Diving into the year ahead How 2015 will shape the tax landscape … · Diving into the year ahead How 2015 will shape the tax landscape in 2016 2 ... program – out of which we

#1Diving into the year ahead How 2015 will shape the tax landscape in 2016

Diving into the year ahead How 2015 will shape the tax landscape in 2016 2

2015 was a landmark year from a tax perspective. Never before has there been such a focus on taxation, and in particular corporate taxation, at both a domestic and international level.

What were some of the big themes of 2015?

• The OECD Base Erosion and Profit Shifting (BEPS) program – out of which we saw the passage of the multinational anti-avoidance law (MAAL), the implementation of country-by-country reporting laws, the extension of GST to offshore digital supplies, the Board of Taxation review of hybrids and one of the first OECD BEPS compliant double tax treaties (Australia/Germany)

• The Australian tax reform debate, with contributions reflecting a wide range of political, partisan, economic, taxation and industry views

• The Senate Inquiry into corporate tax avoidance

• The increasing focus on tax transparency, including the release by the ATO of the tax paid report, the Board of Taxation report on a voluntary tax transparency code and the expansion of the general purpose financial reporting regime

• A bold, new approach from the ATO, continuing with their ‘Reinvention’ program, correcting the record at the Senate hearings, the rollout of an upfront, proactive administration of the MAAL and a focus on the digital tax world of the future. The ATO has also had wins (at first instance) in a significant transfer pricing case (Chevron) and on Part IVA (Orica), with these cases also having implications on penalty exposures and the existence or otherwise of reasonably arguable positions.

The combined impact of these developments meant the tax landscape was irreversibly changed: corporate tax found a new home on the front page of the financial press, and generated untold pages of Hansard reports from Senate Committees, the House of Representatives and the Senate. Tax is now a matter of great public interest and media focus.

In 2016 tax will continue to be a risk, brand and reputation issue and a priority for boards. With the focus on transparency, multinational and corporate tax generally, large corporates will be under increasing pressure to publicly demonstrate their economic contribution and to evidence good corporate citizenship.

In addition, this year is also a federal election year, and our political parties are starting to articulate their tax policies given tax is expected to be a key issue for the electorate.

It’s time to take stock of the events in 2015, and consider how they will influence tax policy in 2016.

Understanding the changes wrought by a turbulent 2015...

In 2016 tax will continue to be a risk, brand and reputation issue and a priority for boards.


Learnings from the Senate Inquiry into corporate tax avoidanceWhilst the Senate Inquiry into corporate tax avoidance is due to report on 26 February 2016, some important learnings have already emerged.

1. The Senate Inquiry didn’t tell the ATO anything it didn’t already know, but our politicians and the public learned a lot

Concerns about base erosion and profit shifting were not uncovered at the Senate Inquiry. The OECD globally, and Treasury and the ATO domestically, had already recognised well before that global tax rules were not keeping up with changes in the modern global economy. Increased cross border trade, technological change (in particular the digital economy) and mobile investment was driving new business models and consequently new threats to revenue.

By the time the Senate Economics References Committee commenced in October 2014, there had already been significant activity in other forums:

• The May 2013 Budget provided the ATO with an additional $109.1 million over four years to increase compliance activities around ‘restructuring activity that facilitates profit shifting opportunities’

• Internationally the OECD BEPS Action Plan to address gaps and mismatching in the tax rules was endorsed by the G20 Finance Ministers, including Australia in July 2013

• Also in July 2013, Treasury released the results of its scoping paper: ‘Risk to the sustainability of Australia’s corporate tax base’ concluding it ‘is clear that there are real and identifiable risks facing Australia’s corporate tax base’

• By November 2013, the ATO was publicly talking about its efforts to combat multinational tax avoidance – examining global models adopted by foreign multinationals and participants in the digital economy. A small number of audits in e-commerce industries had commenced

• The ATO had commenced its International Structuring and Profit Shifting Program (ISAPS), a four year initiative focusing on transfer pricing and international restructures. By November 2013 the ATO had identified 66 taxpayer cases where it was considered highly likely the risk of base erosion or profit shifting was present

• The ATO was busy engaging with (and leading) a range of organisations such as the Study Group on Asian Tax Administration and Research (SGATAR), the Joint International Tax Shelter Information Centre (JITSIC), the Global Forum on Tax Administration and the Global Exchange of Information (EOI) Forum

• Australia was also leading a group of six countries in its ‘E6’ project – which examined how digital multinationals might be shifting their profits to tax havens

• Australian personnel and resources were embedded in many of the OECD BEPS Working Paper groups.

