Profit shifting: Scooping the pools amid shifting sands

Profit shifting: Scooping the pools amid shifting sands

The Prime Minister is pushing for tougher global tax laws to stop companies shifting profits from revenue earned in Australia. How would this work in practical and political terms? Gareth Hutchens has a look at the books.

■Why is the Prime Minister raising this as an issue now?

There's growing international pressure to deal with offshore tax evasion, particularly after people found out how little tax is being paid by powerful tech giants like Google and Apple.

Governments around the world, including Australia, have realised that they're missing out on billions of dollars in potential revenue. Australia is also chairing the G20 Leaders Summit in Brisbane in November, where tax issues (including global profit-shifting) are on the official agenda.

■Will the PM have the ability to influence world leaders' appetite for global tax reform?

The times are certainly with Mr Abbott. Not only are global governments sweating over the issue, but Australia chairing the G20 summit means the Prime Minister will have a great opportunity to influence world opinion.

And he will find a receptive audience. It was at the behest of G20 countries that the Organisation for Economic Co-operation and Development released its action plan on ''Base Erosion and Profit Shifting'' (BEPS) last year.


That plan set a clear framework to deal with the problem, and recommended ways to develop a stronger international tax system. The November summit is really important because it will be the culmination of this work.

■Has the warrior for smaller government and lower and fewer taxes had a conversion?

Not at all. The Prime Minister remains a fan of ''smaller'' government, so don't worry. That's why he and his Treasurer, Joe Hockey, used the budget to try to cut government spending to 0.7 percentage points below its 30-year average (the point of which is simple: if you reduce government spending, you don't have to tax as much).

He is not contradicting his political philosophy by pushing for multinationals to pay their fair share of tax. He is a fan of the market system and the system works best when its players play by the same rules.

And if multinationals start paying more tax, the tax burden on other companies may eventually be reduced, so that will help suit his ''smaller government'' goal.

■What about in our own backyard: the ''budget emergency'' was as much created by disappearing revenue as excessive growth in government spending. Did the federal budget flag any imminent reforms to tackle local corporate profit offshoring?

The Labor government's last budget, from 2013-14, did mention the problem of profit shifting. The most recent budget doesn't, but that doesn't mean the government isn't taking it seriously. A lot has happened behind the scenes in the past 12 months. The Federal Treasury and the Australian Tax Office have been working with the OECD to deal with aggressive tax structures, to close loopholes, and to come to terms with the disruptive effects of the digital economy on the government's revenue collection. The Abbott government is also implementing some of the ideas from Labor's last budget.

■How would reform of this area work in practice? Would it require the creation of a global tax office?

It won't require the creation of a global tax office. That option isn't being seriously considered. Many of the BEPS reforms rely on countries fixing their own tax laws to prevent international tax arbitrage (a consequence of the mismatch in country tax treatment of business arrangements). The goal is a ''co-operative international tax approach'' that aligns key company tax rules and prevents arbitrage.

■Would all G20 countries need to agree, or could reforms start with a smaller cohort?

Reforms could start with a smaller cohort and they already have, with some countries such as Britain implementing reforms earlier than necessary.

But the reforms won't be as effective if the G20 countries don't agree to do the same thing. It is in everyone's interest to agree on this issue, and to do it quickly. The OECD recognises that reforms must be made now before the international consensus begins to unravel.

■How much money might be recouped through curbing this form of tax minimisation?

According to Tax Commissioner Chris Jordan, Australia may be losing more than $1 billion in potential revenue each year, but experts expect it could be much more than that.

■If this push fails, what other measures could be used to tackle this disappearing revenue stream?

Governments can still pursue bilateral agreements, which many are doing. And they can continue to tighten their own tax laws. But again, it is in everyone's interest to work together on this.

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