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Page 1: The Tax Disputes and Litigation Review - Greenwoods · The Tax Disputes and Litigation Review The Tax Disputes and Litigation Review Reproduced with permission from Law Business Research

The Tax Disputes and

Litigation Review

Law Business Research

Third Edition

Editor

Simon Whitehead

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The Tax Disputes and Litigation Review

The Tax Disputes and Litigation ReviewReproduced with permission from Law Business Research Ltd.

This article was first published in The Tax Disputes and Litigation Review - Edition 3(published in February 2015 – editor Simon Whitehead).

For further information please [email protected]

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The Tax Disputes and

Litigation Review

Third Edition

EditorSimon Whitehead

Law Business Research Ltd

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THE MERGERS AND ACQUISITIONS REVIEW

THE RESTRUCTURING REVIEW

THE PRIVATE COMPETITION ENFORCEMENT REVIEW

THE DISPUTE RESOLUTION REVIEW

THE EMPLOYMENT LAW REVIEW

THE PUBLIC COMPETITION ENFORCEMENT REVIEW

THE BANKING REGULATION REVIEW

THE INTERNATIONAL ARBITRATION REVIEW

THE MERGER CONTROL REVIEW

THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW

THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW

THE CORPORATE GOVERNANCE REVIEW

THE CORPORATE IMMIGRATION REVIEW

THE INTERNATIONAL INVESTIGATIONS REVIEW

THE PROJECTS AND CONSTRUCTION REVIEW

THE INTERNATIONAL CAPITAL MARKETS REVIEW

THE REAL ESTATE LAW REVIEW

THE PRIVATE EQUITY REVIEW

THE ENERGY REGULATION AND MARKETS REVIEW

THE INTELLECTUAL PROPERTY REVIEW

THE ASSET MANAGEMENT REVIEW

THE LAW REVIEWS

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www.TheLawReviews.co.uk

THE PRIVATE WEALTH AND PRIVATE CLIENT REVIEW

THE MINING LAW REVIEW

THE EXECUTIVE REMUNERATION REVIEW

THE ANTI-BRIBERY AND ANTI-CORRUPTION REVIEW

THE CARTELS AND LENIENCY REVIEW

THE TAX DISPUTES AND LITIGATION REVIEW

THE LIFE SCIENCES LAW REVIEW

THE INSURANCE AND REINSURANCE LAW REVIEW

THE GOVERNMENT PROCUREMENT REVIEW

THE DOMINANCE AND MONOPOLIES REVIEW

THE AVIATION LAW REVIEW

THE FOREIGN INVESTMENT REGULATION REVIEW

THE ASSET TRACING AND RECOVERY REVIEW

THE INTERNATIONAL INSOLVENCY REVIEW

THE OIL AND GAS LAW REVIEW

THE FRANCHISE LAW REVIEW

THE PRODUCT REGULATION AND LIABILITY REVIEW

THE SHIPPING LAW REVIEW

THE ACQUISITION AND LEVERAGED FINANCE REVIEW

THE PRIVACY, DATA PROTECTION AND CYBERSECURITY LAW REVIEW

Page 6: The Tax Disputes and Litigation Review - Greenwoods · The Tax Disputes and Litigation Review The Tax Disputes and Litigation Review Reproduced with permission from Law Business Research

PUBLISHER Gideon Roberton

BUSINESS DEVELOPMENT MANAGER Nick Barette

SENIOR ACCOUNT MANAGERS Katherine Jablonowska, Thomas Lee

ACCOUNT MANAGER Felicity Bown

PUBLISHING COORDINATOR Lucy Brewer

MARKETING ASSISTANT Dominique Destrée

EDITORIAL COORDINATOR Shani Bans

HEAD OF PRODUCTION Adam Myers

PRODUCTION EDITOR Claire Ancell

SUBEDITOR Janina Godowska

MANAGING DIRECTOR Richard Davey

Published in the United Kingdom by Law Business Research Ltd, London

87 Lancaster Road, London, W11 1QQ, UK© 2015 Law Business Research Ltd

www.TheLawReviews.co.uk No photocopying: copyright licences do not apply.

The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients.

Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of February 2015,

be advised that this is a developing area.Enquiries concerning reproduction should be sent to Law Business Research, at the

address above. Enquiries concerning editorial content should be directed to the Publisher – [email protected]

ISBN 978-1-909830-38-7

Printed in Great Britain by Encompass Print Solutions, Derbyshire

Tel: 0844 2480 112

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The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

BAKER & McKENZIE LLP

BOWMAN GILFILLAN

CUATRECASAS, GONÇALVES PEREIRA

DANNY DARUSSALAM TAX CENTER

DLA PIPER WEISS-TESSBACH RECHTSANWÄLTE GMBH

FLICK GOCKE SCHAUMBURG

GIDE LOYRETTE NOUEL

GREENWOODS & HERBERT SMITH FREEHILLS

HANNES SNELLMAN ATTORNEYS LTD

HERBERT SMITH FREEHILLS

HOCHE SOCIÉTÉ D’AVOCATS

HWUASON LAW FIRM

JOSEPH HAGE AARONSON LLP

KYRIAKIDES GEORGOPOULOS LAW FIRM

LOYENS & LOEFF

MAISTO E ASSOCIATI

MASON HAYES & CURRAN

McEWAN, ROBERTS, DOMINGUEZ & CARASSAI

ACKNOWLEDGEMENTS

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Acknowledgements

ii

MORAIS LEITÃO, GALVÃO TELES, SOARES DA SILVA & ASSOCIADOS, RL

MORRISON & FOERSTER LLP

MPC LEGAL, SOLICITORS & ADVOCATES

NISHIMURA & ASAHI

OPF PARTNERS

PÉREZ BUSTAMANTE & PONCE, ABOGADOS

PWC LEGAL CIS BV

ROSCHIER ADVOKATBYRÅ

SELE FROMMELT & PARTNER ATTORNEYS AT LAW LTD

SYCIP SALAZAR HERNANDEZ & GATMAITAN

TAUIL & CHEQUER in association with mayer brown llp

WARDYŃSKI & PARTNERS

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Editor’s Preface ..................................................................................................viiSimon Whitehead

Chapter 1 TAX APPEALS TO THE EUROPEAN COURT OF JUSTICE ....................................... 1

Paul Farmer

Chapter 2 ARGENTINA .......................................................................... 11Juan Pablo McEwan and Agustín José Lacoste

Chapter 3 AUSTRALIA ............................................................................ 19Tony Frost and Cameron Hanson

Chapter 4 AUSTRIA ................................................................................. 30Franz Althuber and Marco Thorbauer

Chapter 5 BELGIUM ............................................................................... 41Caroline P Docclo

Chapter 6 BRAZIL.................................................................................... 56Celso Grisi, Thaís Azevedo and Caio Luz

Chapter 7 CANADA ................................................................................. 70Jacques Bernier and Mark Tonkovich

Chapter 8 CHINA .................................................................................... 90Liu Tianyong

Chapter 9 ECUADOR ............................................................................ 102Juan Gabriel Reyes-Varea and Alejandro Páez-Vallejo

CONTENTS

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Contents

Chapter 10 FINLAND.............................................................................. 112Ossi Haapaniemi, Lauri Lehmusoja and Meeri Tauriainen

Chapter 11 FRANCE ................................................................................ 125Eric Ginter and Julien Bellet

Chapter 12 GERMANY ............................................................................ 140Michael Hendricks

Chapter 13 GREECE ................................................................................ 155Panagiotis Pothos and Nina Kakali

Chapter 14 HUNGARY ............................................................................ 167Anna-Mária Veres and Balázs Kutasi

Chapter 15 INDIA .................................................................................... 179Aseem Chawla

Chapter 16 INDONESIA ......................................................................... 192David Hamzah Damian

Chapter 17 IRELAND .............................................................................. 201John Gulliver and Robert Henson

Chapter 18 ITALY ..................................................................................... 213Guglielmo Maisto

Chapter 19 JAPAN .................................................................................... 227Akihiro Hironaka, Michito Kitamura and Masaki Noda

Chapter 20 LIECHTENSTEIN ................................................................ 240Heinz Frommelt and Angelo Trebo

Chapter 21 LUXEMBOURG ................................................................... 253Frédéric Feyten and Guy Perrot

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Contents

Chapter 22 PHILIPPINES ........................................................................ 264Carina C Laforteza and Mark Xavier D Oyales

Chapter 23 POLAND ............................................................................... 275Dariusz Wasylkowski

Chapter 24 PORTUGAL .......................................................................... 287Francisco de Sousa da Câmara and António Lobo Xavier

Chapter 25 RUSSIA .................................................................................. 300Yana Proskurina

Chapter 26 SOUTH AFRICA .................................................................. 319Johan Kotze

Chapter 27 SPAIN .................................................................................... 332Miró Ayats Vergés and Jaume Bonet León

Chapter 28 SWEDEN .............................................................................. 349Daniel Jilkén and Ulrika Grip

Chapter 29 UNITED KINGDOM .......................................................... 358Simon Whitehead

Chapter 30 UNITED STATES ................................................................. 386Edward L Froelich

Appendix 1 ABOUT THE AUTHORS .................................................... 417

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .. 437

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EDITOR’S PREFACE

The objective of this book is to provide tax professionals involved in disputes with revenue authorities in multiple jurisdictions with an outline of the principal issues arising in those jurisdictions. In this, the third edition, we have continued to concentrate on the key jurisdictions where disputes are likely to occur for multinational businesses.

