The Australian Government has approached the wider public to back its findings that multinational corporations in Australia aren't paying enough tax.
The "aggressive tax practices" of global companies like Google and Apple are the subject of a new government paper, in which it seeks to establish risks to the local corporate tax base from the current use of international tax rules. The Government is now seeking a response from business and the community.
The work is being lead by Treasury and a specialist reference group made up of business, tax professionals, academics and the wider community.
Since the onset of the Global Financial Crisis, Australian companies have been paying around 27 cents per dollar of profit compared to the statutory rate of 30 cents per dollar, Treasury said.
Additionally, company tax receipts accounted for 22 percent of total tax receipts in 2011-12. The agency said compared to other countries, Australia's corporate tax collections have "fallen by more and recovered by less" since the GFC began.
But it is too early to prove whether the reduction is the result of tax avoidance or companies carrying forward losses.
“The ... analysis provides a number of indicators that suggest the existence of base erosion and profit shifting in Australia. However ... it is difficult to reach a definitive conclusion,” the paper stated.
The paper forms part of a wider government inquiry into transfer pricing, which could force multinationals to reveal exactly how they calculate their local tax bills.
Assistant Treasurer and Minister Assisting for Deregulation David Bradbury said the Government needed to ensure it was keeping up with the “changing nature of global commerce in the information age”.
"We have already moved to tighten a series of loopholes that will protect more than $10 billion of revenue over the next four years,” he said in a statement.
"Just as importantly, governments all around the world also need to re-examine many of the key rules of international taxation, which were designed for the industrial age and are not keeping up with the changing business models and tax planning arrangements of many multinational companies."
The key issue is whether tax concepts developed for the industrial age are applicable in the information age, according to the paper.
The Global Financial Crisis highlighted complex tax structures of multinationals to the wider community, thanks to its enduring effect on tax revenues of governments the world over, the paper said.
It highlighted use of the “Double Irish Dutch Sandwich” method - an arrangement in which a corporate entity shifts income from a higher-taxing country to a lower tax one, specifically Ireland, which uses a territorial rather than worldwide tax approach.
Bradbury singled out Google and Apple as users of this method in a November 2012 speech.
Apple paid only $40 million in tax in Australia in 2011 despite achieving record revenues of $6 billion, while Google was reported to have paid $74,176 in tax off $201 million in revenue - a figure later disputed by the company, which claimed its tax bill was closer to $781,471.
“Even if the higher figure is correct, I can understand why many in the community would be perplexed to learn that this figure is so low for a company whose annual advertising revenue from Australia has been estimated by media analysts to be over $1 billion per annum,” Bradbury said at the time.
“While the day-to-day dealings of Australian firms advertising on Google might be with Google Australia, under the fine print of contracts Australian firms sign with Google, they are actually buying their advertising from an Irish subsidiary of Google.
“It is then argued that the source of this income - and therefore the taxing rights under our tax treaty - would be with Ireland rather than Australia.”
How Australia taxes
Australia operates under a worldwide tax approach for individuals - taxing its residents no matter where their income is geographically derived and taxing income from foreign residents within its borders.
The approach is different for business, where the territorial method only taxes earnings sourced within geographic borders.
A company is an Australian resident if it is incorporated or carries on business in Australia, and if its central control is in Australia, or its voting power is controlled by Australian shareholders.
The paper said the reduction of trade barriers as well as improvement in information technology had resulted in an “unprecedented” level of integration between countries and more businesses with international operations.
“The rise of the digital economy has meant that many transactions and functions that previously relied on a physical proximity with the market can be undertaken more or less anywhere,” it stated.
“This has meant that an increasing proportion of economic activity has become tradeable —that is, subject to international competition—resulting in challenges and opportunities for businesses as well as substantial benefits to consumers.”
Multinational organisations had responded to the changing environment by shifting their business structure to a global, rather than country-specific, model, according to the report.
“In practice this means that MNEs are able to shift activities within their multinational networks according to changing demand and cost conditions in order to co-ordinate production and distribution across many countries.”
As a result, traditional tax principles were now more difficult to apply and multinationals were often exploiting “differences in domestic tax rules and international standards that provide opportunities to eliminate or significantly reduce taxation.”
At the launch of its election platform this week, CEO of vendor representative body the Australian Information Industry Association (AIIA) Suzanne Campbell said there was no evidence any member of the AIIA or the wider industry was not paying taxes.
“There is lots of conversation about how the tax regime might change but no one’s suggesting they’re not paying their taxes as they’re legally obliged to today.”
How to calculate local effect
The paper acknowledged the global nature of the issue meant it was difficult to quantify how Australia alone was affected. It is seeking consultation on whether such tax practices should be of concern to Australia and whether they in fact exist.
The input will form part of the Treasury Scoping Paper, in conjunction with the specialist reference group announced last year. That paper is expected to be released in June this year.
The issue will also be discussed at the meeting of the G20 Finance Ministers in July, where members of the OECD will present an Action Plan on the topic.