Australia: Insights on Tax Settlements and Compliance in 2023–24 for Public and Multinational Businesses

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This year marks Australia´s Taxation Office (ATO) second annual publication of insights on settlements with public and multinational businesses. Expanding on the previous report, which covered the 2022–23 period, this edition broadens the scope to include details on ongoing and completed disputes, in addition to the information provided in the ATO annual report. 

KEY HIGHLIGHTS OF 2023–24 TAX DISPUTES

• Increased Compliance: Public and multinational businesses showed higher levels of tax compliance. ATO’s preventative compliance efforts led to an additional $2.2 billion in voluntary tax payments.

• Consistent Audit Activity: A consistent number of audits were conducted. During the year, 24 cases were escalated to audit, and ATO issued income tax assessments to 124 public and multinational entities, generating $2.76 billion in tax liabilities.

• Focus on Global Profit Shifting Risks: Global profit shifting remained a key focus, with about 65-70% of income tax audits involving related issues. Audits included risks like transfer mispricing, mischaracterization of business activities, and withholding tax avoidance.

AUDIT AND COMPLIANCE PROGRAM OUTCOMES

The audit program identified and addressed various compliance risks:

• Income Tax Liabilities and Penalties: ATO raised $2.76 billion in income tax liabilities for 2023–24, with approximately $2.5 billion generated from 24 companies under audit. Penalties totaling $177 million were assessed, and further penalties are still under consideration for recent audits.

• Global Profit Shifting Audits: Approximately 80% of income tax litigation decisions in 2023–24 addressed global profit shifting concerns, including transfer pricing and anti-avoidance measures. A significant portion of audits focused on issues like intangible asset migration, related-party finance, and royalty arrangements.

SETTLEMENT APPROACH AND OUTCOMES

ATO’s commitment to fair dispute resolution saw public and multinational entities accounting for over 20% of settlement agreements in 2023–24, with a substantial portion involving income tax and global profit shifting risks. ATO secured 69% of disputed tax amounts through settlements.

TAX CONTRIBUTIONS BY LARGE BUSINESSES

Public and multinational companies are major contributors to Australia’s tax system. In 2022–23, they reported $96.6 billion in corporate income tax (about 70% of total company tax) and $48.2 billion in GST (around 62% of total GST liabilities). The 10 largest companies paid approximately 30% of all corporate tax, while the largest 100 accounted for 55%.

REDUCING THE TAX GAP

ATO’s tax gap analysis reveals that 93.5% of income tax is paid without intervention, increasing to 95.8% following ATO efforts. Aiming to reduce the gap sustainably, ATO provides guidance, assurance programs, and justified trust programs for large businesses. This focus ensures that significant corporate tax compliance is maintained, especially as Australia’s high tax rate and reliance on corporate tax make it susceptible to profit-shifting risks.

ONGOING COMPLIANCE AND TAX AVOIDANCE TASKFORCE

Since its establishment in 2016, the Tax Avoidance Taskforce has generated $22.8 billion in liabilities from public and multinational businesses. The 2023–24 preventative compliance actions resulted in an additional $2.2 billion in tax revenue, achieved primarily through prior interventions that influenced voluntary tax compliance.

PUBLIC GROUPS AUDIT PROGRAM AND GLOBAL PROFIT SHIFTING

ATO’s audit program includes around 100 to 150 ongoing audits for public and multinational businesses. Global profit shifting remains a significant area of scrutiny, with nearly two-thirds of income tax audits targeting arrangements that divert profits from Australia to low-tax jurisdictions.

OVERVIEW OF RECENT INCOME TAX TRENDS AND DISPUTES

Over the past three years, income tax liabilities have generally trended upwards. However, despite this increase, many audits are showing a reduction in materiality compared to previous years. This shift largely results from the resolution of significant arrangements, such as those related to internal financing. Yet, new issues, evolving business models, and events like business disposals continue to drive notable income tax adjustments.

TAX IN DISPUTE

In most cases, taxpayers aren’t required to pay tax liabilities immediately when they dispute an assessment. However, high-risk and large business taxpayers are generally expected to pay either in full or in part. Large businesses often enter a 50:50 payment arrangement, where they pay half the tax liability and settle any Diverted Profits Tax (DPT) assessments fully upfront. If a dispute resolves in favor of the Commissioner, the remaining tax liability, interest, and penalties become payable. If the taxpayer wins, any taxes paid upfront are refunded with interest. In 2023–24, $2.76 billion in liabilities were raised, with $533 million undisputed and promptly paid. Of the $2.22 billion under dispute, $1.09 billion was pre-paid under 50:50 arrangements.

REVIEW OF AUDIT DECISIONS

Taxpayers who disagree with audit results can request a review or file an objection. Large businesses may qualify for an independent review of proposed audit adjustments before an assessment is issued. However, independent review isn’t available for transfer pricing or matters involving anti-avoidance rules. In 2023–24, only two reviews occurred for public and multinational businesses.

OBJECTIONS AND THEIR OUTCOMES

In 2023–24, 171 objections were lodged by public and multinational businesses, with 92 objections to ATO decisions and 79 "self-objections." Complexities in tax matters mean disputes can span several years. Objections related to income tax made up 44% of resolved cases, with GST at 20% and penalties at 29%. Nearly half of the objections upheld the ATO’s decision or led to partial settlements, suggesting that audit decisions are generally reinforced in most cases.

DISPUTE RESOLUTION AND SETTLEMENT APPROACH

Settlements are an integral part of ATO's strategy, especially in cases where prolonged litigation may be costly. In 2023–24, the ATO settled 29 cases with 67 public and multinational businesses, securing around $1.8 billion in tax revenue. Approximately 65% of these cases involved global profit-shifting risks, underscoring the importance of settlements for future compliance. Most settlements—around 78%—occurred either before or during an audit, while others were resolved at the objection or litigation stage.

TRANSPARENCY AND OVERSIGHT IN SETTLEMENTS

The ATO has taken steps to increase transparency around settlements, encouraging businesses to disclose agreements. Settlement decisions undergo rigorous review, especially in high-value cases exceeding $20 million, with independent assurance from former federal court judges to ensure fairness. In 2023–24, all independently reviewed settlements were deemed fair and reasonable.

LITIGATION AND THE MUTUAL AGREEMENT PROCEDURE

The ATO’s litigation strategy aims to resolve issues and clarify the law. In recent years, courts have ruled on high-profile cases such as Singtel v Commissioner and PepsiCo, Inc. v Commissioner of Taxation. In 2023–24, favorable outcomes were achieved in 53% of cases involving public and multinational businesses. The ATO also utilizes the Mutual Agreement Procedure (MAP) under double tax treaties to mitigate double taxation issues in cross-border matters.

As at June 2024, 24 MAP cases were open from ATO audit activities, primarily involving transfer pricing and royalties.

SOURCE/RECOMMENDED READ: 

• Findings report - Public and multinational business disputes and settlements 2023–24 | Australian Taxation Office