Minimising tax just became a lot riskier

They don’t call it a blacklist. That label is a recent media invention – as recent as right here, right now – but it fits. After all, this list is a state secret, and you surely would not want your name on it.

You see, the Australian Taxation Office has prepared a classified register of the country’s top corporations and they are ranked according to how compliant they are when it comes to paying tax.

Needless to say, the ATO doesn’t formally call it a blacklist.

That’s far too vulgar a term, too overtly confrontational for an initiative that seeks to “encourage” those with a “relative likelihood of non-compliance” to “work with” the Tax Office via its new “continuous review” template.

The least compliant of Australia’s largest corporate entities are euphemistically registered as “higher risk” in a program the ATO calls “Large Business – Risk Differentiation Framework”.

Some might say this RDF is the ultimate barometer of corporate citizenry. But right now, as the federal budget comes under pressure from waning tax revenues, the blacklist is also one of the most powerful weapons in the taxman’s armoury. It is shaming without quite naming.

Individually, companies know where they stand. They know if they are ranked “lower risk”, “medium risk” or the dreaded “higher risk” – though those in the latter category are understandably loath to reveal their status.

It means the government doesn’t believe you pay your fair share. The tax teacher, you might say, has ordered you to sit right under his nose at the front of the classroom for special encouragement.

The ATO confirmed there are 13 names in this “higher risk” list. It would not be too hard to have a stab at them. The usual suspects who are locked in Federal Court battles with the Tax Office are a fair bet of being on the blacklist.

But we don’t know for sure, so we won’t speculate. The other telltale signs of how a company ranks could be found in the notes to the accounts on tax items in annual reports or, even more simply, in the rate of tax paid on overall profits.

The corporate tax rate is 30 per cent. Those who make a profit and pay close to 30 per cent would be deemed “low risk”. Others, which sometimes manage to pay rates as low as single digits, skulking out of hundreds of millions of dollars of liabilities with their smart structures and tax treatments, might be “higher risk”.

Although it is indeed a corporation’s duty to shareholders to minimise its tax as far as it lawfully can, the sheer complexity of tax law and the immense cost of monitoring and policing tax mean the issues are rarely black and white. There is much grey area, matters of degree. Hence the drawn-out, expensive Federal Court lawsuits over arcane tax disputes, the huge sums paid for top tax lawyers to exploit loopholes, concoct sophisticated new structures, anticipate regulatory behaviour across jurisdictions, and so on.

At its core, much of the challenge for both the poachers and the gamekeepers of the tax world hinges on what constitutes a profit. For, if there is no profit, no tax needs to be paid. It is too easy to dispose of a profit: to hide it, to pay it out in deductible interest payments via highly leveraged structures, to have it made offshore in a lower tax jurisdiction.

And the biggest minimisers are not the Australian companies but the foreign multinationals via the likes of transfer pricing.

Google is the prime example, although not exactly of transfer pricing – which involves transactions between different arms of the one company in different jurisdictions – but rather of having its customers transact with an entity in Ireland. The tax rate is lower in Ireland.

The internet giant made more than $1 billion in revenue in Australia last year and paid just $74,176 in tax. That is the equivalent of paying $74 in tax (not to forget the 17¢ – let’s round that one down) on a $1 million income.

Google broke with its tradition of silence on the matter this year when the chief executive, Nick Leeder, defended the company by saying it met its obligations in every country. ”I think it’s a big ask to ask a company, one individual, to pay more tax than it’s required to by the law. I mean it’s just not fair,” he said.

As the highest profile player in its sector, Google tends to get singled out (though you would hardly call it ”unfair”). The likes of eBay are in the same camp, and the transition to a global new economy is eroding the government’s tax base. It can be easier to tax a good than a service, a real property rather than an intellectual property.

In any case, the taxman is on the case, toting its latest weapon, the RDF. “The RDF is based on the premise that our risk management approach will be different based on our perception of both your estimated likelihood of non-compliance (that is, having a tax outcome we don’t agree with) [and] consequences (dollars, relativities, reputation, precedent) of that non-compliance,” says the Tax Office information kit.

“Using the framework, we place you into one of four broad risk categories (higher risk, medium risk, key taxpayer and lower risk) for each tax type (income tax, GST and excise).

”Our risk rating does not in any way influence the outcome of a possible risk review, but it does influence the likelihood of a review and the formality and intensity of it.”

The layman’s eye may pass over such apparently dry policy talk but for the chief financial officer, auditor and lawyer presiding over a billion-dollar profit-and-loss account, the mere sight of the words “risk”, “non-compliance”, “reputation” and “dollars” in the same word group are cause for alarm.