The intelligence available to the ATO and to Treasury at that time was already significant and was being actioned. But public interest built up as the coverage of the Senate Inquiry took tax to the front page and into households via live stream internet broadcasting.

2. The Inquiry put pressure on both the ATO and the Government to be more transparent and pro-active in addressing multinational tax avoidance (and will continue to do so)

The Government position prior to the Senate Inquiry was to act and influence through their leadership of the G20 and via the OECD BEPS Agenda. The coordinated, multilateral approach was expected to create a ‘level playing field’ globally where no country would be competitively disadvantaged by tightening their tax rules. But with political pressure mounting, and the advent of the Diverted Profits Tax in the UK, the then Treasurer Joe Hockey responded in December 2014 that Australia would take some unilateral action ahead of the BEPS Action Plan. And by December 2015, the MAAL was enacted.

Even though the BEPS final reports were released in October 2015, the political pressure to address BEPS promptly is still significant.

The OECD globally, and Treasury and the ATO domestically, had already recognised well before that global tax rules were not keeping up with changes in the modern global economy


The issue of multinational tax avoidance also has the capacity to waylay the Government’s critical agenda on tax reform. The events of 2015 have left the public sceptical as to whether business is paying its ‘fair share’ of tax. Addressing this is crucial in convincing the electorate to accept more widespread tax reform.

The ATO was also placed under pressure during the Senate Inquiry. The tone of the public debate resulting from the Inquiry emphasised the changed expectations of multinationals, and by default the increased community expectations of the regulators to take a harder line in dealing with tax disputes of this nature. The ATO responded strongly to this and the public and political sentiment is likely to continue to influence the ATO.

The ATO also had to move rapidly to address the threat of a lack of confidence in Australia’s tax administration system. There remained a risk other taxpayers would lose trust. As a result the ATO has shared an increasing amount of information about its compliance activities.

The Commissioner made public statements about individual corporate taxpayers in order to correct the public record. He has also moved to reassure the public through extensive communications on the ATO website titled ‘Building confidence’– the new name for what was previously ‘Compliance in Focus’. This web communication is about the ATO being transparent about their approach in administering the tax system and explaining how they deal with taxpayers who are non-compliant.

3. Tax is big news

Media generated from the Senate Inquiry was unprecedented. There is an ever widening spectrum of stakeholders taking an interest in what has historically been seen to be a niche technical subject.

And this is at a time when we have a strong voluntary compliance culture, administered by the ATO, one of the most effective and respected tax administrations in the world.

2015 tax word/acronymn of the year The winner is …MAAL, referring to the Multinational Anti-Avoidance legislation which started on 1 January 2016. MAAL did not even exist as a word or an acronym prior to the May 2015 Budget – and since then, has spawned much focus and debate.


The tax reform puzzle pieces

It started with a pre-election promise from the then Opposition leader, Tony Abbott. It then spawned the mantra of ‘lower, simpler, fairer’. And the tax reform process had begun: a discussion paper, a green paper, followed by a white paper and reform policies to be taken to the 2016 election. In hindsight, it all seemed simpler back in 2013.

A lot has happened since then: the public mood has shifted, political leadership has changed, the debate has first been shut down and then re-opened as everything was put back on the table. And a wide range of views have been expressed in the public debate – personal tax and bracket creep, superannuation, CGT discount, negative gearing, corporate tax rates and multinational tax, innovation, GST and more.

In January 2016, Treasurer Morrison indicated he was not in favour of an old style process of big tome documents. He has implied a Green Paper and possibly a White Paper in the traditional sense may not be necessary and indicated a statement of government policy can be done in many ways:

“Presently, I mean, we have the current arrangement, which says there’d be a green paper and a white paper. But what the debate over the last three or four months, I think, has shown is, in many ways the public have moved beyond that”

What are some of the moving pieces in the evolving tax reform debate?