Each chapter provides an overview of the procedural rules that govern tax appeals and highlights the pitfalls of which taxpayers need to be most aware. Aspects that are particularly relevant to multinationals, such as transfer pricing, are also considered. In particular, we have asked the authors to address an area where we have always found worrying and subtle variations in approach between courts in different jurisdictions, namely the differing ways in which double tax conventions can be interpreted and applied.

It is noticeable in this third edition that the past year has seen a general increase in litigation as tax authorities in a number of jurisdictions take a more aggressive approach to the collection of tax; in response, no doubt, to political pressure to address tax avoidance. In the UK alone we have seen the tax authority vested with broad new powers not only of disclosure but even to require tax to be paid in advance of any determination by a court that it is due. The provisions empower the revenue authority, an administrative body, to compel payment of a sum, the subject of a genuine dispute, without any form of judicial control or appeal. A further announcement has just been made to introduce a ‘diverted profits tax’ to impose an additional tax in the UK when it is felt that a multinational is subject to too little corporation tax. These are, perhaps, extreme examples, reflective of the parliamentary cycle, yet a general toughening of stance seems to be felt. In that light, this book provides an overview of each jurisdiction’s anti-avoidance rules and any alternative mechanisms for resolving tax disputes, such as mediation, arbitration or restitution claims.

We have attempted to give readers a flavour of the tax litigation landscape in each jurisdiction. The authors have looked to the future and have summarised the policies and approaches of the revenue authorities regarding contentious matters, addressing

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important questions such as how long cases take and situations in which some form of settlement might be available.

We have been lucky to obtain contributions from the leading tax litigation practitioners in their jurisdictions. Many of the authors are members of the EU Tax Group, a collection of independent law firms, of which we are members, involved particularly in challenges to the compatibility of national tax laws with EU and EEA rights. We hope that you will find this book informative and useful.

Finally, I would like to acknowledge the hard work of my colleague Alice McDonald in the editing and compilation of this book.

Simon WhiteheadJoseph Hage Aaronson LLPLondonFebruary 2015

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Chapter 3

AUSTRALIA

Tony Frost and Cameron Hanson1

I INTRODUCTION

In Australia, disputes between taxpayers and the federal or state tax authorities are common. They are also usually complex to manage and prosecute, requiring specialist knowledge, skill and experience. It is easy for costs to escalate and for disputes to become protracted.

Australia is a federation and the two levels of government each separately impose and administer their own taxes. The federal government imposes the major taxes – income tax (including a dedicated tax on employee benefits and another on pension funds), value added tax (referred to in Australia as the goods and services tax, or GST), petroleum resource rent tax, as well as import duties and excises. The states impose a variety of taxes – principally land tax, payroll tax, and stamp duty on certain transactions. Australia does not impose a wealth tax, estate tax or inheritance tax.

Almost all disputes arise from the federal or state revenue authorities challenging the taxpayer’s position, with the onus then placed on the taxpayer to rebut the government’s assertion. Data released by the Australian Taxation Office (ATO) – the body responsible for administering federal taxes – shows that in 2013 the ATO reviewed and adjusted about 500,000 tax matters (mostly personal and corporate income tax). Small businesses and individuals usually accepted these changes (which suggests that problems were often due to mechanical errors or misunderstandings). However, the picture for large businesses is rather different: large businesses usually disputed the ATO adjustments, which suggests they reflected substantive disagreements about the meaning and application of tax law. While some of these disputes were eventually settled, some could not be settled and resulted in litigation. The ATO acknowledges higher rates

1 Tony Frost is managing director at Greenwoods & Herbert Smith Freehills and Cameron Hanson is a partner at Herbert Smith Freehills.

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of disputes where large businesses are involved, attributing this to ‘the complexity of large commercial or international transactions’.2 A similar picture would emerge for the administration of state taxes.

The ATO’s views on the question of whether to try to settle or litigate a dispute is set out in the ATO’s Code of Settlement Practice (the Code), which was revised in 2014 to simplify the factors relevant to the decision.3 The Code indicates that the decision should be based on three factors: the relative strength of the parties’ position, the cost versus the benefits of continuing the dispute and the impact on future compliance for this taxpayer and the broader community. However, a settlement should not be pursued if there is a contentious point of law which requires clarification, if it is in the public interest to litigate or the behaviour is such that the ATO wants to send a strong and public message to the community.

II COMMENCING DISPUTES

i Disputes about income tax assessments

Personal and corporate tax disputes usually commence after the ATO has decided to review a taxpayer’s tax return, although mechanisms exist that allow a taxpayer to initiate a dispute if it is unsure how the law operates or wishes to verify a position it has already adopted. Where the taxpayer has failed to file returns, the ATO can also initiate a dispute after an investigation.

