The ATO continues to evolve and refine its processes for identifying and managing tax disputes, so any organisations managing existing or potential disputes with it need to so keep up with (or get ahead) of its thinking. The Top 5 Themes for 2021 we flag in this article are relevant to any decisions being made at board, management or investor level about tax risk and tax dispute appetite.
1. Justified Trust reviews – the ATO funnel for future disputes
The ATO has been conducting Justified Trust reviews of the largest organisations in Australia since 2016, focused on obtaining assurance that corporate taxpayers are paying the right amount of tax, and have appropriate governance processes.
The information gathered by the ATO in the Combined or Streamlined Assurance Reviews enables it to better compare taxpayers within and across industries. The reviews are also the means by which the ATO identifies issues for more rigorous examination in its Next Actions program.
For a taxpayer obtaining a high level of assurance, there is the promise of less rigorous future compliance activity by the ATO. However, it appears from the ATO's guidance that a relatively high level of rigour will still apply during the two lighter review years following a high assurance rating. Organisations will need to be highly prepared on any potentially contentious tax issues because ATO questions often home in quickly on sensitive topics.
2. Increasing push for (very) early ATO engagement
The ATO encourages taxpayers to engage with it regarding potential tax issues as soon as possible, including through the FIRB approval process, pre-lodgment compliance reviews and annual compliance arrangements, and private rulings.
From 1 July 2021, the ATO has introduced the New Investment Engagement Service (NIES) for businesses planning a new investment in Australia of above $250 million, aiming to provide quick pre-transaction guidance. As for a private binding ruling or advance pricing arrangement, the NIES can provide a degree of comfort to taxpayers, and is not mandatory.
To maximise the potential value of engaging with ATO via NIES, organisations will need to be ready to identify the tax issues to be raised, and also to present compelling facts and analysis. Comfort from the ATO is only likely to be of value for potentially contentious issues. Early engagement has the allure of dispute avoidance, coupled with the risk of dispute acceleration. Balancing these two competing considerations will be worthwhile exercise for taxpayers with sizeable transactions and significant potential tax risk.
3. Transfer pricing focus
ATO focus on transfer pricing (TP) remains a feature of the tax landscape in 2021.
Judicial guidance continues to emerge. In May, the High Court denied the ATO's application for special leave against the Full Federal Court's decision in Glencore, meaning the taxpayer's win stands. The case provides an example of how taxpayers can meet their burden of proof under the TP legislation, with this occurring through evidence from industry experts rather than the TP economic expert evidence favoured in early TP litigation in Australia. It will be interesting to monitor which principles from the decision, if any, are accepted by the ATO as having application beyond the commodities context. The presently reserved Federal Court judgment regarding Optus' historical financing arrangements is likely to also provide additional guidance.
Taxpayers continue to grapple with the most efficient path to resolution of transfer pricing disputes. Some complexities include that:
- the utility of the ATO's Independent Review process for transfer pricing issues is limited;
- TP litigation is relatively rare and also highly fact-dependent, resulting in many disputes concluding by directly negotiated settlements (sometimes assisted by mediation);
- the ATO may also seek to apply Part IVA;
- Mutual Agreement Procedures under treaties are generally effective, but relatively slow; and
- Mandatory Binding Arbitration is now available under the Multilateral Instrument to circuit-break slow MAP processes in some circumstances, but involves a taxpayer ceding more control of its dispute than if it undertook domestic litigation or saw MAP through.
4. Practical Compliance Guidelines – divergence between purpose and practice
Since their inception in 2016, the ATO has issued 55 Practical Compliance Guidelines on a very wide range of topics. Three draft PCGs regarding professional firm profits, hybrid mismatches and intangibles are also in the pipeline. In contrast, the ATO has only issued 24 taxation rulings during this time.
In contrast to taxation rulings in which the ATO states its view of the law, PCGs are a purely administrative tool, intended to indicate to taxpayers the instances in which they may or may not attract the attention of the ATO.
Taxpayers and the ATO continue to debate, in the context of reviews, audits and disputes, the relevance of PCGs. A common refrain from taxpayers and advisers is that ATO teams often seek to apply the guidance quite strictly in substitution for the words of the relevant legislation. Another cause for complaint is the ATO's suggestion that compliance with the guidance is voluntary. Taxpayers can often feel, however, that this is not the case, in circumstances where ATO teams seem to be driving an audit outcome that would land the taxpayer in the "green zone" of a PCG. The tension between holding tight to a position well-founded in facts and law and potentially compromising that position to strike a balance and avoid extensive, costly compliance and dispute activity is very real for taxpayers.
5. Information gathering at speed
Taxpayers are coming to grips with resourcing necessary to meet the ever-increasing level of information required to be provided to the ATO. This arises through both:
- additional lodgement requirements, such as the country-by-country report; and
- aspects of ATO compliance activity, such as the extensive Justified Trust information requests and catch-all formal notices at the completion of information gathering during ATO audits.
The ATO is more routinely challenging taxpayer compliance with requests for information. Recent activity in relation to challenging legal professional privilege claims is but one example of this.
The increased level of information available to the ATO may result in more efficient tax dispute management, subject to its ability to digest and refine tax dispute issues earlier. The recent Optus tax dispute concerns transactions from 2001. Time will tell whether we continue to see tax litigation which concerns events almost 20 years earlier or if that gap might close.
Implications for your business
Please contact us if you would like to discuss how these trends might affect your business.