Multinational enterprise: Corporate 'effective tax rate' now in revenue authorities' sights

Multinational enterprise: Corporate 'effective tax rate' now in revenue authorities' sights

As if the OECD BEPS (Base Erosion and Profit Shifting) project is not causing enough angst for corporates, revenue authorities, particularly in the UK and Australia, are now zeroing in on what is termed a company's "Effective Tax Rate" (ETR) to make a comparative analysis of what tax a company is paying relative to other companies.

Of course, the opportunity is taken to push the message that such methodology creates a greater level of transparency "to build community confidence in the tax system".

On 30 July 2015, the Australian Taxation Office (ATO) announced it has developed what it calls an Effective Tax Borne (ETB) methodology and has started a pilot with businesses to test and determine its viability. The methodology seeks to provide a standardised approach to identifying an economic group's worldwide profit from Australian linked business activities, and the Australian and offshore tax paid on that profit. The ability for the ATO to make "like-for-like" comparisons of taxpayers' ETB is seen as an outcome.

The ATO said further consultation is likely to follow the initial stages of the pilot to capture the findings and determine how ETB fits within ATO and government directions.

Similarly in the UK, as part of its recent announcement to require large businesses to publish their tax strategy and drive greater transparency and ‘cultural changes, the UK HM Revenue & Customs stated that, when a company articulates its tax strategy, it may cover whether the UK Group has a target ETR, what that is, and what measures the business is taking to maintain or reach this target ETR.

Background
This concept of ETR or ETB, or effective tax rate, has been around for a long time. Before hearings in April this year of the Australian Senate Economic References Committee enquiry into Corporate Tax Avoidance, testifying corporations quoted ETRs to demonstrate the high level of Australian tax paid. However, there was no consistency in the basis of calculating these ETRs and the ATO was critical of some of the methodologies adopted.

The ATO indicated to the Senate Enquiry it had developed a formula for calculating an ETR (or "effective tax borne") which if applied to the testifying corporations, would permit a comparison on a "like-for-like" basis. It provided the formula to the Enquiry. The ATO said the formula is intended to identify an economic group's total worldwide profit from Australian linked business activities, and the Australian and offshore tax paid on that profit. It said this will provide an indication of total tax borne as well as the proportion of those profits actually taxed in Australia.

The core objective of the formula is to quantify revenue, income or profits which are related to Australian-linked business operations; to quantify taxes paid on that Australian-linked revenue, income or profits; and from those two figures, determine the Australian or global ETR.

The denominator in the formula is the total economic group profit from business activities which are linked to Australia. There is a variant which excludes some abnormal items from the profit calculation. The ATO says the starting point is the consolidated accounting profit of the Australian group (which may include offshore subsidiaries). To develop the estimate of the total economic group profit from business activities linked to Australia, the ATO says it is necessary to make a range of adjustments to that profit (especially for inbound multinationals, where the Australian accounts will only be a subset of the economic group's activity).

The ATO states there are 2 alternative numerators under the combined metric:
• the Australian tax (including non-resident withholding taxes) paid on those business activities by the economic group;
• the global tax paid on those business activities by the economic group.
The ATO has said the metric deliberately includes profits of the economic group which may not be taxable in Australia under Australia's source, residency and anti-profit shifting rules or the OECD / Double Tax Agreement principles intended to avoid double taxation. The metric also seeks to reflect all of the channel profit derived from business activities involving Australia and the Australian and global tax paid on that channel profit.

The ETB methodology now developed and being piloted, is the result of the ATO's work to date. Although this is still a "work-in-progress", there is no doubt that many within the tax and accounting profession at home, and abroad, would be keenly interested to observe the development of the ETR methodology by the UK and Australia.

Multinational enterprise: Corporate 'effective tax rate' now in revenue authorities' sights
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Terry Hayes

Terry Hayes

Terry Hayes is a Senior Tax Writer with Thomson Reuters where he leads the Tax Newsroom for Checkpoint, the company’s online tax research, information and workflow solution. He is also Technical Editor for the Thomson Reuters Australian Financial Planning Handbook. Terry’s experience stems from 12 years at the Tax Office and several years in the “Big 4? environment in Sydney. He is also a Registered Tax Agent.

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