The ATO has a little list. Photo: Virginia Star

Update The taxman has a black list. That’s the quiet chat in the rarefied world of tax lawyers and their big corporate clients.

They don’t call it a black list. 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 Tax 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 black list.

That’s far too vulgar a term, too overtly confrontational for an initiative which 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 black list is also one of the most powerful weapons in the taxman’s armoury.

It is shaming without quite naming.

Risky business

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 that 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 word in tax circles was there are 17 names in this “Higher Risk” list – the ATO later narrowed that number down to the unlucky 13 (see below ‘ATO view’ below). 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 tell-tale 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.

30 per cent

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 by 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 cents – let’s round that one down) on a $1 million income.

Google broke with its tradition of silence on the matter this year when 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.”

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.

On the case

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

ATO view

A late comment has been lobbed by an ATO spokesperson:

“The ATO has advised 1240 economic groups in the large market of their RDF categorisation for the 2011/12 financial year including Australian divisions of foreign multinational.

Each group was advised of their risk categorisation and were considered lower risk, medium risk, key taxpayer or higher risk. Thirteen taxpayers were notified that they were considered ‘higher risk’ in 2011/12.

The RDF is central to our commitment to increased transparency around our approaches. We have received feedback in response to our notification letters and in taxpayer meetings that support our approach and welcome the opportunity to openly discuss issues and their categorisations.

The secrecy provisions of the tax act prevent us from commenting on individual taxpayers or providing details of their risk categorisations. We will continue working with taxpayers in the large market to improve our compliance relationship and move to a disclosure framework where we can identify and treat tax risk in real time.

We currently have 18 operational ACAs in place covering one or more taxes, for example income tax, GST , FBT and excise. Although this is a relatively small number, they are significant in terms of the coverage and impact they have on the economy. We currently have three ACAs under negotiation for renewal and have four taxpayers that have expressed interest after we wrote to 35 business last year inviting them to enter into an ACA with us.”

Still, should anyone have this black list please forward it immediately to mwest@fairfaxmedia.com.au. Thanks. Your identity will be protected. You will be on a secret white list whose contents are only known, and shall remain only known, to one living person.