The dispute usually follows an audit of the taxpayer’s income tax return by the revenue authority. In theory, an audit can be commenced at any time and for any prior periods or transactions, although reviews typically focus on events within the tax statute of limitations. In most income tax matters, the ATO is precluded from amending tax assessments if more than four years has elapsed since the assessment was issued, unless there has been fraud or evasion.

In an audit or other tax investigation, the ATO has the right of full and free access, without notice being given, to all buildings, places, books and other documents, subject to limited exceptions including the application of the legal professional privilege doctrine in certain situations. The ATO also has very wide powers to obtain information from a taxpayer, including situations where information or documents are located outside Australia.

Most commonly, the tax dispute process begins with the taxpayer lodging a written objection against an assessment or amended assessment of tax issued by the ATO, arising out of the audit. However, in 2013 the ATO instituted a system for internal ‘independent reviews’ of disputes involving large businesses in order to try to resolve disputes during the audit, and before the issue of an amended assessment.

2 ATO, Your Case Matters (3rd ed.) p. 7 (available at www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/General-statistics/Your-case-matters---3rd-edition/).

3 ATO, Code of Settlement Practice (available at www.ato.gov.au/General/Correct-a-mistake-or-dispute-a-decision/In-detail/Avoiding-and-resolving-disputes/Settlement/Code-of-settlement/?page=1).

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The objection against the amended assessment triggers an internal review by the ATO of its prior decision. The objection document must set out fully and in detail the grounds upon which the taxpayer is putting its case because subsequent proceedings are limited by the contents of this objection. Drafting the objection requires care and skill to frame the dispute and the taxpayer’s arguments properly. The objection must be lodged within stated time limits – 60 days, two years or four years, depending on the type of decision being challenged. If the taxpayer is objecting against an amended assessment, the time limit is 60 days. The ATO has discretion to allow an objection to be lodged after the relevant time limit and must provide written reasons if it fails to grant an extension.

If the ATO fails to address the objection within 60 days after it was submitted (and the taxpayer has not agreed to extend the time), the taxpayer may serve a notice requiring it to determine the objection. If no decision is made within a further 60 days, the ATO is deemed to have rejected the taxpayer’s position so that the taxpayer can advance the matter.

Where the ATO does not accept the arguments in the taxpayer’s objection, or the ATO has failed to address the matter within the required time, the taxpayer then has the option to have the ATO’s decision reviewed by either the Administrative Appeals Tribunal (AAT) or the Federal Court. The initiating documents must be lodged with the AAT or Court within 60 days of the ATO’s decision. The AAT and the Federal Court each have the power to allow a taxpayer to file their claim after the relevant time limit has expired.

ii Disputes about private income tax rulings

The Australian tax system also has a formal system of tax clearances, the ‘private rulings’ system. Under this regime, taxpayers can seek a ruling from the ATO on the tax treatment of transactions that are being planned or have been completed (but not yet reported in an income tax return). A ruling binds the ATO in its subsequent dealings with the taxpayer in respect of the matter dealt with in the ruling.

Where the applicant is dissatisfied with an unfavourable ruling, or the ATO has failed to make a ruling after a written notice was filed by the taxpayer insisting that a ruling be issued, the taxpayer can lodge a written objection against the ruling. The objection must be lodged with the ATO within 60 days of receiving the ruling (or deemed rejection). Again, lodging the objection triggers an internal review by the ATO of the taxpayer’s arguments. Where that objection is not accepted by the ATO (i.e., the ruling is not revised to express the taxpayer’s preferred position) the taxpayer may again appeal to either the AAT or the Federal Court.

iii Disputes about state taxes

The processes for disputing state taxes are governed by separate legislation in each state. In most cases, the dispute process will follow the model outlined above: the revenue authority will examine or re-examine the taxpayer’s declared position and may adjust or reassess its prior position. A taxpayer who is dissatisfied with that adjustment may object, typically within 60 days after the decision was made. This will trigger an internal review. If the taxpayer is dissatisfied with the results of that internal review, it can then appeal to the relevant state administrative decisions tribunal or a state court.

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III THE COURTS AND TRIBUNALS

There is no dedicated tax court in Australia. Instead, disputes with the ATO about federal taxes are heard by the AAT and the courts that have jurisdiction over federal matters (the Federal Court and the High Court), both of which have wide-ranging jurisdiction. Disputes about state taxes can be instituted before a state administrative decisions tribunal or a state court. However, even though there is no adjudicative body dedicated to tax matters, administrative processes within the AAT or court will often allocate tax cases to particular members with special expertise in tax law and practice.In any tax dispute, the onus is on the taxpayer to prove that the assessment was excessive.

i Proceedings before the AAT

The AAT is established by statute to review the decisions of administrative agencies, including the ATO. Its purpose is to undertake a second review of an administrative decision, reconsidering the facts and law with a view to deciding whether the principal agency’s decision was appropriate. The AAT can substitute its own decision for that of the agency, including re-exercising any discretion or reassessing the level of any penalty to be imposed. The AAT ‘stands in the shoes’ of the original decision-maker.