1. In play as part of the tax reform process is the House of Representatives Economics Committee Inquiry into Tax Deductibility

Its role is to examine some options to simplify the personal and company income tax systems, with a particular focus on options to broaden the tax base to fund reductions in tax rates.

The Inquiry will focus on two key areas:

• The personal tax system as it applies to non-business income, with particular reference to the deductibility of expenditure in earning assessable income. The Inquiry will consider tax treatment of comparable jurisdictions such as the United Kingdom and New Zealand

• Company income tax deductions; primarily interest deductions.

The Committee sought submissions by 15 January 2016 and whilst no reporting date has been set, this is anticipated to be in late February/March.


2. We have also not yet seen the House of Representatives Economics Committee Inquiry into Home Ownership Final Report

This Committee was tasked with considering the impact of current tax policy at all levels on home ownership and the opportunities for reform. It is likely recommendations on negative gearing and the CGT discount will flow from this Inquiry sometime in March.

3. Reform of the Federation is the other key piece to settling tax reform policy

One of the big announcements out of the last meeting of Council of Australian Governments (COAG) in December 2015 was that the aim of Federation tax reform was firmed up to be to incentivise growth rather to boost health spending.

The next meeting of COAG is scheduled for March 2016, with the aim to make decisions on tax reform options for the Federation.

Comments after the last COAG meeting indicate the Commonwealth position is becoming more pragmatic about Commonwealth and State unity on tax reform with Senator Cormann stating:

“Our preference is to achieve a consensus with State and Territory governments around how our tax system can be improved and how we can make it more growth friendly. But by the same token, if in the end it is not possible to achieve a consensus, we will have to make judgements on what we can sensibly do ourselves within our respective jurisdictions to improve our tax system”.

Whatever the outcome, tax reform is likely to be a huge focus in 2016. Whatever the format, the Government is expected to deliver a proposal for policy reform which will focus on reducing complexity, improving fairness in the tax system, encouraging workforce participation and supporting improvements to productivity. Tax reform proposals will be taken to the electorate as one of the key policy platforms in the Federal election in 2016.

There is still a chance some non-controversial tax reform initiatives could be included in the May 2016 Budget with Senator Cormann indicating “It depends on when certain decisions are made as to whether that would be reflected in next year’s Budget or whether it will be reflected in next year’s half yearly Budget update.”


2015 Tax Catchlines“...we need to have a tax system that is supporting people to ‘work and save and invest’”

“...we don’t have a revenue problem”

“...pay their fair share of tax”

“...a 15 per cent GST on everything”


Election update – key tax policy platforms of the major parties

The two principal political parties are starting to articulate their tax policies, given tax will likely be a key differentiator for the electorate. The ALP federally has commenced campaigning against any change to the GST.

Below is a summary of the policy statements made or policy directions indicated in 2015 and early 2016:

Liberal/National Coalition Australian Labor Party

Company tax rate

A competitive company tax rate, but:

• A company tax rate cut of at least two to three percentage points would be needed to drive a significant investment response

• This could only be done as a change in the tax mix (a zero sum result).

A competitive company tax rate, but:

• This is a long-term objective of lowering the rate to 25 per cent

• This couldn’t be done with the deficit as it is or while Commonwealth spending exceeds revenue by 1.5 per cent

• A lower rate in the long-term would be achieved by ensuring the tax net is “as tight as it can be” referring to multinational tax avoidance.

Tax reform and possible changes to the GST

A change in the tax mix from inefficient (such as income tax) to efficient taxes (such as GST) as indicated through its mantra of developing a tax system that is supporting people to “work and save and invest.”

Publicly the party has expressed its concern about the impact of bracket creep

No overall increase in taxes (“we do not have a revenue problem”)

Incentives both within and outside the tax system to encourage an innovation economy

The Treasurer has implied no changes to GST on health and education stating “the issues that were present back when GST was originally introduced around health and education are still there today”

The Treasurer has also implied small changes to the tax system around multinational tax avoidance, workplace deductions, superannuation and GST on digital supplies would not be sufficient in size to fund reduced personal tax and company tax rates. But that an increase in the GST would be of the scale sufficient to do this.

