WARNING: The ATO Is Aggressively Targeting Australian Companies Doing Business Offshore

Jamie Buhrer of the Sea Eagles is tackled during the round 10 NRL match between the Manly-Warringah Sea Eagles and the Newcastle Knights. Matt King/Getty Images

International moves to shut down profit-shifting from high to low tax countries is starting to have an impact on Australian companies doing business offshore.

A new EY report says these local companies are feeling the heat of a global trend of “increasingly aggressive” tax authorities.

EY’s 2014 Tax Risk and Controversy survey found that 68% of the largest companies feel tax authorities have increased their focus on cross border transactions in the past two years.

And the same percentage of companies are reporting that tax audits have become more aggressive.

More than four out of five (81%) companies surveyed expect already heightened tax risks to accelerate in the next two years.

The report also finds companies view the potential lack of coordination by national governments around the Organisation for Economic Cooperation & Development’s (OECD) anti-tax avoidance Base Erosion and Profit Sharing (BEPS) project as a major risk.

EY Tax Controversy Partner Howard Adams says the Australian Tax Office (ATO) is taking an increasingly proactive approach when looking at cross border transactions.

“The ATO has previously acknowledged that they have an identified group of 86 “high-risk” multinationals, but many more companies are concerned about tax agency coordination across geographies,” Mr Adams says.

“Tensions described in previous surveys pale in comparison with the tax risks that are currently being identified.

“We recognise that the OECD has an invaluable role in addressing profit shifting internationally and that the ATO had taken a leading role within the global BEPS initiative.

“Clearly, these organisations have a critical responsibility to prevent tax chaos, double taxation and increased controversy.”

The EY survey of 830 tax and finance executives (including 120 chief financial officers) in 25 countries offers the first quantifiable sample of how companies around the world view the OECD BEPS project.

Nearly one-third (31%) of all companies surveyed predict the BEPS roll-out will be characterised by relatively limited coordinated action and by increased unilateral action by countries.

Three-quarters (74%) of the largest companies surveyed (those with annual revenues in excess of US$5 billion) say they believe some countries already see the very existence of the OECD’s BEPS project as a reason to change their enforcement approach before any recommendations have passed into national law.

The majority of these largest companies (61%) as a result fear that double taxation will increase in the next three years.

As well as risks relating to BEPS, the survey reveals other sources of tax risks companies say they are currently experiencing and anticipate facing in years to come:

  • Companies are experiencing a harsher enforcement environment from tax authorities, particularly around transfer pricing, which they identify as the top tax risk. Companies ranked indirect tax and permanent establishment challenges as their second and third biggest sources of risk.
  • The news media has been an even bigger driver of tax-related reputation risk. with 89% of the largest companies are concerned about news media coverage of taxes, up from 60% in 2011.
  • 84% of the largest companies agree that entering into or operating in an emerging market significantly increases levels of tax risk and controversy risk, up from 67% in 2011.

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