Large Business Compliance

1. Large Business Compliance Jim Killaly, Deputy Commissioner, Large Business and International, Australian Taxation Office

2. Increasing internationalisation of the Australian economy debate on sovereignty and local interest increasing stocks and flows of investment and income repatriation of profits is a big issue strong interest in renegotiation of DTAs increasing levels of foreign ownership community expectations about corporate citizenship Environment

3. Net investment in Australia Australian investment abroad Foreign investment in Australia Australia’s international investment position (ABS) 800000 700000 600000 500000 $m 400000 300000 200000 100000 0 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Sep-89 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Quarter The average annual growth for Australian investment abroad over the last ten years was 13.1% and for Foreign investment in Australia it was 9.% . This compares with the average annual growth of nominal GDP which was 5.9%. Outward is growing twice as strongly and inward one and a half times as strongly as GDP.

4. Australia’s global positioning increasing concern on “branch office syndrome” debate on fiscal policy and its role in competitiveness tax competition tax havens preferential regimes bank and commercial secrecy Environment

5. Significant global restructuring and repositioning by MNEs markets/ business opportunities mergers and acquisitions cost pressures capital markets and capital management volatility of interest and exchange rates and commodity prices risk management a driving focus Environment

6. Increasing share of global trade and investment being managed by MNEs Significant increase in related party dealings $50 billion rise in income and expenses in two years Heightening focus on international financing and financial markets Debate on sustainable economic development competition issues Environment

7. Technology revolution Government is redefining itself Marked shift in the balance of portfolio and direct investment and shareholder voice implications for “patient” investment Increasing questioning of value systems and institutions Significant expanding use of tax planning to avoid policy intent Reducing impact of imputation Environment

8. 1. An international tax system that facilitates investment and trade, promotes corporate citizenship and improves the social and economic wellbeing of the Australian community. Effective management of harmful tax competition: to prevent distortion of investment to ensure Australia remains internationally competitive. Australian views reflected in decisions of international tax forums. International - Desired Future - Goalposts for Success

9. 2. International tax policy and law which aligns with the proper functioning of markets, positions Australia well and ensures that Australia gets its fair share of tax. System ignores conduit activity and reflects economic substance and value added. Australia’s tax treaty network is maintained and enhanced to ensure Government objectives are met. Assessment and collection systems are effective High level of cooperation between revenue authorities to share information, resolve disputes and protect the legitimate interests of Australian residents. A community of revenue authorities that actively promotes the ongoing improvement of taxation administration International - Desired Future - Goalposts for Success

10. Corporate Pathways Insur. & Super Financial Arrangements Other Centres of Expertise LB&I High Level Design : Systemic Management - Strategic Market & Client Focus Subject Expertise Client Management National Industry Groups National Client Group ITD CGT Financial Services Innovation Losses Large clients 1X1 relationship Priv’n Energy and Resources Multi-Media & Info Technology $100M Middle Market Alliance (LB&I) Functional Centres $10M LDD Middle Market Alliance (SB) (Note: displaying the Alliance is not meant to imply increased ownership by LB&I) $1M Project capability Tax Planners Projects commissioned by the GMT Corporate BIC HWI Technical Excellence & Integrated Tax Design RevenueManagement Relationship Management Compliance Assurance National Practices - optimising business ‘praxis’ in core processes

11. 2 1 3 Note: 1 The remaining 9000 (middle market) economic enterprises account for the remaining 10% of tax assessed 2 Turnover ~ $800 million 3 Turnover ~ $100 million

12. Average growth for LB&I over the period = 13% pa Average growth for nominal GDP over the period ~ 6% pa

13. Average growth in LB&I collections over the period = 12% pa (10% pa adjusted for the PAYG bring-forward)

14. The Number of LB&I Audit Results (collections & adjustments) 200 189 180 160 143 140 122 120 No. 100 80 60 40 20 0 1998/99 1999/00 2000/01 Financial Year

15. Fieldwork Stock over Four Years 900 739 800 672 700 600 659 500 540 Audit Numbers 531 513 400 416 300 340 200 100 0 1997/98 1998/99 1999/00 2000/01 Years Start Final

16. Results from Audit Activity of Large Business Sector 2,500 2,000 1,908 1,542 1,523 1,500 1,430 Dollars (millions) 1,234 1,231 1,113 1,075 1,049 1,000 996 925 910 848 793 700 669 625 548 512 500 494 452 451 371 343 337 281 276 162 151 135 81 54 0 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Financial Year Tax and Penalties ($m) Notional Tax ($m) Collections ($m)

17. Why have a Cooperative Compliance Model? It provides: a rationale practical guidance explanation to large business and the community translation of ATO strategic models to large business compliance activity Why have a Cooperative Compliance Model?

18. Objectives • Optimising economic growth • Generating community confidence • Building cooperative relationships with business

19. Understanding the economic enterprise, its markets and key relationships From transactions to functions assets and risks From price to profit channel, the profit drivers and margins Benchmarking economic performance Understanding business strategy and investor mindset Awareness of structuring location and changes Awareness of interaction of tax systems and impacts on investment, trade and income flows Insights from Transfer Pricing Casework

20. Need for a global perspective and solution Clarifying the rules and methodologies Positioning the program Engaging industry Mirroring performance Building and continuing a relationship Facilitating risk assessment Moving from confrontation to cooperation Insights from Transfer Pricing Casework

21. React Transactions/ Events Anticipate Patterns & Trends Drivers Change World Views Transform

22. It is the community’s tax system A systemic behavioural approach needed keeping the people in the picture and building relationships across all functions tax system part of wider global socio-economic system tax administration should reflect market and business realities, not impede business, and operate in real time tax performance needs to be evaluated against economic performance tailored approaches appropriate to the risks Need to engage industry & MNEs with underlying tax policy and LB&I’s programs Philosophy of Administration

23. There are several interrelated drivers of compliance “compliance” needs to be reframed to reflect them all industry needs to be part of an ongoing dialogue on this and have a design role a balanced multifunctional program is needed to support the new approach Tax administration needs to be transparent publication of strategic statement publication of risk model and methodology mirroring of each other’s performance Philosophy of Administration

24. Practical meaning: applying cooperative compliance Fig

25. Relating professionally Building understanding Balancing self regulation with enforcement Improving the quality of the law Meeting community expectations Five key themes

26. Figure 1 The compliance pyramid Cooperative compliance is about movement; both up and down the pyramid, from active enforcement measures at the top, to self regulation and cooperation at the base Active enforcement Assisted self-regulation Self-regulation and cooperation

28. Self-regulation philosophy in Model in line with self-assessment principles. The taxpayer can independently: Take a position on issues Conduct due diligence & risk assessments ATO freed up to focus on: Higher risk issues Increased and more effective coverage

30. Co-designed with the members of the CCC. Released in November and available to taxpayers LB&I and GST Large Enterprise Compliance using it; influenced ATO restructuring Large business asking about their risk category Philosophy being explained and brought to life within the ATO. CCC sub-committee oversighting implementation What has happened?