IRS' and ATO's latest views on hot tax issues for multinationals

Angela Wood, Andy Bubb
22 Mar 2023
Time to read: 3 minutes

Both the ATO and IRS are focused on similar tax topics in reviewing multinationals, but execution of their compliance programs diverges. A multi-jurisdictional tax dispute resolution strategy is essential, not an optional extra.

In a fast-paced discussion, co-moderated by Clayton Utz Tax partner Angela Wood and Sharon Katz-Pearlman (shareholder, US law firm Greenberg Traurig), two Deputy Commissioners explored the IRS' and ATO's key focus areas, new developments and dispute resolution approaches towards multinationals. Over 260 multinationals joined to hear Rebecca Saint (Deputy Commissioner, Public Groups & International, Australian Taxation Office) and Jennifer Best (Deputy Commissioner, Large Business & International, Internal Revenue Service), reflecting the very high level of interest in how the ATO and IRS will be dealing with multinationals in the short term.

Both Rebecca and Jennifer shared some up to the minute insights during the session and the revenue authorities' key messages to multinationals:

  • The ATO's three key tax issues for multinationals are related party finance, marketing hubs and intangibles (particularly migrations out of Australia and embedded royalties). The ATO is particularly well-resourced regarding intangibles, wanting to be on top of these issues quickly. The IRS echoed these three key issues, adding procurement hubs, and noted that for transfer pricing matters generally they are more likely to raise economic substance and sham arguments going forward.
  • The IRS is due to receive US$80 billion of funding in the coming years as part of the Inflation Reduction Act, more than half of which will be allocated to enforcement activities. For multinationals specifically, the IRS will focus on pre-filing work, public guidance and post-filing dispute resolution. The IRS emphasised its ongoing use of data and analytics to identify tax risks to review, and the additional funding will mean that more issues identified in that way can be reviewed.
  • The ATO will be recruiting another 1,200 people given the Government's continued funding of the Tax Avoidance Taskforce. The funding will continue to cover Justified Trust reviews of multinationals in the Top 100 and Top 1,000 cohorts, as well as other initiatives including further public guidance from the ATO. For the private equity sector, a new program of ATO engagement will be established, with further details forthcoming. The IRS will also go on a hiring spree with some of its additional funding, and relevantly for multinationals there will be a particular focus on hiring staff with transfer pricing expertise.
  • Beyond the initial round of Justified Trust reviews, the level of ongoing ATO engagement will depend on the nature of each business. In particular, the ATO will seek a higher level of engagement with businesses which have more M&A activity.
  • The ATO's justified trust assurance programs are here to stay, rather than the ATO making any move back to a risk-based assessment. Rebecca explained that although significant resources have been invested in the justified trust reviews by the ATO and multinationals in recent years since their commencement, the trust obtained to date "cannot last forever".
  • There is a balance between what tax certainty the ATO should provide and the role of tax advisers. Transfer pricing is not suitable for private rulings, hence the pressure on the advance pricing arrangement (APA) program culminating in the ATO's ongoing review of that program. The ATO is mindful that collateral issues or possible tax avoidance can disrupt the APA process, and that multinationals only want to embark on an APA process if an agreement is likely. Similarly, the IRS intends to be more selective in the cases it accepts into its APA program, with preliminary views to be communicated by the IRS before a formal APA application is made by a taxpayer.

Angela Wood (Clayton Utz), Sharon Katz-Pearlman (Greenberg Taurig), Rebecca Saint (ATO), Jennifer Best (IRS)

There are some clear takeaways from multinationals:

  • Proceed with caution for any transactions involving the revenue authorities' hot topics. The ATO and IRS have a significant amount of public guidance on issue, and it is often in very granular detail. The revenue authorities expect taxpayers to know about and apply the guidance. Taxpayers who decide to operate outside of the guidance need to do so in an informed manner, armed with the knowledge that their arguments and evidence are likely to be scrutinised in great detail. This is particularly so in Australia where the Reportable Tax Position schedule often requires annual disclosure where a taxpayer falls outside of the parameters set by the ATO in certain guidance it has issued.
  • A multi-jurisdictional tax dispute resolution strategy is essential, not an optional extra. There are mechanisms available to resolve the opposing views of revenue authorities for cross-border transactions, including APAs, mutual agreement procedure and arbitration. However, these mechanisms can be time and cost-intensive to use. This may be acceptable for businesses in some circumstances but not in others. Tax dispute strategies also must consider the relevant countries' arrangements in detail. For example, there is wide variability under tax treaties regarding whether arbitration is available, and if so, the waiting period before access can occur. Having an eye on all of the possibilities is critical in the development of dispute resolution strategy, management of stakeholder expectations, transaction planning and determination of material tax positions.
  • Ongoing assurance reviews are not disappearing in Australia, and the ATO will remain highly engaged in the tax affairs of large multinationals. When combined with the ATO's propensity to seek public disclosure of significant settlements, and high penalties for multinationals, the stakes in Australian tax disputes can be high, both financially and reputationally. Some of these factors may be less pertinent in other jurisdictions. Australian subsidiaries of multinationals need to ensure that their tax leaders are aware of these issues when making strategic decisions about material tax positions.

With plenty of questions and issues left on the table for another time, it's pleasing that Rebecca and Jennifer have both agreed to participate in another webinar in the coming months, which will be scheduled shortly.

The webinar recording is available here for you to watch.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.