The AAT is not formally a court, is not bound by rules of evidence and is intended to resolve a matter with minimal formality. Nevertheless, proceedings before the AAT are often conducted in a manner reminiscent of a court and many parties are represented by lawyers.

Taxpayers will often take a dispute to the AAT if the matter is one that turns on the exercise of a discretion as the AAT can re-exercise discretions and reassess levels of penalty. Other factors that might induce a taxpayer to take a dispute to the AAT include cost (the AAT does not award costs to the successful party) and publicity (AAT proceedings can be kept private).

One disadvantage to commencing proceedings in the AAT is that any findings of fact made there cannot be challenged in any subsequent appeal. Taxpayers (or the ATO), if dissatisfied with the decision of the AAT, can appeal to the Federal Court but only on a question of law.

ii Proceedings in the Federal Court

Taxpayers may initiate proceedings in the Federal Court if the ATO has rejected the taxpayer’s objection to the original decision. Taxpayers (or the ATO) can also appeal to the Federal Court if they are dissatisfied with a decision of the AAT on a question of law.

In either case, the proceedings are conducted as in other Australian courts, with formal pleadings, evidence given by affidavit and in person, subject to rules of admissibility, representation of the parties by counsel and so on. Initially, the case will usually be heard by a single judge, sitting without a jury.

Cases that depend upon a technical analysis of the meaning of the tax law will usually be conducted in the Federal Court rather than the AAT.

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iii Appeals

Taxpayers (or the ATO) who are dissatisfied with the decision of the Federal Court can appeal as of right to a Full Court of the Federal Court (the Full Federal Court). The application must be lodged within 28 days of the date of the initial judgment. This appeal is heard by a panel of three judges.

Taxpayers (or the ATO) who are dissatisfied with the decision of the Full Federal Court can make an application for special leave to appeal to the High Court, which is the supreme judicial body in Australia. The application for special leave to appeal must be made within 28 days of the date of the judgment of the Full Federal Court. Leave to argue the appeal is granted where the taxpayer (or ATO) can demonstrate that a ‘question of public importance arises’, if there is a difference of opinion between lower courts or if the court considers that some obvious error has been made by the lower court. If leave is granted, the appeal is usually heard by a panel of five High Court judges. If the case raises issues of constitutional validity, the High Court has jurisdiction to accept the case directly (i.e., without passing through lower courts).

iv State tax disputes

Proceedings involving state taxes mirror the processes at federal level. Taxpayers who are dissatisfied with a decision may institute proceedings before a state administrative decisions tribunal or before a state court of competent jurisdiction, typically the district or supreme court, depending on the amount of money involved.

It is possible to appeal against a decision of an administrative decisions tribunal to a court on a question of law. Appeals against the decisions of a district court or single judge of the supreme court will be made first to the court of appeal of the supreme court. It is also possible to appeal to the High Court against a decision of a state court, with leave.

IV PENALTIES AND REMEDIES

Compliance with the various federal and state taxes is enforced by administrative penalties (i.e., fines) and criminal penalties (fines, forfeiture of assets and imprisonment).

The revenue authorities are given the power to impose administrative penalties without the need to resort to a court. Almost all tax disputes resolved in favour of the revenue authority involve the imposition of an administrative penalty by the revenue authority. Penalties may be imposed for failure to keep proper records, failure to lodge required forms on time or in the correct manner, failure to withhold amounts when required or to pay amounts to the ATO on time, making false or misleading statements to revenue officials in tax returns or other correspondence, or hindering an investigation. Where a taxpayer takes an incorrect position in a tax return, a penalty calculated by reference to the amount of the tax shortfall may be imposed. The level of the penalty is related to the degree of culpability: failure to take reasonable care (25 per cent), recklessness (50 per cent) or intentional disregard of the law (75 per cent). Penalties are also applicable where the taxpayer is involved in (an unsuccessful) tax avoidance scheme. Penalties can be reduced where a taxpayer voluntarily discloses the issue to the revenue authorities or if the error was caused by relying on the ATO’s practices or announcements.

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Criminal penalties are rare in tax matters. The main exceptions usually involve small businesses operating in the cash economy or wealthy individuals engaged in tax fraud by concealing amounts offshore. Criminal penalties can only be imposed by a court. The ATO has a policy on referring matters to the Director of Public Prosecutions (an independent criminal prosecuting authority) to be handled under criminal law. Prosecutions are typically only considered where there is clear evidence of dishonesty – failing to report income on a tax return, claiming deductions for amounts not incurred, dishonestly lodging a return to obtain a financial benefit (typically a refund of GST input credits), falsifying documents or identity theft. Criminal charges can also be laid for wilfully making false or misleading statements to revenue officials or obstructing an investigation. Advisers and other accomplices can also be – and have been – sentenced to jail.

