“Fundamental and valuable” - Australian tax authorities look to data centres to boost tax revenues

For many years, the Australian federal government has sought to obtain its “fair share” of tax from multinational enterprises. Given the recent explosion of data centres being built in Australia, it is unsurprising that the Australian Taxation Office (ATO) is actively investigating data centres. In this article we explore why data centres have come into focus for the ATO, and the potential global tax issues that can arise in relation to existing structures if the ATO makes an adverse adjustment. We will unpack the specific tax risks likely to be examined by the ATO and explore what steps taxpayers should take to prepare for investigations by tax regulators. In addition, those planning for a data centre in Australia may be interested in the federal and state tax incentives that have been announced or are available.

Background

Australia currently has over 300 data centres, with the majority of those sites located on the east coast of Australia. However, reports suggest this number is set to surge even further over the next few years, with Macromonitor estimating the capacity of Australia’s data centre sector to be 2180 MW in 2024/25, 2800 MW by 2025/26 and exceed 5000 MW in 2029/30.^[1]

The rise in data centres is attributed to an increase in demand for cloud infrastructure, generative artificial intelligence (AI) and data-driven technologies. Australia is an attractive location for global data centre operators to invest in due to its stable political environment, availability of land, and sunshine for renewable energy projects to offset the electricity demanded by power-intensive data centres. However, such significant growth also comes with added scrutiny from regulators, including the ATO.

The ATO continues to set its sights on multinationals. In June 2024, Rebecca Saint, Deputy Commissioner Public Groups, gave a speech to the PacRim Conference which publicly put data centres on notice that the ATO is focusing on this sector. Saint announced that the ATO has taken the view that data centres are of “critical importance in order to reduce latency and for data security/reliability/sovereignty requirements.”^[2] She further contended that “[c]oncerningly, we have seen some multinationals claim the Australian data centre entities provide low value services for the offshore group. However, our perception is that the Australia activities, and data centre assets, and their physical location in Australia, are a more fundamental and valuable part of the broader enterprise”. 

There is no doubt that Australian based data centres are important to multinational operations. We have observed that the key difference in disputes between multinationals and the ATO is that the ATO’s approach to value is Australia-centric, and often fails to put the contributions into perspective as against the global value chain. With the differences in opinion between the ATO and multinationals about the value of the contribution of a data centre to the global model, mismatches in taxation outcomes can arise, including the potential for double taxation. Resolution of double taxation on a global level is complex, inherently uncertain, and in extreme cases, no double tax relief may be available. 

Recent audit and litigation experiences have demonstrated that the ATO is prepared to use multiple tools available to it to explore its thesis on value, and it is also prepared to run novel interpretation arguments in pursuit of its agenda. In addition, the Federal government has shown that it is willing to amend legislation in order to alter the implementation of double tax agreements (DTAs) in Australia when confronted with DTA interpretations contrary to its views.

The successful defence and resolution of these disputes will depend upon the particular facts and circumstances of the case, the strength of available evidence, and the litigation governance strategies deployed.

What are the ATO’s areas of focus for data centres?

If the ATO forms the view that the data centre is a fundamental and valuable part of an enterprise, then they are likely to explore the application of a number of Australian tax rules including whether:

• income should be attributed on the basis that the data centre is a permanent establishment (PE);
• a transfer pricing adjustment should be recognised commensurate with the value of the Australian activities;
• royalty withholding tax should be paid in relation to the rights to use intellectual property and ancillary services such as the provision of know-how; and
• general anti-avoidance laws (including the diverted profits tax) should apply to structures or arrangements where, in the ATO’s view, they have been put in place for the principal purpose of avoiding Australian or foreign tax, including the abovementioned payments. 

PEs

Australia has entered into DTAs with more than 40 countries in order to prevent double taxation. DTAs allocate taxing rights between countries, including limiting Australia’s right to tax business profits of non-resident companies to profits attributed to a PE in Australia. 

The scope of a data centre’s functions may vary, from simply hosting data, to making decisions (via AI) and/or performing platform and contracting functions central to providing services to local customers. Previously, the ATO’s view was that the mere presence of a server here in Australia wouldn’t typically give rise to a PE risk.  Based on recent ATO activity, in circumstances where a foreign entity retains significant control over these aspects of the data centre’s functions, the ATO may argue that this may constitute a PE.

The ATO is conducting extensive audit and information gathering exercises in order to evaluate whether the foreign entity has a fixed place of business in Australia. This is a question of fact. 

Transfer Pricing

A common approach for transfer pricing analysis is to consider that the provision of servers and processing of data is a routine activity in which no significant value is created. In contrast, the ATO’s position is that the presence and use of data centres by related parties creates significant value in Australia and makes a valuable contribution to the profits of the business in the jurisdiction. The ATO is examining in granular detail the functions, assets and risks of the Australian business. A common challenge in these types of disputes is contextualising the Australian business contributions within the entire global value chain. In addition, another challenge in these disputes is collating sufficiently comparable and reliable data to support the appropriateness of the pricing outcomes agreed by the related parties.

