ATO expected to double down on multinational opportunity
The regulator is expected to ride its recent multinational tax wins to a funding boost come budget time.
The ATO’s landmark win against PepsiCo has opened up a significant opportunity to claw back tax from non-compliant multinationals, said Jason Casas, partner and national head of transfer pricing at Grant Thornton.
Mr Casas expects the ATO to apply for additional funding from the government to heighten its multinational regulatory efforts given the decision’s “huge applications across the economy.”
“The expectation is that they’re going to be asking for substantial funding in addition to the existing funding they have to tackle those significant global entities,” said Mr Casas, adding the government is seeing a solid return on its funding towards the ATO.
Asked where the funding might go, Mr Casas said he expects the ATO to expand the scope of its multinational enforcement processes to include medium-sized and emerging markets. To date, the regulator has been “very much focused” on companies with annual turnovers of $250 million or more.
While smaller companies have been subjected to some oversight, the ATO has not applied the same standards, said Mr Casas.
“I think it’s a really interesting area because it’s got such broad applications to a large number of multinationals that are operating in Australia,” he said.
“If you take that PepsiCo case, it’s applicable to any large multinational that’s supplying products into Australia that has a brand name or includes some IP around the brands or the formulations of the specific product.”
“You are talking about cosmetics, you are talking about pharmaceuticals, where companies that in the past have just been buying the product from a related party overseas and supplying it into the Australian market. That’s where we expect to see the ATO focusing going forward.”
In the PepsiCo case, the US-based company was ordered to pay tax on a portion of payments made to Schweppes Australia Pty Ltd, which the court said should have been characterised as royalties.
Since the decision was handed down, PepsiCo has filed a notice of appeal to the Full Federal Court. Interestingly, so too has the ATO.
While the details of either appeal are yet unknown, Mr Casas said, in his opinion, the ATO will likely be asking the court to consider its case for diverted profits tax.
In his judgment, Judge Mark Kranz Moshinsky said the diverted profits tax rules would have been invoked in the alternate had the royalties withholding tax rules not applied. It is this limb of the decision Mr Casas expects the ATO will direct its appeal towards.
“This is purely my opinion, but I expect the ATO is appealing to get the case decided on the diverted profits tax,” said Mr Casas. “The potential for the ATO was that the diverted profit tax would deliver more revenue.”
While the decision might have strengthened the ATO’s resolve to crack down on non-compliant multinationals, Mr Casas said the regulator's appetite for multinational regulation is nothing new.
“Multinational companies have been in the sights of the ATO certainly for the last ten years, quite intensively.”
Since transfer pricing legislation came into place in 2013, there has been “constant output” from the ATO regarding their expectations around compliance, he said.
“It is just that a few things have coincided this last year. They have had some wins, which culminated, obviously, in the PepsiCo case.”
Though the regulator has had its sights set on multinationals for some time now, Mr Casas said its recent victories reflect a stronger approach.
“I think the ATO has demonstrated there are companies that potentially aren’t doing the right thing, and there is an opportunity to claw back tax from those companies.”