Given that the same behaviour might lead to either civil or criminal penalties, the revenue authorities have some discretion about whether to impose administrative penalties or to refer the matter to the Director of Public Prosecutions. Where a matter is referred for criminal prosecution, no civil penalty can then be pursued and any civil penalty already imposed must be refunded. The ATO’s prosecutions policy says that the decision to refer a matter for prosecution will be influenced by a number of factors such as the taxpayer’s compliance history, level of cooperation, the seriousness of the conduct and whether there is a ‘public interest’ in having the matter dealt with under the criminal process. This could be an allusion to possible spill-over benefits for compliance from the public prosecution of high-profile non-compliant taxpayers.

V TAX CLAIMS

i Recovering overpaid tax

Overpayment will usually arise because the taxpayer has discovered an error in its return or has changed its mind about a position taken in the return. The taxpayer may either make a request for an amendment to its assessment or follow the tax dispute procedure by objecting to the original assessment issued by the revenue authorities. The taxpayer can only initiate this process within the time limits set in the tax statute of limitations.

Taxpayers may also overpay by deciding to pay an amount claimed by the revenue authorities even though it is in dispute. This is done to eliminate exposure to high interest rates on amounts unpaid. If the taxpayer wins the dispute, the ATO will refund the amount in pursuance of the court order or settlement, along with interest on the amount overpaid.

ii Challenging administrative decisions

Decisions related to the making of assessments or the determination of objections are not reviewable under general administrative law. A taxpayer who wishes to contest an assessment or objection decision must follow the process set out above. In any proceedings, the onus is on the taxpayer to show that the relevant assessment was excessive. There is little scope for traditional administrative law arguments, such as claims of procedural unfairness. In addition, in the absence of a binding ruling of the kind referred to above, an assessment cannot be set aside on the basis that it is inconsistent with public or private

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guidance given by the ATO (although that guidance may be relevant to the question of penalties).

It is possible to challenge certain administrative decisions not directly connected with the making of an assessment under general administrative law. For example, a number of challenges have been brought to the ATO’s use of its information-gathering powers, although those challenges have had limited success.

iii Claimants

Claims for recovery of tax are made by the affected taxpayer in most tax matters. The tax legislation permits the ATO to aggregate and set off all amounts owed (tax, interest, penalties, etc.) and amounts recoverable from the government under the principal federal taxes. This process allows the revenue authorities to retain amounts overpaid under one tax against deficiencies on another. This system also means interest is charged on the aggregate unpaid balance.

Where the taxpayer is a member of a consolidated corporate group, the tax positions of all members of the group are automatically aggregated and set off. If the net result is an entitlement to a refund, the claim is made by the head entity of that group.

In GST matters, a supplier that incorrectly pays GST to the ATO is prevented from recovering that amount unless it can show that it has already remitted an amount equal to the GST to the buyer and that the buyer is not registered for GST.

VI COSTS

Where a taxpayer decides to challenge a revenue authority’s decision before an administrative tribunal, each party bears its own costs of the proceedings other than in exceptional circumstances, such as where the taxpayer has lied to the tribunal or failed to comply with procedural directions of the tribunal without reasonable excuse.

If the matter is begun in a court or is appealed to a court, the basic rule in Australian commercial litigation is that ‘costs follow the result’ – in other words, the winner in the dispute is entitled to recover from the loser the legal costs incurred to vindicate its position. This position, which is found in the court rules, applies also in tax matters conducted before a court and courts will typically make an order to this effect. Where a case is successfully appealed from a lower court, the superior court will typically reverse the costs order of the lower court, as well as making an order awarding the costs of the appeal.

The usual costs order may be varied, for example where the case involves multiple issues and the successful party loses on some of those issues, if a party’s behaviour unduly prolongs the proceedings, if a party decides to abandon some claims but only on the steps of the court or if it raises new issues late in the process.

The amount that the successful party is entitled to recover from the loser is almost always less than the actual cost of conducting the case. In rare cases where the court has concluded that the position of the loser was clearly untenable, the court may order that the winner be indemnified for their actual costs.

The basic position can be varied by agreement between the parties and the ATO has a programme to fund test cases in which an important point of law is raised. Taxpayers

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can apply to have their case funded under the test case litigation programme. Where the ATO has agreed to accept a particular dispute as part of the test case programme (only a few are accepted each year), the ATO will pay the costs of the taxpayer even if the taxpayer is unsuccessful.

