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Taxman slugs big buyouts

Sydney Morning Herald

Monday February 28, 2011

Ben Butler

Michael D'Ascenzo says private equity funds must pay up or prove they are paying tax elsewhere. Ben Butler reports. THE Australian Tax Office commissioner, Michael D'Ascenzo, has challenged multinational private equity firms to pay tax in Australia or prove why they shouldn't.The private equity firms should offer the proof by disclosing the identity of their investors to the Tax Office, he said.In a warning to the industry before likely exits by large private equity players, including CVC in Nine and KKR in Seven Media Group, Mr D'Ascenzo attacked the tax stance of what he called "offshore leveraged buyouts".In a wide-ranging interview with BusinessDay, Mr D'Ascenzo also:Warned that increasing company profits and a fall in the tax take was leading to a "tax gap".Signalled the possible need for legislation to shore up its position on transfer pricing.Foreshadowed continuing action in its long-running Wickenby investigations.Mr D'Ascenzo demanded private equity players prove their argument that their investors were paying tax offshore, eliminating the need for tax to be paidin Australia."Their claim is that all this is kosher, it's all going back to the client and they're all exempt ... they're all paying tax elsewhere," he said."All we're saying is: put your money where your mouth is."His comments follow the failed Tax Office legal bid last year to stop $1.4 billion from the Myer float by US private equity group TPG flowing out of the country, tax-free.Mr D'Ascenzo said a tax treaty allows private equity profits to leave Australia tax-free if they are to be be taxed in the US.But he said it was difficult to determine the actual position of tax payments because of "blocker" arrangements used by the funds."But no, there's a whole range of holding structures which public information says, 'This is a blocker from Australian tax and this is sought to be a blocker from US tax'," he said."And so I just wonder if whether the claims are right that all these mechanisms are done for legitimate commercial purposes."He said that if private equity firms were serious in their contention that all their arrangements were above board they should have no problem giving the identities of their investors to the Tax Office.Mr D'Ascenzo also hinted at "fragility" in the system of taxing companies after soaring profits had resulted in a reduction in the amount of company tax collected.He said the gap, revealed in research released today by the Tax Office, may be due to a surge in profits in the mining sector, which attracts hefty tax deductions.Research on the so-called "tax gap" examined the difference between the amount of company tax it expected to collect and the amount actually collected.Mr D'Ascenzo said the gap could be due to tax avoidance. He also said it could be due to growth in capital-intensive export industries, which "have high levels of tax deductions"."The mining sector would fit all those criteria," he said."So you could see a growth in mining profits but not necessarily a commensurate growth in tax, for legitimate reasons."He declined to be drawn on whether the gap supported the introduction of a resources rent tax."If there is a fragility in the business tax system, if the policy parameters are producing outcomes that were unexpected, then we should be advising government of what we're seeing on the ground," he said.Mr D'Ascenzo refused to disclose the size of the gap, saying the research was "a first cut" and more investigation was required.On transfer pricing, Mr D'Ascenzo said the Tax Office had seen an upsurge in arrangements where multinational corporations artificially inflate the price they pay for goods purchased from overseas associates in order to shift profits out of Australia."What we're finding is really the tip of what we think is probably reasonably aggressive practices that do question the current legal structure of our transfer pricing provisions," he said.The Tax Office has appealed against its loss in the Federal Court of a transfer price case against French chemicals company SNF, heard last week."I think there would be an issue for government in relation to some adverse decisions in this space," Mr D'Ascenzo said.

© 2011 Sydney Morning Herald

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