No increases to the rate or base of GST: this is the view at the Federal level. However, at the State level some Labor Premiers have given qualified support to an increase in the GST in order to fund health expenditure

Publicly the ALP has also expressed concern about the impact of bracket creep.



Addressing multinational tax avoidance

No change to thin capitalisation rules due to the tightening of the thin capitalisation measures two years ago (making Australia’s rules already BEPS compliant)

Better alignment of Australia’s rules on hybrid entities: the Government has asked the Board of Taxation in May 2015 to undertake consultation on the implementation of new tax laws to neutralise hybrid mismatch arrangements pursuant to the recommendations of the OECD

Strong commitment to BEPS 15 point Action Plan.

Further tightening of the thin capitalisation rules limiting the financing costs companies can claim to a limit based on the entire debt-to-equity ratio of a group’s global operations

Better alignment of Australia’s rules on hybrid entities: this measure is based on the OECD BEPS Action 2 and is being actioned by the Government

Increasing funding to the ATO to track down and tackle corporate tax avoidance.

Superannuation

More targeted incentives for superannuation.

There is a reluctance to penalise those taxpayers who have saved for their retirement under the existing rules

The Government has also indicated a desire to allow more flexibility in the superannuation system

Media speculation suggests the Government may be considering reducing the concessions available to taxpayers on pre-tax contributions to superannuation, together with a relaxation of annual contribution caps (perhaps in favour of life-time caps).

Focus on fairer superannuation

Proposal to tax any earnings over $75,000 on superannuation assets supporting retirement income streams at 15 per cent (currently not subject to tax). It is anticipated this will largely impact taxpayers with balances in excess of $1.5 million. Capital gains will be grandfathered. Labor will also remove the 10 per cent tax offset for defined benefit income above $75,000. If implemented, the measure is to apply from 1 July 2017

Plans to reduce the Higher Income Superannuation Charge threshold to $250,000 (this would extend the additional 15 percent charge for superannuation contributions to taxpayers at the lower income threshold of $250,000 – previously $300,000)

Ending the freeze of the Superannuation Guarantee at 9.5 per cent and fast-tracking the Superannuation Guarantee increase to 12 per cent.



Negative Gearing

Negative gearing policy still to be announced.

Whilst the former Prime Minister comprehensively ruled out changes to negative gearing, Prime Minister Turnbull has left all options on the table

However it is Treasury’s view the high cost of housing is more a function of low interest rates than taxation settings and if any taxation settings were to blame, the CGT discount is more likely to be the tax policy setting that needs to be looked at

Some limited quarantining of negative gearing deductions is still a possibility.

Negative gearing policy still to be announced

At one point last year the ALP was considering limiting negative gearing concessions to new houses or just one investment property

Shadow Treasurer Chris Bowen stated any changes proposed for negative gearing would be taken to the next election; people who have invested in good faith with existing rules will not be disadvantaged; and any policy will not risk reducing the supply of new housing or, if possible, improve the situation with the supply of new housing

However, Labor leader Bill Shorten has played down these comments stating: “we think there’s a lot of focus that needs to be on the supply side. Negative gearing changes are not the focus of the Labor Party.”

Other tax policies

Increases in tobacco excise to reduce tobacco consumption in the form of four 12.5 per cent excise rate increases commencing on 1 July 2017.


There is a tax transparency revolution underway

Companies are under increasing pressure to report more about their taxes, as the public debate around the tax contributions of large corporates continues and regulators respond.

Not only are mandatory reporting requirements expanding, but voluntary reporting is becoming more common. An increasing number of corporates worldwide, including in Australia, are including more tax disclosures within both their financial reporting and/or social responsibility statements. Many corporates are reviewing their current tax disclosures from a different perspective, considering a potential audience that is non-tax, and assessing whether there might be public relations benefits from increasing or refining their messaging around taxation.

1. Voluntary disclosure is the new black

Domestically the Federal Government kick started a process back in May 2015 asking the Board of Taxation to develop within 12 months a voluntary corporate tax disclosure code. Hanging over the code is the implied threat that if the code is not widely adopted by large business, then the government may consider legislating mandatory disclosure.

