8 billion from 2017-18, which can be attributed to the mining and resource sector and increases in commodity prices. All other sectors saw the first decline in income tax payable since the first report was published, partly reflecting the downturn in non-mining company profits during the 2018-19 financial year,” Ms Saint said.
Despite the fall in income tax payable in most sectors, the report shows that the proportion of companies that have paid no income tax remains steady at 32% in 2018-19 in comparison to 2017-18. This reflects a decline from 36% since the first report in 2013-14.
There are many reasons why companies pay no income tax including legitimate business or economic factors. Companies may pay no income tax due to operating losses, utilising losses from prior years, or expensing projects operating in a start-up phase.
“The ATO takes steps to verify that losses in the large market are not created through contrived schemes, but actual losses that can be traced back to commercial operations. Companies that report sustained losses year-on-year face scrutiny from the Tax Avoidance Taskforce,” Ms Saint said.
“The Taskforce and the Justified Trust program allow us to change behaviours and engage directly with the largest corporate taxpayers to assure their tax compliance. The majority do the right thing and pay the right amount of tax, but we take firm action against companies that try to avoid their tax obligations.”
“The Tax Avoidance Taskforce has proven very successful, contributing to the ATO raising a total of $19.8 billion in tax liabilities and collecting $11.2 billion from large public groups, multinational corporations, wealthy individuals, and private groups from 1 July 2016 to 30 September 2020,” Ms Saint said.
The successful implementation of the Multinational Anti-Avoidance Law (MAAL) resulted in 44 taxpayers restructuring to recognise sales in Australia. In 2018-19, these taxpayers are now collectively booking more than $8 billion in additional sales in Australia and paying more than $100 million each year in additional income tax compared to 2015-16. They also reported an estimated net GST paid of approximately $80 million in 2018-19. The vast bulk of the additional sales can be seen in the report.
“By ensuring taxpayers are compliant with the MAAL and locking in their future compliance via robust settlements and Advance Pricing Arrangements, we have brought millions into Australia’s tax system, ensuring economic activity in Australia is taxed in Australia,” Ms Saint said.
“Our Justified Trust program assures that the largest 1,100 corporate groups pay the right amount of tax. Around a third of large corporates have achieved the highest assurance rating with around half achieving a medium rating. Taxpayers that achieve low assurance ratings are subject to intensive scrutiny and investigation by the Tax Avoidance Taskforce.”
“The intensive scrutiny of our Justified Trust program sets the bar higher for the largest taxpayers. But achieving a high assurance rating doesn’t just build community confidence in the taxation system, many Boards find the rating to be an investment in good corporate governance and ultimately lower tax compliance costs.”
“Increasingly we are seeing corporate groups that have achieved “high assurance” tax ratings informing their shareholders, employees and other stakeholders, providing confidence in their tax performance.”
Corporate Tax Transparency Report
The ATO is required under law to publish tax information reported to us by certain large companies each year. This year’s tax transparency report covers 2,311 corporate entities, of which:
- 1,320 are foreign-owned companies with an income of $100 million or more
- 991 are Australian public or private entities, of which
- 527 are Australian public entities with an income of $100 million or more
- 464 are Australian-owned resident private companies with an income of $200 million or more.
It is important to note the data in the corporate tax transparency report is pre-pandemic. Next year’s report will reflect the economic impacts of COVID-19.
Oil and gas sector
The ATO can closely monitor the projects covered by the Petroleum Resources Rent Tax (PRRT) due to the highly concentrated taxpayer base. Eleven corporate entities paid $1.06 billion in 2018-19. This is a slight decline from the $1.16 billion paid by nine corporate entities in 2017-18. The decline in PRRT is primarily due to a fall in the oil price.
“The ATO will continue to monitor a number of corporate entities in this sector that generated tax losses in 2018-19. However, the amount of PRRT payable is expected to decline and then remain stable in the near term, consistent with lower oil prices,” Ms Saint said.
Multinational Anti-Avoidance Law (MAAL) and the Diverted Profits Tax
The Multinational Anti-Avoidance Law (MAAL) has ensured that the 44 multinational enterprises which restructured to report sales in Australia will continue pay the appropriate amount in tax on profits earned in Australia. The MAAL prevents the use of artificial and contrived arrangements to book profits offshore.
The success of the MAAL in prompting these multinationals to restructure has meant the ATO has not needed to issue a MAAL assessment to date. Considering the passage of time since the introduction of MAAL, and commercial circumstances relevant to multinational enterprise (MNE) sales in Australia which makes attributing increased sales revenue to MAAL less reliable over time, we will not be measuring the impact on revenue as a result of the MAAL beyond 2018-19.
While most sales income captured by the MAAL is included in the report, some corporate entities did not meet the income reporting threshold and are not covered by the report.
“While the economic benefits of the MAAL will continue over the long-term, the next significant step in addressing multinational tax avoidance will be the impact of the Diverted Profits Tax (DPT). The DPT prevents multinationals from reducing the amount of tax they pay by diverting profits offshore through contrived arrangements with related parties. It also encourages taxpayers to provide information to the Commissioner so that disputes can be resolved more efficiently,” Ms Saint said.
“Over the last twelve months, a small number of DPT matters have advanced significantly with one progressing to an assessment.”
Loss making companies
Corporate income tax is payable on profits, not gross income. A significant percentage of companies continue to make losses each year, for both accounting and tax purposes.
Many single entities that did not pay tax are members of a tax paying corporate group. At the economic group level, a total of 2,041 economic groups or standalone entities were to some degree in scope for the transparency report (noting some of these entities may not be included in the reported entity list in their own right). Of these, 78% had a tax liability through one or more member entities.
Many companies do report a tax loss as a legitimate consequence of their business activities. However, sustained losses prompt greater scrutiny from the ATO’s Tax Avoidance Taskforce.
The ATO is committed to ensuring that companies making sustained losses understand their obligations to the ATO and the wider taxpaying community.
Large corporate groups income tax performance
Our view is that most large businesses do the right thing and are paying the right amount of tax, as reflected in our estimate of the large corporate group income tax gap.
For 2017-18 we estimate a gross gap of 7.5%, which is the gap prior to ATO engagement. We estimate a net gap of 3.7%, which reflects the final amount of income tax uncollected after ATO action.
“The community expects that big business is held to the highest standards. Our compliance activity ensures that large corporate groups are held to account more than any other segment.”
Our Justified Trust reviews support our confidence in the compliance of most large corporates. These reviews cover Australia’s largest 1,100 public groups and multinationals, providing positive assurance on a significant part of this population.
Where we cannot assure that a large corporate is paying the right amount of tax or we identify areas of concern, we conduct further compliance activity (including audits) as part of our activities under the Tax Avoidance Taskforce.
“Many companies also voluntarily provide additional information about their tax affairs which can inform the public if they are meeting their tax obligations,” Ms Saint said.
The Top 100 program covers the largest contributors to corporate income tax, excise, and PRRT collections, contributing a reported $34.1 billion or 41% of all corporate income tax for 2017-2018.
The Top 1000 program covers businesses reporting $26.3 billion or 32% of all corporate income tax for 2017-18 paid by public and multinational businesses.
- Findings report Top 100 (income tax) program
- Findings report Top 1,000 (income) tax performance program
- Voluntary Tax Transparency Reports are hosted at data.gov.au