Royalty withholding tax 

The ATO’s concern here is whether royalty withholding tax ought to have been paid in respect of payments made by Australian subsidiaries of multinational groups for the use in Australia of intellectual property, such as software platforms and brands. 

Even outside data centres, this is a hot topic. The ATO has published a number of draft tax rulings and practical compliance guides concerning intangible arrangements outlining its views and the type of arrangements that it views as being low or high risk. You can read our articles on these topics.

The Commissioner of Taxation also recently lost the PepsiCo case before the High Court of Australia when he sought to challenge arrangements relating to the use of intangible assets and the application of the diverted profits tax. In PepsiCo, the Commissioner sought to argue that payments made under ordinary commercial arrangements between unrelated parties at arm’s length contained an embedded royalty and were subject to royalty withholding tax. In the event that royalty withholding tax was not payable, the Commissioner argued the diverted profits tax would apply. The majority of the High Court found in favour of PepsiCo on both issues. You can read more about this case in our Insight.

Group Structures and anti-avoidance

Business strategy should drive a corporate structure, however, the ATO will also be concerned to understand whether the Australian activities or payments within a multinational group have been separated in distinct legal entities for the purpose of reducing Australian tax. The ATO may see this occurring through the avoidance of a PE or the mischaracterisation of activities for transfer pricing purposes. In particular, the ATO will consider whether the general anti-avoidance rules could apply to the corporate structure and contractual arrangements that have been implemented. 

State taxes considerations

In addition to managing federal income tax risks, taxpayers need to be alive to the state taxes that will be imposed on datacentre landowners. Depending on where a data centre is located, a data centre landowner may be liable for a number of the following state imposts:

Whilst state taxes may not drive site selection decisions, they will be important in evaluating the financial viability of a project and can vary dramatically between jurisdictions. For example, transfers of commercial land in South Australia are generally not subject to stamp duty. Land tax is payable in all Australian jurisdictions (except the Northern Territory); however, Victoria and Queensland also impose an additional foreign land tax surcharge on industrial and commercial land which can add hundreds of thousands of dollars to annual land tax bills if an exemption is not available. Relief may be available subject to satisfying certain criteria. Further information on these concessions can be found in our earlier Insight.

Incentives for data centres 

In its 2023-24 federal budget, the Australian government announced it would extend the 10% concessional managed investment trust (MIT) withholding tax rate for clean buildings to data centres. Under this proposed measure, if MITs invest in buildings that achieve a 6-star rating from the Green Building Council Australia or 6-stars under the National Australian Built Environment Rating System (NABERS), payments to foreign investors would be subject to a 10% concessional withholding rate. To be eligible, the construction of a data centre must have commenced after 7.30pm AEST on 9 May 2023.  This measure was set to apply from 1 July 2025, however, in the 2025-26 budget the government announced the measure would be deferred to commence on the first 1 January, 1 April, 1 July or 1 October after the Act receives royal assent. It is unclear if or when this measure will commence. 

Data centres should also consider any potential state government incentives or priority programs to bring projects online fast. For example, the NSW government recently announced in its 2025/26 state budget that it would create an Investment Delivery Authority (IDA) to accelerate approvals for major projects valued at over $1bn, including data centres. The aim of the IDA is to assist around 30 major projects annually to provide advice on navigating the planning system, evaluate projects to be fast-tracked, coordinate infrastructure necessary to deliver projects and encourage investment in the state. 

What should taxpayers do?

Taxpayers should engage with tax advisors experienced in working on data centre projects early, and well before selecting sites, to ensure efficient structures are implemented, all available incentives and concessions are applied for, and compliance with Australia’s evolving regulatory regimes. 

To prepare for potential investigations by Australian revenue authorities, taxpayers should consider the merits of a proactive approach to evidence gathering (both internal and expert) to support their filed positions. Taking proactive steps towards evidence gathering can offer a robust basis to respond to questions in response to ATO enquiries, defend positions adopted and potentially offer penalty protection. This could involve gathering contemporaneous documents such as tax governance policies, group structures and contractual arrangements. Consideration should be given to preserving key business records via legal holds on the emails and documents of key personnel. By having tangible evidence to support the activities that are being undertaken in Australia, when and by whom, taxpayers will be well-positioned to address revenue enquiries in a fulsome and efficient manner.  

In addition, maintaining robust transfer pricing and PE documentation will be critical to responding to any subsequent tax audit.  

The JWS tax team has supported a number of multinationals in successfully defending and resolving disputes of this nature. Please reach out if you would like to discuss any aspects of this article further.

^[1] Australia’s data centre capacity forecast to pass 5,000 MW by 2029/30, 10 July 2025 accessed at https://www.pv-magazine-austrlaia.com/press-releases/australia-data-centre-capacity-forecast-to-pass-5000-mw-by-2029-30/.

^[2] Rebecca Saint, Deputy Commissioner, Key Developments in tax administration in Australia, Speech delivered to PacRim Conference 14 June 2024, accessed at https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia  on 8 August 2025.