ATO flags multinationals and larger taxpayers as priority area in FY25 plans

The ATO has outlined that sustaining multinational and large taxpayer performance will remain firmly on its compliance agenda in its corporate plan for 2024–25.

In its Corporate Plan, the ATO said by addressing key risks to the corporate tax base and closing tax loopholes, the community can have confidence that public and multinational businesses are paying the right amount of tax in Australia.

"Better public reporting of large business tax information will boost tax transparency and support the integrity of the tax system.

"We will also support large businesses through our timely provision of tailored advice and guidance, and other contemporary services."

Key focus areas

Speaking at a recent industry conference, ATO deputy commissioner Rebecca Saint recently outlined some of the areas of concern for larger businesses and tax compliance for the year ahead, including intangibles and the mischaracterisation of payments.

"The ATO has been concerned with the proliferation of arrangements involving intangible migration and the mischaracterisation of payments in connection with intangible assets," Saint said.

The ATO recently issued several guidance materials, including PCG 2024/1, which deal with the migration of intangible assets or mischaracterisation and non-recognition of Australian activities connected with those assets.

"This guidance allows taxpayers to self-assess the risk that they might be subject to compliance activity in relation to their intangible migration arrangements," Saint said.

The ATO has also issued Taxpayer Alert 2018/2, where it outlined its concerns as to whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met.

"Since then, we have issued draft software rulings, the latest of which is Taxation Ruling 2024/D1. This ruling has attracted considerable attention from some US companies and stakeholders in particular," Saint said.

"The revised ruling provides a detailed explanation of our consideration of the meaning of copyright as relevant to the definition of royalties in our domestic law and our treaties.

"We acknowledge there are differing views about the application of copyright law (which has itself changed over time) to the facts of modern software distribution arrangements, and the secondary, but critical, issue as to how much of a payment is for the use of that copyright."

Saint said the ATO remains focused on finalising its views subject to the feedback received in consultation earlier this year.

"We are aiming to issue a final ruling by the end of the calendar year. Whilst we anticipate some revisions, we accept that there are some issues which we and some stakeholders will not agree on," Saint said.

"Of course, the ATO does not make tax law, it only expresses its considered opinion. Ultimately the courts decide, and so an opportunity for judicial consideration of the issues by an Australian court would be welcomed by the ATO."

The ATO is also working on draft administrative guidance which will likely be a practical compliance guide (PCG).

"The PCG will focus on the practical implications of the view in the ruling. This guidance is intended to address, in a practical way, some of the difficult issues around apportionment, evidentiary requirements and the ATO’s compliance approach to the mischaracterisation of royalty payments," Saint said.

"We will consult on this draft guidance and are aiming to release a draft later this calendar year. We welcome your views and input as part of the development of this guide."

Saint added that the ATO is also paying closer attention to diverted profits tax (DPT), the ATO has only applied the DPT provision sparingly.

"We have considered the potential application of DPT in over 500 cases, with only two cases proceeding to assessment stage," she said. "Currently we have around 10 cases where we are actively considering the application of the DPT."

Since DPT was introduced, the ATO has seen an increased willingness from taxpayers to address ATO concerns about their structures, she said.

"Given the limited instances where the ATO has sought to apply the DPT, if the ATO team tells you that they are considering applying the DPT, you should take this very seriously, and consider reviewing your arrangements and making necessary changes if you wish to avoid a DPT assessment."

"It is also a good opportunity to take stock as to how you and your advisor are providing information to, and interacting more generally with, the ATO."

The ATO is also concerned about multinationals claiming that data centres built in Australia only provide "low-value services for the offshore group".

"However, our perception is that the Australian activities and data centre assets, and their physical location in Australia, are a more fundamental and valuable part of the broader enterprise," Saint said.

"The tax outcomes and structuring of these large-scale Australian data centre activities is therefore an emerging issue. We are essentially considering whether profits currently being returned in Australia appropriately reflect the value of the large-scale data centres in Australia, and whether there is the use in Australia of IP (including software platforms and brands) held offshore giving rise to royalty withholding tax obligations."

Saint said the ATO is reviewing these arrangements to assess whether they artificially bifurcate or separate integrated business activities to reduce or avoid Australian tax.

The ATO has also been focused on engaging with taxpayers concerning the GloBE and domestic minimum tax measures, first announced in the May 2023 federal budget.

"We understand the significant compliance burden for in-scope taxpayers, and will be seeking to apply transitional relief (including in respect of penalties) in accordance with OECD administrative guidance," Saint said.

"That is, it is our intent that no penalties or sanctions should apply during a transitional period in connection with filing GloBE Information Returns where an MNE has taken reasonable measures to ensure the correct application of the GloBE rules."

In the lead-up to the first lodgment due date, the ATO said client engagement activities will be focused on supporting clients to get the 'basics right' for lodgment and payment obligations.

"This will be done through education/awareness initiatives, such as targeted communications to be delivered in accordance with the Pillar Two communications strategy," it said.

"Following receipt of the first incoming lodgments, targeted GloBE reviews are expected to be conducted, taking a risk-based approach. We don’t propose to undertake a justified trust or assurance approaches at least in the initial years."