$500,000 for late lodgement: Is there a chance that your business could be affected by the new multinational tax laws?
Large multinational companies are now firmly in the sights of the ATO and the Australian Government, who are renewing their efforts to crack down on underpayment of tax or tax avoidance schemes.
Large companies with an annual global turnover of over $1 billion are dubbed ‘Significant global entities’ or SGEs, and are subject to a raft of stringent additional reporting requirements and heftier penalties for tax infringements such as failing to lodge documents on time.
Most notably, the ATO is cracking down on multinational entities that seek to avoid having a taxable presence whatsoever with the introduction of the ‘Multinational Anti-Avoidance Law’ (‘MAAL’) passed in 2015, and further by way of the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act passed in 2017, which introduced a ‘diverted profits tax’, meant to prevent multinationals from diverting profits overseas by shifting them through a third party.
The progression towards stricter tax laws regarding multinationals is a natural outcome of increasing globalisation and of the gradual consolidation of capital into increasingly dominant ‘supercompanies’, for example mass-traders, tech giants, and ultra-profitable natural resource companies and foreign state-owned resource behemoths. According to the Forbes Global 2000 list of 2019, there are at minimum 1,922 publicly traded companies in the world with sales of $1 billion or above. There are likely hundreds if not thousands more privately held firms with sales over $1 billion – and that’s only revenue from straight sales figures. Sales figures are a fairly accurate reflection of revenue for manufacturing or consumer goods companies such as Apple, but other companies in the financial sector, such as banks, credit unions or hedge funds, hold enormous amounts of assets, make comparatively few ‘sales’, and may instead reap significant revenue through manipulation of holdings and economic conditions.
In short, billion-dollar multinationals aren’t going anywhere, and so new tax legislation intended to prevent companies with enormous revenues from surreptitiously shifting income overseas and out of reach of the ATO is an idea that is easy to support. But there may be some downsides to tarring all SGEs with the same brush.
The extra burden placed on significant global entities isn’t strictly reserved for multinational companies. Notwithstanding the ‘global’ in the term ‘significant global entity’, Australian companies that trade solely within Australia and do not conduct overseas trading activities or have international presence are also included so long as their revenue is over the billion dollar mark. Australia’s biggest companies, such as the Big Four banks, Woolworths and Wesfarmers are obviously over the $1 billion revenue cutoff. But the net cast by the significant global entity definition also catches several lesser operators, including, among others, small retailers and some government sub-contractors. This is because the definition for SGE also includes companies that are a member of a group of entities where the global parent entity has an annual global income of $1 billion or more. This means that small Australian subsidiaries or offshoots that fall under a larger global umbrella, but which may or may not have the same access to resources or funding as the parent company, are potentially getting hit by penalties 500 times what they would be facing if they were not a subsidiary– enough to wipe a small business or franchise out.
The SGE penalties notably are capable of affecting Australian governmental operations where governmental departments subcontract activities to private service providers. While most government agencies do not pay income tax and as such are exempt from the operation of the MAAL, privately-owned government contractors or sub-contractors possess no such immunity.
As an example, several Australian public transport agencies and operators which are wholly owned by state governments frequently subcontract actual provision of services out to private contractors, many of which are subsidiaries of much larger global public transport companies. Despite being part of a larger conglomerate, these small transport businesses have a fairly minor presence in South Australia and most commonly run on extremely slim operating margins. Most of them are unlikely to make profits and are largely dependent on government grants to continue operating. These small companies may fall within the category of being a significant global entity despite being bit players in state economies.
This places them at a much greater disadvantage than even smaller non-SGE public transport operators in the event of a taxation dispute, and greatly increases the burden on the company’s key staffers. Such companies potentially face ATO fines in the range of $100,000 to $500,000 for non-compliance infringements or late lodgement of tax documents – the same fines that would be levied on Microsoft or Woolworths. These companies may lack the resources to seek expert tax advice or accountancy services despite being at risk for enormous penalties.
Internationally, some companies place themselves at risk of the SGE penalty regime by attempting expansion into Australia. Several multinational software developers have recently opened branch offices in major Australian cities. Due to large global operating revenues, such companies are subject to the SGE reporting requirements and penalty regime, despite typically having less than 100 employees in Australia. Compare this to an unnamed prominent Australian-operated construction firm, which in 2018 was just shy of the $1 billion cut-off and which has between 500 and 600 employees, or a Queensland hospital operator which in 2018 which had revenue in the $800 million range and directly employed just over 6000 people.
Additionally, the extremely harsh fines may have the effect of simply discouraging multinational operators from opening Australian branches or subsidiaries. Some technology companies including ride-sharing operators or other multinational gig-economy startups have expressed interest in expanding internationally. However given that such startups typically operate on fairly shaky margins during their early phases and may even operate at a loss for some years before becoming profitable, the weighty additional reporting requirements and potential penalties entrenched in Australian tax legislation may just be enough to discourage an Australian branch operation for some time.
If you have any questions or concerns about the operation of the ATO penalty regime, have been notified by the ATO that you are operating as an SGE, or have any other questions regarding your tax and taxation obligations, you can contact Bambrick Legal today for a free 30-minute no obligation consultation.