VII ALTERNATIVE DISPUTE RESOLUTION

The ATO has been under pressure for some time to increase the use of non-curial methods to resolve disputes. The Review of Business Taxation (1999) and the Inspector General of Taxation (2009, 2011) have all recommended greater use of alternative dispute resolution (ADR) methods. Some institutional elements have been introduced to allow this to occur. The ATO has reported that it is increasingly using ADR and recent experience has been that more disputes are being settled, and that they are being settled at an earlier stage of the dispute resolution process.

The rules of the Federal Court now require both parties to attest, at the time that proceedings are commenced, that they have taken genuine steps to resolve the matter. If the court is not satisfied that this has happened, this may affect the award of costs. A similar obligation is also imposed by the Civil Dispute Resolution Act 2011, which applies in tax disputes before the Federal Court.

In addition, the rules of both the AAT and the Federal Court permit the tribunal or court to order that the parties attend mediation.

The ATO has issued two documents outlining its position that ‘the Tax Office recognises and supports the use of ADR as a cost-effective, informal, consensual and speedy means of resolving disputes’.4 There is evidence of a growing use of ADR techniques such as mediation (a negotiation that is mediated by an independent lawyer, often a retired judge) and neutral evaluation (a more formal process that involves an independent lawyer, again often a retired judge, giving the parties a written opinion on the merits of the case). However, the ATO will not arbitrate, in part because of an arbitral award’s lack of value as a precedent. In addition, the ATO is more constrained than commercial parties in settling disputes (see Section I, supra).

VIII ANTI-AVOIDANCE

Revenue statutes at both federal and state level typically have both specific and general anti-avoidance rules.

The general anti-avoidance rule (GAAR) for income tax is the model for the GAARs for other federal taxes. It is based on four elements – the notion of a ‘scheme’, a list of advantages that are amenable to adjustment, a description of the substitute situation to be taxed instead of the impugned transaction and a requirement that the actor’s dominant purpose was to secure a tax advantage for someone.

4 Practice Statement Law Administration 2007/23, Alternative Dispute Resolution, Practice Statement Law Administration 2009/9, Conduct of Tax Office Litigation.

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If the GAAR is to be invoked, the matter must be examined by the ATO’s internal GAAR panel. It comprises senior ATO officials and some private sector tax experts. The panel will review documents and submissions from the ATO and the taxpayer, and may allow the taxpayer to appear and argue its position. The panel will recommend to the ATO whether to proceed with the matter under the GAAR. The recommendation is not binding on the ATO and has no evidentiary value in subsequent proceedings.

For much of the past two decades, the GAAR was invoked in a few well-known areas: mass-marketed tax shelter arrangements typically involving agricultural projects, mass-marketed tax-effective employee benefit arrangements, and income-splitting structures. These situations usually affected individuals and small businesses. In recent years, however, the ATO has invoked the GAAR against multinational enterprises. Several high-profile cases have been fought involving in-house finance companies, corporate restructuring, corporate emigration, fundraising through structured instruments, foreign tax credit arrangements and invoking the consolidation system.

Several important GAAR cases involving multinational enterprises were litigated from 2010; many of these were lost by the ATO. The ATO convinced the government that these losses were evidence of deficiencies in the GAAR, which led to significant changes to its design and structure in 2013. The changes were directed at modifying the description in the legislation of the substitute situation that is to be taxed instead of the impugned transaction.

IX DOUBLE TAXATION TREATIES

Australia has negotiated income tax treaties with 44 countries and with Taipei, and has tax information exchange agreements with 37 countries. Australia has a treaty on estate and gift taxes with the United States and is a signatory to the multilateral Convention on Mutual Administrative Assistance in Tax Matters.

In recent years, a number of cases have been litigated before Australian courts about the impact of Australia’s income tax treaties on tax claims made under Australian domestic law. Australia has sometimes been obliged to forego claims because of the effect of a treaty.

The interpretation of double taxation treaties has been considered by Australian courts on a number of occasions. Debates about the interpretation of treaties typically revolve around two issues – the strictness or leniency in interpreting the text, and the ability to rely on sources outside the text of the treaty to establish its meaning.

It seems to be accepted that the interpretation of treaties differs from the interpretation of domestic statutes in several respects. One Australian court has referred to ‘the mandatory requirement that courts look to the context, object and purpose of treaty provisions as well as the text’ and noted that doing so ‘is consistent with the general principle that international instruments should be interpreted in a more liberal manner than would be adopted if the court was required to construe exclusively domestic legislation’. The reference to ‘context, object and purpose’ is an allusion to the fact that Australia is a signatory to the Vienna Convention on the Law of Treaties.

With regard to extraneous sources, Australian courts have accepted that the OECD Model and Commentary can be examined as informing the parties’ intention

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and so forms part of ‘the context’. Several of Australia’s cases cite passages from the Commentary to establish or buttress a view. In addition, Australia’s domestic transfer pricing rules insist that the rules are to be read ‘so as best to achieve consistency [with the] Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’.