Broadly, the Board has recommended larger businesses (Australian turnover of AUD 500 million or more) prepare a ‘taxes paid’ report, which would include a corporate’s:

• Approach to tax strategy and governance

• Tax contribution summary for corporate taxes

• Information about international related party dealings, financing and tax concessions.

It has also recommended both larger businesses and medium businesses (Australian turnover greater than AUD100 million but less than AUD 500 million) should improve their disclosures of tax information in their financial statements by:

• Providing a reconciliation of accounting profit to tax expense and to income tax paid or income tax payable

• Identifying material temporary and non-temporary differences

• Calculating accounting effective company tax rates (ETRs) for Australian and global operations (pursuant to AASB guidance).

Globally, new expectations of disclosure are evolving. Corporates are, either pro-actively or defensively, addressing issues such as:

• Why their effective tax rates differs from the expected statutory rate

• Taxes paid or tax contributions split between various categories of tax (and possibility geographically)

• Tax-related governance (including policies on setting and monitoring adherence)

• Uncertain tax provisions for which a provision or contingency has been recorded

• Use of tax havens if any.

2. ATO mandatory reporting will roll on

The long expected 2013-14 tax transparency details for public companies with income in excess of $100 million was published by the ATO on 17 December 2015. The report published limited tax details of 1,539 corporate taxpayers. The tax data reported was limited to total (gross) income, taxable income and tax paid. The ATO also published a general analysis of the published data, starting with breakdowns of the number of companies published by income segment, industry segment, market size and foreign ownership.

If the code is not widely adopted by large business, then the government may consider legislating mandatory disclosure.


According to the report, a total of 579 entities (38 percent of those in the disclosure regime) did not pay any income tax in respect of the 2013-14 income year. The ATO provided useful guidance explaining the limitations of the reporting and the underlying complexity. As expected, the release provided much material for the media.

A further 300 (approximately) Australian owned private corporations with total income of $200 million or more will be published in a second tranche in March 2016.

This reporting is part of the new legislative landscape and will roll out on an annual basis in the future. There has been some discussion the release should disclose other items (e.g.accounting profit) to better target the focus on book/tax differences. This would require legislative amendment, and as evidenced in the MAAL debate at the end of 2015, once the current Senate starts a debate on tax transparency, the results are unpredictable.

3. A tax law takeover of the Corporations Law?

The political wrangling to pass the MAAL resulted in an expansion of the general purpose financial reporting rules being imposed. Unusually, this is not being done by way of ASIC and the Corporations Law, but via tax legislation. This last minute amendment, although short, throws up lots of uncertainties that will need to be addressed before the new regime kicks in, for years commencing on or after 1 July 2016.

2016 will continue to be a year where tax is under the microscope. The coming 12 months may prove us wrong – but we believe the key issues of 2016 will largely be sourced in the developments of 2015. Much new territory has been opened up in 2015. Old norms are being challenged, new standards are being set: the landscape is shifting at dramatic speed. We see the tax story of 2016 will be a deeper technical, practical and tax-administrative journey into the issues that first surfaced in 2015.

We remember 2015 as the year of heated tax debate

Senate debate on the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 amendments on transparency:

“This is a dirty Greens deal done dirt cheap.”

“I won’t sit down. If you want to come outside, I’ll come outside – you boofhead!”

“...you are now in league with the knuckle-draggers of the Liberal Party”

“...you are now lickspittles in your desperate attempt to show how moderate and relevant you are”

Contacts

Fiona Cahill Partner Tel: +61 8 9365 7313 [email protected]

John Rawson Partner Tel: +61 8 8407 7158 [email protected]

Teresa Dyson Partner Tel: +61 7 3308 7341 [email protected]

Peta McFarlaneAccount Director Tel: + 61 3 9671 7868 [email protected]

Vik Khanna Partner Tel: +61 3 9671 6666 [email protected]

David WatkinsPartner Tel: +61 2 9322 7251 [email protected]

For further information, please visit our website at www.deloitte.com.au

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s approximately 200,000 professionals are committed to becoming the standard of excellence.

About Deloitte Australia

In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 6,000 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit Deloitte’s web site at www.deloitte.com.au

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Diving into the year ahead How 2015 will shape the tax landscape … · Diving into the year ahead How 2015 will shape the tax landscape in 2016 2 ... program – out of which we