Like tourists who come for the koalas but keep finding spiders and snakes, companies lured to Australia’s singular market are navigating a flip side of doing business Down Under: the Australian Taxation Office.
The ATO this year is doubling down on its muscular approach to taxing and tracking foreign businesses—despite a major legal setback. And that’s prompting renewed complaints from US and European corporations.
“In fairness, maybe that’s a badge of honor for the ATO,” said Michael Clough, Australian chair and partner at King & Wood Mallesons. “They’re unashamedly implementing a policy of ensuring all multinationals pay.”
The ongoing gripe is about the ATO’s strict enforcement of the nation’s 30% corporate tax rate—among the highest in developed nations—and its aggressive interpretation of tax codes and even judicial rulings. But things could soon get much more interesting.
Later this year, the ATO plans to publicize multinationals’ reports on how much they are paying in taxes in each jurisdiction where they operate, along with a trove of data that could strip bare closely held financial information of the biggest companies operating on the continent. That full-public-disclosure feature in Australia’s “country-by-country” reporting plan would be an outlier among major world economies.
The US Chamber of Commerce wants the Trump administration to step in. And some major corporations are even threatening to stop doing business in Australia.
But whether they can afford to bypass the continent’s wealthy consumer market, its natural resource abundance, and its role as a strategic player across the Pacific Rim remains to be seen.
Jordan Era
Some business groups expected a cooling off at the ATO this year after a landmark legal defeat at the hands of American food-and-beverage giant PepsiCo, a decision from the nation’s highest court that seemed to weaken some of the agency’s most aggressive policies.
But in its official take on Commissioner of Taxation v. PepsiCo Inc., the agency—in effect—dismissed the ruling as a one-off.
“The decision in PepsiCo does not establish any broad proposition that the characterisation of a payment under a contract—whether involving arm’s length parties or related parties—can never be challenged,” the ATO said in its March 19 decision impact statement, released seven months after the High Court ruling. “We continue to examine the arrangements of related parties closely.”
The ATO’s approach to taking multinational corporations to task over taxes has roots in the country’s legal framework and culture. But its boldness in recent years is traced to Chris Jordan, who in 2013 left KPMG to become the agency’s first leader from the private sector.
“He basically just reinvented the whole ATO,” said former agency tax specialist Nitin Saby, who is now founder of Sabypartners.au and managing principal at Fortuna Advisory Group.
Jordan says he approached running the agency much like working at a Big Four accounting firm, urging staff to think of individual taxpayers as “clients” and to adopt a more corporate-ish attitude of customer service.
Under Jordan, the ATO also began investing heavily in data analytics and other high-tech ways to modernize and beef up taxpayer services and investigations.
The changes were aimed in part at improving employee morale and the ATO’s reputation among Australian taxpayers.
Foreign companies weren’t as charmed. Jordan went after multinationals that he claimed had been underpaying taxes on the value they created in Australia and cowing tax auditors with pricey lawyers.
Jordan instructed his auditors to look at a case and say: “Does this make sense?” he told Bloomberg Tax in an interview. “Why does this company make no money, or make a loss, in Australia, but yet it has so many sales and yet it’s worldwide margin is—you know—30% or something like that?”
He directed the ATO to invest heavily in challenging companies’ transfer pricing calculations—how a multinational business values the transactions between and among its related parties. And he hired former colleagues familiar with the tactics used by major businesses to obscure profits and limit their tax liability.
“The expertise that I brought in at a senior level, we could go toe-to-toe with the best of any of their advisers,” Jordan said.
More than a few times, the agency hit pay dirt.
In 2019, Google agreed to pay A$481.5 million in back taxes to the agency, one of several tech giants to make a deal with the ATO, not all of whom disclosed specific dollar amounts.
In 2022, global mining giant Rio Tinto coughed up nearly A$1 billion in a settlement to end a dispute over more than a decade’s worth of taxes it paid.
And the government, happy with the results, invested in the agency.
The ATO operating expense budget has been steadily on the rise for years, according to annual reports—from A$3.4 billion in 2018 to around A$4.5 billion today.
‘Early Mover’
It wasn’t all smooth sailing under Jordan, who ran the agency until 2024.
Shortly before Jordan signed on, the government’s Tax Practitioners Board revealed that a PwC official it confided in had shared confidential information with his Big Four colleagues about government plans to tax multinationals. While those revelations predated Jordan’s tenure, much of his time at the ATO was shadowed by the investigations and hearings over that scandal.
More recently, the ATO uncovered widespread goods and services tax fraud that siphoned billions of dollars from government coffers only after it had gone viral on TikTok in 2021.
The PepsiCo Inc. ruling from Australia’s highest court offered the ATO a chance to reevaluate its approach under Jordan’s successor, Rob Heferen, a career public servant and a more conventional pick as commissioner. But Australian lawmakers and the ATO continue to cut off avenues for companies to use transfer pricing to hide or divert profits.
“The ATO has been an early mover on many transfer pricing issues over the last decade,” said Jones Day attorney Ben Lancaster. He noted the agency “is prepared to take novel positions on transfer pricing issues, which can be inconsistent with how the arm’s-length principle is applied in other countries.”
