Allens online learning
Tax disputes series: what lies ahead – ATO compliance focus in the large market
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Covered in this webinar:
- Perspectives on the Reportable Tax Positions report, focusing on tax risk in the large market
- ATO compliance focus in the large market over the next 12 months
- ATO products in development, including with respect to IP migration, hybrid mismatch rules and legal professional privilege protocols
- The Commissioner's perspectives on the MAP, arbitration, the role of APAs and dispute settlement in an uncertain economic environment
This session was recorded on Tuesday, 22 September 2020
CPD points
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Core area: NSW/VIC/QLD Substantive Law | WA Substantive Law CA4 | 1 hour – 1 CPD point.
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Key takeaways
The ATO's core compliance focus in the large market relates to international and domestic risks.
For international risks, areas of focus include related-party cross-border debt, marketing hubs, inbound supply chains, and non-arm's length dealings relating to intangibles. For domestic risks, areas of focus include the capital-revenue distinction, including labour costs for construction of capital assets in the oil and gas sector, the recharacterisation of trading income to concessionally-taxed income flows and R&D Tax Incentive claims.
The ATO will pursue litigation to address areas of legal uncertainty, in appropriate circumstances.
The ATO employs multiple tools to manage areas of legal uncertainty – including rulings, practical compliance guidelines and settlement of disputes.
However, the ATO may pursue litigation where there is precedential value for the market or a segment of it. The ATO will also litigate to take action on certain arrangements (e.g. aggressive tax avoidance), and where the differences between the taxpayer and ATO are irreconcilable. The ATO expects several cases to reach litigation over the next few years.
The first round of the Top 1,000 Tax Performance Program is almost complete, with the second round now commencing.
The ATO has finalised more than 900 assurance reviews, with the findings report for the Top 1,000 to be published in the coming weeks. The key findings will be that 30% of taxpayers achieved high assurance, 50% medium assurance, and 20% low assurance. The second round will constitute a 'combined' program which will include GST, in addition to income tax, and is intended to provide a more holistic approach to tax assurance. A key focus of the second round will be governance, and the approach to taxpayers will vary depending on the level of assurance they achieved in the first round. For taxpayers with high assurance, it will be relatively light touch, with questions around any changes that have been made. For taxpayers with medium assurance, there will be questions around the changes that have been made in response to recommendations made in the first round, and evidence of those actions. Low assurance taxpayers will be subject to greater scrutiny. The Findings Report of the Top 100 will also be published soon, with an expected increase from 30% to 50% of the number of taxpayers achieving high assurance.
The ATO will soon issue a report about the Reportable Tax Positions Schedule Program.
This will allow taxpayers to understand where they sit relative to their peers in areas that are important to the ATO. The key findings are that around 85% of disclosures related to PCG questions, which mostly related to cross-border related-party finance. At least 30% of taxpayers are landing in safe zones, which increases to 50% for disclosures relating to marketing hubs.
The ATO anticipates publishing a Legal Professional Privilege (LPP) Protocol by the end of 2020.
The ATO supports the common law right of LPP and encourages taxpayers to seek legal advice about their tax affairs, but is focussed on ensuring LPP is not misused. To this end, the LPP Protocol will provide practical 'best practice' guidance about making LPP claims in a way that ensures ATO confidence, such as guidance about the type and scope of information that should be provided in different circumstances to substantiate LPP claims. It will also cover the timing of engagement with the ATO and guidance on resolution of disputes around LPP. Taxpayers who proceed to make LPP claims otherwise than in accordance with the Protocol may find their claims subject to additional questioning and scrutiny.
Some Advance Pricing Arrangements (APAs) have been affected by COVID-19, and affected taxpayers are encouraged to contact the ATO's APA team.
While COVID-19 has the potential to affect the critical assumptions of APAs, only a relatively small number of taxpayers have indicated that this has occurred. The ATO is working with affected taxpayers, and encourages affected taxpayers to contact them through the taxpayer's operational representative, or by emailing the International Gatekeeper at internationalsgatekeeper@ato.gov.au.
The ATO is in the process of finalising Memoranda of Understanding with other States in relation to mandatory binding arbitration under the mutual agreement procedure (MAP).
These will set out procedural matters for arbitration that are not provided for under the Multilateral Instrument. While most MAP cases involving Australian taxpayers have been finalised (49 out of 50), MAP cases in the transfer pricing area remain more difficult to resolve. Consistent with OECD obligations, the ATO approaches MAP cases with the intent of seeking resolution by mutual agreement with other Competent Authorities. The ATO also considers that the introduction of the mandatory binding arbitration process as a mechanism for resolving unresolved MAP cases is consistent with encouraging Competent Authorities to resolve MAP cases by mutual agreement.
(Note: The MOU on the Mode of Application of the Arbitration Process between the competent authorities of Australia and the Swiss Confederation was published by the ATO on 23 September 2020.)