Compliance challenges continue to be a major worry for most corporations, particularly those with wide-ranging international operations.
As organisations grow and become more diverse in their activities, the tax compliance risks become increasingly complex, creating the need for advanced measures to mitigate and control such risks.
This blog outlines the major compliance risks present in large companies and the regulatory measures designed to deal with them.
The Evolving Nature Of Corporate Compliance Risks
Most large corporations in Australia experience numerous instances of non – compliance risk mainly caused due to their intricate business structures and foreign dealings.
Hence, it would be valuable to look into the particular areas of risk and the consequences therein.
Let’s examine the key risk areas and their implications.
International Compliance Risks
1. Profit Shifting
The digital age has transformed how multinational corporations operate. With companies no longer needing to maintain a physical presence near their customers, profit shifting has emerged as a significant concern.
This practice involves:
2. Related Party Debt
One of the most common tax compliance issues involves the allocation of debt within corporate groups. Key focus areas include:
- Excessive debt allocation to Australian companies
- Non-market interest rates on related party loans
- Complex financing arrangements designed to minimise tax
3. Offshore Service Hubs
Many corporations use centralised operating models for various functions. While these arrangements often have legitimate business purposes, they can raise compliance concerns when:
- Marketing hubs don’t reflect true value creation
- Procurement activities aren’t properly priced
- Service charges don’t align with the actual benefits received
4. Inbound Supply Chains
Multinational companies commonly rely on their foreign associated companies to source certain goods or services which are then brought back to Australia for sale.
A major area of concern relates to compliance and ensuring that the appropriate profit is recognised in Australia. Irrespective of any incorrect pricing it is likely that profits will inappropriately be attributable to the Australian jurisdiction and thus taxable income will be understated in Australia.
5. Intangible Assets
Intangible assets like intellectual property are highly liquid and can easily be relocated for tax planning.
Improper treatment of these intangible values and assets can help in tax avoidance particularly in situations that involve royalties. The collection and the administration of these intangible assets are subject to compliance measures by tax authorities.
Domestic Risks
1. Re-characterisation of Income
Reclassification underpays business income by converting it into passive focus further on the lower taxes of limited incomes.
This practice may segregate different aspects of one business and place them under different legal entities which may pose challenges in tax assessment. However, recent legislative amendments subjected these recharacterise income streams to higher tax rates.
2. Research and Development (R&D) Incentive Misuse
The R&D tax incentive serves to increase the level of innovation in businesses, however some companies abuse this system by pretending that non R&D related expenses are actually R&D expenses.
In fact, the ATO focuses its efforts on particular industries such as construction and farming due to the high number of false claims.
3. Property and Construction Sector Risks
Property and construction sectors remain active yet very risky economic sectors. Most of the compliance tax related problems emanated from these sectors are related to borrowing, bankruptcy and complicated structuring of the industries. The ATO has introduced measures to address such issues as compliance by sector.
4. Group Structuring and Major Business Events
Mergers, acquisitions, and other major business events can present significant compliance risks. The transfer of assets within a corporate group, if not managed within regulatory frameworks, can result in unintentional or deliberate tax avoidance.
Regulatory Actions To Address Compliance Risks
To combat these compliance challenges, tax authorities, including the Australian Tax Office (ATO), employ multiple strategies and tools.
Here’s an overview of the primary actions taken:
1. Tax Avoidance Taskforce
A task force aimed at combating tax avoidance in large corporations, multinational companies and rich individuals. The amount of funds and resources allocated has increased its capacity to effectively deal with investment tax avoidance cases.
2. Court Litigation
Judicial process is involved in cases where taxes in dispute are of large amounts, where more recent cases have helped in the operationalisation of the standards for compliance.
For instance, lawsuits on matters such as trust income and R&D activity eligibility have drawn the line.
3. Taxpayer Alerts & Guidance
Alerts serve as warnings, mainly to corporations and their advisors, on paying or promoting certain aggressive tax strategies and work to assist self-advise the businesses on the attitude of ATO regarding several issues.
For instance, compliance alerts regarding issues like related party financing and migration of intangible assets are made to encourage compliance behaviour before potential misconduct.
4. Legislative Amendments
Targeted amendments seek to amend the Law with respect to any specific compliance risk, for example, income re-characterisation. Such modifications will mitigate gaps and reinforce compliance requirements.
5. Compliance Guidelines (PCGs)
Pragmatic compliance guidelines give corporations a glimpse of what managing risks entails, which includes the acceptable practices relating to cross-border arrangements.
PCGs for offshore hubs and inbound distribution are targeted at helping corporations understand what is expected of them regarding compliance.
Stay Ahead Of Compliance With KPG Taxation
In order to achieve corporate objectives and maintain organisational stability, proper management of compliance-related risks is crucial. At KPG Taxation we acknowledge this and offer our assistance in deciphering the taxing laws, facilitating reporting, and reducing the risk of penalties.
Get in touch with our team of specialists today so as to protect and ensure your business stays compliant.