ATO also has gotten creative by asserting “embedded royalties” in sales into Australia, which was put to the test in the PepsiCo case.
The ATO argued that the company’s sale of beverage concentrate from a Singapore subsidiary to an Australian Schweppes-owned bottler improperly failed to account for the intellectual property that the ATO claimed was embedded in the transaction.
The case rested on a novel idea that the ATO could impute “embedded royalties” in products imported into the country, arguing that because the companies’ IP was needed to sell the concentrate in Australia, the sale of the product included a sale of a royalty to use that IP. That triggered the withholding tax.
It also freaked out companies around the world.
PepsiCo argued that it was only selling beverage concentrate, and no such royalties existed.
The US Council on International Business and the Information Technology Industry Council said companies might need to reevaluate whether they want to be in Australia at all.
The case was especially puzzling for practitioners because the two parties, PepsiCo and Schweppes, weren’t related, and so the agency didn’t have the same flexibility it would have in a transfer pricing case.
The ATO was successful in its case against PepsiCo in the lower court, but lost on appeal, and last August lost in the High Court—but the rulings were close. All three rulings came down to a single judge.
“It’s not an endorsement of our tax system that 11 of our finest [judges] can’t agree on something as simple as whether a payment is a royalty,” said John Storey, tax counsel at The Tax Institute, headquartered in Sydney.
“The decision does not disturb our view that, depending on the relevant facts and circumstances, a royalty may be found notwithstanding rights to use IP have been ‘embedded’ into amounts labeled as consideration for something that is not IP, such as a good or a service,” the ATO said in the decision impact statement.
“The characterisation of a payment is not determined by the label attached to it by the parties (for example, stating it as being for goods or services, or being ‘royalty-free’), or how it is computed.”
While the case worked its way through the courts, the ATO launched similar cases against Coca-Cola Co. and Oracle Corp., in both cases claiming that the companies owe withholding tax on embedded royalties that went unrecognized.
In the Coca-Cola case, a court recently said the ATO could modify its argument against the company in light of the PepsiCo decision. But the ATO says core issues remain as it awaits a ruling in the Oracle case.
“The ATO considers clarification of the central issue—how royalty withholding tax applies to modern software distribution arrangements—would be best achieved by judicial consideration of the relevant modern facts, the terms of Australia’s treaties, and relevant domestic law,” Deputy Commissioner Michelle Sams said in a statement.
“A Court decision would provide certainty to both taxpayers and the ATO as an administrator on the position in the software ruling.”
Down Under Outlier
Jordan said that during his time running the ATO, other countries would send delegations to Australia to observe how the government conducted audits on large multinational companies.
“I am aware very much that companies did not want others to know that they were paying a much higher margin tax on a higher margin in Australia,” Jordan told Bloomberg Tax.
But some of that has filtered out as the ATO helps other tax authorities develop modern multinational tax audits.
“The ATO has been helping a lot of developing nations, and they look up to Australia to understand the automation, AI technology, data-driven side of things,” Saby said. “And I personally think like Australia is a living laboratory for tax innovation.”
Australia has followed many of the directives and projects at the OECD, the multilateral body that helps coordinate tax collaboration between countries around the world. But as it’s doing in the country-by-country reporting, Australia frequently puts its own spin on things.
The country-by-country reporting is set to reveal not just what a company that operates in Australia paid in taxes in Australia—but also what it paid in taxes in other countries—on top of a slew of other financial information.
In a letter to US Treasury Secretary Scott Bessent, American business groups that represent Amazon, IBM, Microsoft, Coca-Cola, and Pepsi said public disclosure of tax and sales information would infringe on businesses’ privacy and hurt their ability to compete—especially against any company that doesn’t operate in Australia.
‘Chisel Away at the Ruling’
But for big business, Australia isn’t an easy country to quit.
Driven by a diverse and skilled workforce, Australia’s adult population has the second-highest median wealth in the world, at $268,000 per adult. And much of what they buy comes from other countries.
Energy resource exports comprise almost 30% of Australia’s export income, according to a 2023 report. It has some of the world’s most extensive and diverse mining operations, from gold, diamonds, and opal to rare-earth minerals.
The world’s 15th-largest economy blends the wealth and administrative sophistication of a US or Germany with mineral extraction and imports from foreign corporations akin to many African or Latin American countries.
That leaves tax officials with a heavy incentive to look to foreign corporations for tax revenue—a tricky but politically popular way to fund the government.
A strong reliance on foreign companies inevitably leads to questions about how a multinational accounts for transactions among subsidiaries and affiliates—where they record their profits—and therefore where it owes taxes.
Australia’s current transfer pricing case against Coca-Cola could see the company pay A$174 million in unpaid taxes and penalties.
Or it could be another defeat for the ATO.
How much that will matter in the long run is another question.
“It’s not that they completely ignore it,” Storey said of the ATO and legal decisions around its actions. “But they have a habit of when they win, imposing sweeping changes: ‘OK, well from now on, you’re not allowed to do this.’ And when they lose, they go: ‘OK, well that very specific fact scenario obviously doesn’t apply, but we’re going to chisel away at the ruling.’”