'The government has increased the ATO's budget and its powers.' Photo: Andrew Quilty
WHEN governments around the world started comparing the bulging fortunes of e-commerce and tech giants such as Google and Amazon with the minimal tax they were paying, it was only a matter of time before the knives came out.
It was the Australian government's turn on Thursday and it chose a machete. Using a combination of beefed up transfer pricing rules and a commitment to setting up a think tank that will review the elaborate tax structures, the government made it clear that Google, Apple, Amazon and any other e-commerce giants were in its sights.
The news was delivered in a blistering speech by Assistant Treasurer David Bradbury, who fingered Google and its "Double Irish Dutch Sandwich" technique that is designed to pay minimal tax.
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.
And it 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, the United States and China, which have expressed concern at the tax leakage from high-tech and e-commerce giants. Indeed, the US Senate held a committee on Offshore Profit Shifting and the US Tax Code in September which revealed that between 2009 and 2011 Microsoft was able to save up to $US4.5 billion in taxes by transferring intellectual property rights to a subsidiary in Puerto Rico.
In Britain, the media reported that Amazon paid no tax, 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.
It is something that has been of increasing concern to the government and the ATO for some time. In 2010, senior tax official Jim Killaly gave a sobering speech that outlined that between 2005 and 2008 more than 40 per cent of company income tax returns lodged by large corporates paid zero tax and about half of those were showing losses.
Killaly said over that period, between 540 and 580 groups had an entity that filed a company income tax return with a tax payable of zero; and there were between 130 and 160 that returned a tax payable of zero for the entire economic group.
The government's reaction? It has increased the ATO's budget and more recently its powers. But e-commerce has befuddled it and to this end it has asked Treasury to develop a scoping paper, to be led by the head of revenue group Rob Heferen, to set out the risks to the sustainability of Australia's corporate tax base and look at solutions.
This won't be easy, but it isn't impossible. Niv Tadmore, a tax partner at Clayton Utz, says if the government wants to broaden its tax net to include internet commerce it will need to look at the source rules. By this he means the rules that determine at what point the tax office can tax a non-resident. In this case a non-resident is one that has no physical presence in Australia.
"Our source rules were developed in the first half of the 20th century. They were therefore designed to deal with traditional commerce and are very much focused on physical presence as a prerequisite for taxation," he said.
For this reason it looks like it might be tricky to change the source rules because it would require the agreement of countries with which Australia has a tax treaty, which are our major trade partners. But Tadmore believes the government may have another angle on this. "Since a lot of internet trade is conducted through low-tax countries with which we don't have tax treaties, the government won't be restricted if it wanted to unilaterally amend our domestic source rules to capture such trade."
It is these sorts of issues that the Heferen-headed task force will undoubtedly look at.
In the meantime, 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. But 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 released an exposure draft on transfer pricing on Thursday that takes a more holistic view of multi-national companies and widens the net to include not just treaty countries, but also non-treaty countries. The draft is open for discussion until December 20.
Broadening the powers of the ATO in terms of transfer pricing and anti avoidance will close a lot of loops and raise billions of dollars in revenue, but it doesn't fully cover e-commerce, hence Bradbury's speech:
"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."
They are fighting words that will resonate with the community at large.