Sonia Hickey, journalist, writes about the changes the Australian Tax Office (ATO) wants to make to lawyer privilege allowing easier access to the financials of multi-national companies which may be under the microscope for tax fraud.
The ATO is working with the Law Council of Australia on a new code of conduct which would include a move that will stop multinational firms from using blanket legal privilege claims over documents relating to a company’s financial position.
Loophole or legal advice?
The ATO says one in five major audits currently being conducted by the Tax Office are being complicated by blanket claims of legal privilege, which in some cases means that tens of thousands of documents are being withheld from the ATO.
The ATO is now working with the Law Council to strike a balance to protect privileged legal advice, but allow the ATO greater access to financial information, and its understood that a new standard could be introduced as early as next month.
It’s a delicate and complex issue with potentially far-reaching implications.
Last year the Law Council backed multinational commodities trader Glencore, which owns Mount Isa Mines and Ernest Henry Mining, in its fight against the ATO over the release of the Paradise Papers, saying that if the ATO won the fight to keep the papers it would have a “chilling effect” on the relationship between lawyers and their clients.
The case of Swiss company Glencore
In its investigations of Glencore, the ATO used 11.5 million documents that detailed financial and attorney–client information for more than 214,488 offshore entities. The documents were leaked from a Panamanian law firm and included emails, board briefings, plans and presentations, detailing how Glencore moved $30 billion worth of resource projects out of the Australian tax net after a $16 billion write down.
In the 2014 restructure, Glencore moved significant assets from its Australian investment portfolio into offshore structures, absorbing debt into these other entities, and the directors wrote down the value of the chief holding company here to zero, significantly affecting the tax obligation. While the move is legal (companies usually defend such “cross-currency swaps” to guard against currency value fluctuations), it is under review by the ATO.
At this point, Glencore subsequently took its fight to protect the documents to the High Court, in an effort to force the ATO to return its copies of the legal files, claiming that lawyer-client confidentiality should prevent the tax office from using documents prepared for or marked as legal advice.
The case is continuing, but the outcome could well signal a landmark case on legal professional privilege.
The ATO has been in crackdown mode for some time. It has introduced a range of new penalties and regulations to clamp down on tax evasion of all kinds.
Crackdown on tax fraud and avoidance
The introduction of tough multinational anti-avoidance laws in late 2016, signalled a new era of change, with the ATO taking a much tougher stance on wealthy individuals and multi-national companies. The ATO estimates that the new laws have meant it has claimed an extra $7.7bn in tax revenue over the past two years.
This year, in the budget, the Federal Government provided an extra $1 Billion of funding to the ATO to give it more resources. A special ATO taskforce has been charged with scrutinising the top 1000 corporations in Australia, along with 320 private groups and wealthy individuals.
It is likely that more cases will come through the courts in coming months as the ATO crackdown continues.