History repeating? Tax challenges and opportunities in the COVID-19 environment

As the COVID-19 health crisis in Australia begins to diminish, the spotlight will increasingly turn to appropriate measures to repair the economic damage caused by the pandemic. 

In the aftermath of the 2007-08 global financial crisis, the Commissioner of Taxation saw the Australian Taxation Office as playing an integral role in bringing the Federal Budget back into balance. Could history repeat itself in the COVID-19 environment? 

During COVID-19, the Federal Government has pulled many levers to support Australian businesses, including establishing wage subsidies in the form of JobKeeper, deferring tax payment obligations and introducing instant asset write-off and accelerated depreciation rules to encourage continued investment.

The Australian Taxation Office (ATO) has played a vital role in delivering the Government’s initiatives to date. It has also offered important COVID-19 related relief in the areas of tax residency, permanent establishments and thin capitalisation, where compliance with the relevant rules may be temporarily difficult. However, it is becoming clear that this should not encourage business to think there will be any relaxation of the Commissioner’s approach to extracting from them what he considers to be an appropriate share of the national tax collections. 

As the focus of the Government’s COVID-19 response shifts to repairing the economy, will the ATO play a significant role? An initial sign that it may has been a series of taxpayer alerts released by the Commissioner earlier this year, including after the onset of COVID-19. These alerts warn multinational groups that the ATO will scrutinise arrangements for cross-border financing by non-resident investors of investments in Australian businesses where there are certain features that might reduce future Australian income tax revenue as the economy recovers from COVID-19. The ATO has made it clear that it will focus on such arrangements and whether they might attract an application of the thin capitalisation, withholding tax, transfer pricing or general anti-avoidance rules. The timing of these alerts is particularly pertinent considering that the COVID-19 crisis is likely to see the survival of many businesses dependent upon restructuring that could reasonably be expected to involve injections of capital and changes to the debt to equity mix. 

Another sign is that the ATO has been taking a more proactive role in providing input to the Foreign Investment Review Board (FIRB) in relation to requests for government approval of multinational acquisitions or restructures of Australian business enterprises. In this role, it is closely scrutinising proposed structures, sometimes requiring further detailed information, and in some cases recommending special tax conditions be added to FIRB approvals. Foreign companies seeking FIRB approval may need to consider providing further tax-related information as part of their initial applications with a view to minimising the risk of ATO information requests which have the potential to delay the progress of applications. However, the ATO is certainly doing all it can to ensure applications are dealt with in the normal time-frames.

Looking beyond enforcement activity, attention will be turning to the potential for new taxation measures to help pay for COVID-19 relief measures and repair the broader economic damage. There is likely to be a tension as the Government looks to tax reform to stimulate economic growth while at the same time keeping an eye on managing/reducing deficits from COVID-19. 

In the past, federal governments have dealt with this by implementing new ‘short-term’ special levies, such as the ‘Budget Repair Levy’, which was payable between 2014 and 2017. However, such measures may not be appropriate in the current environment. With many households in no position to take on increased tax burdens, implementing a special levy would likely have a negative effect on economic recovery. 

The major Australian banks have also been subject to levies in the past, such as the ‘Bank Levy’. Given the important role they continue to play in the COVID-19 environment by allowing loan and credit relief to businesses and households however, the Government will likely not want to burden the financial sector with increased tax costs. Another traditional source of revenue in difficult times has been to announce a new crackdown on tax avoidance. This usually involves a raft of new anti-avoidance measures to be added to the ATO’s toolkit. Watch this space.

Further, the Government – like governments across Europe, Asia and the non-US Americas – has been musing over the merits of adopting a new digital services tax. Like the US, Australia has taken the position that any such tax needs to be adopted as part of an Organisation for Economic Co-operation and Development (OECD) consensus. That so far has been lacking, but the OECD is due to release new proposals that it claims have consensus backing. Whether imposing additional tax burdens on electronic commerce is good policy is also open to serious debate. Again, watch this space.

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Many Australian and multinational businesses face monumental challenges in responding to the current COVID-19 health and economic crisis and in preparing to operate in the new ‘COVID-19 normal’. While some businesses will see opportunities present themselves, particularly in terms of M&A, keeping an eye on the current and emerging Australian tax landscape will remain important in the months to come. 

This article is part of our publication Continuity Through Crises: Perspectives on business risk, resilience and recovery in uncertain times.