The federal government is determined to collect more tax from global e-commerce companies such as Google and Apple and will use a combination of beefed-up transfer pricing rules along with the launch of a think tank to review the loopholes.
After delivering a blistering speech that fingered Google and its “Double Irish Dutch Sandwich” technique that is designed to pay minimal tax, assistant Treasurer David Bradbury unveiled an exposure draft on transfer pricing.
It follows last week’s release of draft legislation on tax avoidance, which adds to the ATO’s arsenal to plug loopholes and raise more revenue. It comes at a time when the Gillard Government is desperately trying to produce a surplus in the next federal budget.
The crackdown comes as the government struggles to keep a lid on its budget deficit, never mind meet its election promise to be in surplus by 2013.
Australia joins a number of countries, including Britain and China, which are increasingly concerned about the tax leakage from companies such as Amazon, Apple and Google.
It will be interesting to see how the US reacts to the global backlash given some of the money eventually flows back from the tax havens to the mother country.
Bradbury said to help attack the issue he has asked Treasury to develop a scoping paper, to be led by the head of revenue group Rob Heferen.
The discussion paper will set out the risks to the sustainability of Australia’s corporate tax base and look at the potential solutions. The Treasury analysis will be informed by a specialist reference group, made up of representatives from business, tax professionals, academics and the community sector.
The decision to amend transfer pricing and anti-avoidance law under Part IVA will have a profound impact on the ATO's powers, and that of business. Part IVA is the ATO's key weapon for fighting tax avoidance. However, after a string of losses in the courts, the ATO and the government decided that the 31-year-old law needed to be overhauled.
“It is not my usual practice to mention companies by name or to publicly canvass the tax position of particular taxpayers. Nor is it my normal practice to publicly discuss strategies employed to minimise corporate tax. However, I will be departing from my usual practice today as I believe there is a strong public interest in drawing attention to practices that have the potential to undermine the future sustainability of Australia’s corporate tax base,” Bradbury said at a conference today.
He said that increasingly, governments were discovering the lack of effectiveness in the digital age of international tax concepts created for the industrial age. “This has been highlighted by the compelling evidence revealed by the UK Public Accounts Committee examination of the Taxation of Multinational Corporations.”
Cranking up the scrutiny on big companies is a vote winner, particularly when it is aimed at companies that pay minimal tax, or whinge about the tax they are paying, such as multinationals engaging in elaborate transfer pricing rackets.
Besides singling out Google, Bradbury cited media reports that Amazon paid no tax in the UK yet made more than £3 billion in sales. It did this through an elaborate “routing” of transactions through Luxembourg, where it faced an effective tax rate of 2.5 per cent.
Draft transfer price reforms are designed to ensure robust transfer pricing rules are in place regardless of whether trade occurs between treaty partners or non-treaty countries. Submissions are open until December 20.
The first stage in the modernisation of transfer pricing rules is to make the tax retrospective to 2004. The next step is to widen the net to include non treaty countries, which should capture some of the activities of the e-commerce companies that use tax havens. It is a complex web but governments in need of revenue will pull out all stops to get back what rightfully belongs to the country.
As Bradbury said: “Many in business reject the notion that paying a fair share of tax forms part of a broader social compact, instead believing that it is just another cost of doing business. On this point, I vehemently disagree. These businesses benefit from operating in an economy built on social and economic institutions — our markets and regulators, the rule of law and our judicial system — not to mention physical infrastructure and human capital that is funded or supported by the taxes paid by others.
"Where some multinational businesses enjoy the benefits of these public goods but refuse to pay their fair share, they are free riding on efforts of others. Whether it is a domestic company put at a competitive disadvantage because it is paying tax on all of its profits. Or whether it is Australian families that are expected to pay higher taxes or accept fewer government services.
"Losing sight of this perspective risks a community — and consumer — backlash, particularly at a time when the rest of the community is being asked to make sacrifices in the interests of fiscal sustainability.” They are fighting words that will resonate with the community at large.