The Tax Office is examining whether tax promoter penalties can be applied to big four accounting firms Deloitte, EY, KPMG and PwC as it trawls through emails that detail how aggressive schemes were marketed, in a major challenge to legal professional privilege.
Claims of legal privilege have become critical to a number of corporate audits and the ATO is braced for further legal challenges after Swiss mining group Glencore launched a High Court action two weeks ago.
The High Court action seeks to force the ATO to give up thousands of secret emails and documents from Bermuda law firm Appleby that were part of the Paradise Papers published by The Australian Financial Review and other media groups.
The documents, which were obtained by the Financial Review and are published today on afr.com, detail how Glencore moved $30 billion of international assets into offshore tax structures after a $16 billion writedown by its Australian holding company. The Glencore restructure is now the subject of a major investigation by the ATO.
The ATO is on a roll after its Tax Avoidance Taskforce raised $5.6 billion in cash in two years from its audits of e-commerce giants, big miners and private wealth groups.
With the Taskforce still two years to run, Deputy Commissioner Mark Konza said there was now a focus on intermediaries in tas schemes, the big four accounting firms, after the ATO uncovered aggressive new tax schemes last year to sidestep provisions of the Multinational Anti Avoidance Law which were being marketed to clients. The ATO believes that companies are directing emails through lawyers which allows them to claim legal professional privilege and keep them from the tax office.
“Arrangements we were told were reasonably arguable – we’re now seeing with the emails they weren’t reasonably arguable because they were done with the interest of avoiding tax,” Mr Konza said.
“We want to see if tax promoter penalties apply in some cases.”
Under legislation brought in a decade ago during the huge Operation Wickenby, corporate entities who promote a tax avoidance scheme can face fines of up to $4.5 million, with further penalties for individuals.
Commissioner Chris Jordan signalled tensions with the big four accounting firms in a Senate hearing in March when he singled out “certain intermediaries” who were promoting “next generation schemes aimed at subverting the intent of the OECD BEPS work and recent legislative changes”.
“As part of our efforts in expediting matters, it has become clear that our understanding of what advice is subject to legal professional privilege significantly differs from the position taken by some taxpayers and their advisers,” Mr Jordan said in March.
We expect that these different views as to the scope of legal professional privilege will be tested shortly.”
The domestic claims of legal privilege are different from the Glencore case, where Mr Konza said documents were obtained through the Joint International Taskforce on Shared Information & Collaboration.
Mr Konza said last year after reviewing one presentation of a structure to avoid MAAL payments through a foreign partnership arrangement “as soon as I got back to the office I started an audit on that company and others that have been using that scheme”.
“Some of these companies are also claiming legal and professional privilege,” Mr Konza said. “We had one taxpayer who told us every single document we asked for was privileged.”
Mr Konza was speaking as the ATO released details which showed that more than half of the $10 billion in tax assessments by its Tax Avoidance Taskforce had already been raised in cash payments, with more payments expected over the next 18 months.
Taxpayers who contest assessments are required to pay half of the contested amounts while their appeals are heard. However, Mr Konza said this represented a small fraction of the $5.6 billion cash raised.
“We don’t have many major cases before the courts at the moment,” he said.
On other figures reported by Treasury, which include some assessments issued before the taskforce was officially set up in July 2016, $4 billion cash has been raised from $7 billion in assessments billed to e-commerce companies, big miners and other large corporations.
This includes $1 billion raised from e-commerce groups. Apple, Facebook and Microsoft have all reported reaching settlements with the ATO as part of $1 billion in cash raised from e-commerce companies. Google has said it is contesting audit findings.
In addition on assessments of $3.5 billion to wealthy individuals and private groups the Taskforce has raised close to $2 billion in cash.
“The $679.9 million the government funded the ATO for the Tax Avoidance Taskforce has allowed the ATO to significantly expand its compliance approaches,” Mr Konza said.
“It’s well above expectations [for the taskforce] and we’ve still got another couple of years to go.”
The ATO was satisfied it had a pretty good lock-in of revenue in the IT and e-commerce field, he said. A future focus would be the transfer pricing arrangements for big pharmaceutical companies.
Mr Konza said the ATO was still seeing active tax planning around debt hybrids, Chevron-style debt interest arrangements, transfer pricing and tax on financial arrangements (ToFA).
The ATO won a long-running court case against Chevron in 2015 over related-party loans by US subsidiaries charging the local operations 9 per cent interest, when the US cost of funds was 2 per cent or less.
Since that time, Chevron has settled with the ATO. Other corporations have restructured $80 billion in loans to avoid adverse ATO findings.