X AREAS OF FOCUS

The ATO announces each year potential areas of non-compliance where it will focus resources.5 In the 2013–2014 report, the ATO has indicated that, for large businesses, it will be focusing resources on contrived financing structures, attempts to avoid capital gains tax, questionable asset valuations, stapled company and trust structures, misuse of Australia’s tax consolidation regime, profit shifting and general avoidance practices. This is borne out in practice. Recent history in Australia has seen a marked upswing in the number of cases being brought by the ATO relying on the GAAR.

Transfer pricing has become an area of increasing dispute. While transfer pricing was rarely litigated in Australia (except for procedural issues), the ATO has decided to litigate cases on transfer pricing issues in recent years.

Australia has been a keen supporter of the OECD’s base erosion and profit-shifting (BEPS) project and this is likely to continue. In addition, a great deal of attention has been directed to identifying potential revenue losses arising from cross-border dealings by individuals using tax havens to conceal transactions and structures from the ATO. This has led to several successful criminal prosecutions.

XI OUTLOOK AND CONCLUSIONS

In its approach to tax compliance for large businesses, the ATO has for some time been increasingly seeking systems that will secure more information on a more timely basis. The new emphasis – termed ‘active compliance’ – is on uncovering information by knowing the taxpayer’s business and tax affairs more deeply, and observing transactions and decisions at the time they are being undertaken, rather than waiting until returns are filed, and then examining returns to see if something untoward can be observed.

In the transfer pricing realm this strategy can be seen in the ATO’s ongoing efforts to encourage taxpayers to negotiate advance pricing arrangements based on detailed disclosures about past and current business practices, structures and transactions. This same strategy has been extended by the ATO through its annual compliance agreements programme, into which taxpayers are being encouraged to enter. This programme requires taxpayers, who volunteer to participate, to institute internal tax management systems satisfactory to the ATO and to agree to disclose ‘all material tax matters’ to the ATO. In exchange, the taxpayers are promised benefits such as faster resolution of technical issues, better attention to complaints about poor administration, centralised points of contact with the ATO and concessional treatment of penalties and interest.

5 ATO, Compliance in Focus 2013-14 (available at www.ato.gov.au/uploadedFiles/Content/CS_C/downloads/CSC35735NAT74689.pdf ).

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Further, the recently introduced Reportable Tax Position schedule is designed to achieve the same kinds of outcomes. It requires taxpayers to nominate for the ATO contentious positions that might have been taken in the taxpayers’ returns (in a manner akin to the US ‘uncertain tax position’ requirements).

Australia has also been a prominent supporter of the OECD’s BEPS project, including work on the common reporting standard and automatic exchange of information, and has negotiated a FATCA agreement with the US about information sharing.

These trends towards continuous monitoring by the ATO and greater use of information from abroad will undoubtedly reveal more matters that the ATO will wish to examine and are likely to lead to greater numbers of disputes.

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Appendix 1

ABOUT THE AUTHORS

TONY FROSTGreenwoods & Herbert Smith FreehillsTony is a tax lawyer and also a chartered accountant. Tony has 30 years’ experience in tax, with a focus on financial services and financial transactions. He has advised clients on a wide range of tax matters including innovative financial products, structured finance, mergers and acquisitions, cross-border dealings, transfer pricing, tax audits and negotiations with the Australian Taxation Office.

In the International Who’s Who of Business Lawyers: Corporate Tax 2013, Tony was one of only 14 tax lawyers listed in Australia.

Tony has had significant involvement in the tax reform process via industry and professional bodies, and has close connections with government, Treasury, the Australian Taxation Office and the Board of Taxation. Tony has written or coordinated many submissions over more than 20 years especially, but not only, for the banking industry.

CAMERON HANSONHerbert Smith FreehillsCameron specialises in commercial dispute resolution, with a focus on taxation litigation and corporate and securities market regulation. He advises companies in industries including construction, energy and resources, financial services, funds management and mining.

He has represented clients in the High Court of Australia, the Federal Court of Australia, state supreme courts and the ICC International Court of Arbitration, as well as in negotiations, mediations and expert determinations. He also acts for clients in connection with investigations and audits conducted by the Australian Taxation Office, Australian Securities and Investments Commission and Australian Prudential Regulation Authority. Cameron is recognised by the Legal 500 Asia Pacific as a leading individual in tax disputes.

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GREENWOODS & HERBERT SMITH FREEHILLSANZ Tower161 Castlereagh StreetSydney NSW 2000AustraliaTel: +61 2 9225 5982Fax: +61 2 9221 [email protected]

HERBERT SMITH FREEHILLSANZ Tower161 Castlereagh StreetSydney NSW 2000AustraliaTel: +61 2 9225 5224Fax: +61 2 9322 [email protected]