Global tax crackdown could backfire
Australia risks losing billions in tax revenues from resources sales to Asia if global efforts to stop multinational tax avoidance backfire, Wesfarmers chief executive Richard Goyder said.
The Organisation for Economic Co-operation and Development proposes to change the basis on which profits are taxed, as part of its global anti-avoidance campaign, which will be discussed at next week’s G20 summit.
“If we sell coal to Japan, is the profit derived in Australia or is the profit derived in Japan?” said Mr Goyder, whose company owns some of Australia’s largest coalmines.
“Clearly from our perspective the profit is derived in Australia, and that’s where we pay the tax. But you don’t want complex arguments about the fact that, ‘you know what, some of this profit is derived in Japan’ and that sort of thing.”
The Australian Financial Review revealed on Thursday how more than 340 multinationals used secret agreements with Luxembourg to avoid tax, based on thousands of leaked documents, and triggering reviews by the Tax Office and the Senate. Mr Goyder’s comments reflect mounting concern among business leaders and some governments that the OECD’s years-long campaign against multinational profit shifting via “base erosion and profit shifting” could have unforeseen consequences.
He said it could be “a nightmare” and a barrier to investment if the G20, the OECD or anyone wants to redefine “permanent establishment”.
Under existing rules, a company requires a permanent establishment or physical presence in a country for profits to be taxable there. Google, Amazon and other digital companies have undermined confidence in these rules by generating large sales and profits without a taxable presence, fuelling efforts to change the rules.
KPMG tax partner Grant Wardell-Johnson said the small marketing and customer support teams that Australia’s big miners deploy in countries like China and India did not form a taxable presence under the rules now.
But he said the OECD’s proposal has significant potential to erode Australia’s tax base, unless narrowly defined and clear.
“Drawing the line in a different space will result in the big Australian miners having to very carefully consider the marketing teams and rep teams that they have, because it may mean that the Chinese revenue authorities say, ‘you have created a taxable presence and we want a portion of the profit referable to sales of iron ore and coal in China’.”
Business Council of Australia chief executive Jennifer Westacott warned governments to weigh the impact of changes to international tax rules carefully, given Australia competes in low-tax Asia.
GLOBAL WORRY OVER THE OECD TAX CAMPAIGN
She said the changes should not be so large or complex as to hinder trade, investment, innovation and “the unstoppable evolution of the global economy”.
The US government has also grown wary of the OECD campaign.
Most of the multinationals in the OECD’s sights are American, raising a concern that changes could further reduce America’s disproportionately low corporate tax receipts.
By contrast, Australian corporations bear the second-highest burden of company tax in the OECD as a share of gross domestic profit, and will pay $70 billion in corporate taxes this year, the BCA said. A large chunk of this will come from exporters such as BHP Billiton.
Treasurer Joe Hockey has embraced the OECD’s campaign, saying countries should pay their fair share of taxes where they make their profits.
The issue is on the agenda for next week’s G20 leaders’ summit in Brisbane, which Mr Goyder is heavily involved in as chairman of the Business 20 group of chief executives advising the government.
Robert Milliner, the B20 “sherpa” and former top commercial lawyer, said it was one thing to recite the fundamental proposition that everyone should pay their fair share of tax.
“But you then have to apply that in a globalised world with multiple countries and points of profit, and different tax rates, allowable expenses and what is taxable income.”
These issues were easy to confuse and oversimplify, he said.
“It is a little bit simplistic to say that we can adopt a cookie cutter [approach] which is going to say universally you can do this and everybody can pay tax on this basis,” he said.
A Senate inquiry will examine revelations that a number of large Australian companies shifted profits through Luxembourg to avoid paying tax.
Greens leader Christine Milne is vowing to force company directors to appear at public hearings if necessary.
Senator Milne sponsored a successful push to establish the inquiry, to be conducted by the Senate Economics References Committee, in October to look into allegations that multinationals such as Google and Apple were not paying enough tax in Australia.
Following revelations in The Financial Review on Thursday that Australian companies including AMP, Macquarie Group, Lend Lease and Goodman Group had used the Luxembourg loophole, Senator Milne said these would become a focus of the inquiry.
GOVERNMENT TACKLES TAX AVOIDANCE
“I moved for this Senate inquiry specifically to start looking at this because I am really incensed by the fact that the Abbott government keeps calling poor people and people on low incomes around the country ‘leaners’, and businesses are ‘lifters’, and what we are seeing is massive tax avoidance, minimisation and evasion by large corporations, multinational and national,” Senator Milne said.
Finance Minister Mathias Cormann defended Australia’s anti-avoidance tax laws but said the government was “acutely aware of the need to stay alert” to constant changes in arrangements used for tax minimisation purposes.
“The government is firmly committed to ensuring that Australian tax is paid on profits earned in Australia,” Senator Cormann said.
“While we cannot comment on individual taxpayer affairs, the Australian Taxation Office will look closely at this data and, to the extent it is relevant to Australia, check it against information multinationals have reported to the Australian Taxation Office.”
“If the Australian Taxation Office identifies any discrepancies they will seek clarification and where necessary take further action under their compliance program focusing on international structures and profit shifting.”
The Senate committee, which is chaired by Labor senator Sam Dastyari, can invite whoever it deems appropriate to appear before the hearing.
If a majority of senators agree, individuals can be subpoenaed and forced to appear.
Senator Dastyari said the committee had already written to 40 of the top ASX-listed companies, asking them to explain their current tax status. The next step would be to write to non-ASX listed companies including multinationals like Facebook and Google and also organisations like the Future Fund.
“So far our message has been for those companies that are unable to satisfactorily explain their tax situation, our initial recourse is going to be to invite them to appear but we are reserving our powers of subpoena if necessary.”
The date of the first hearing of the inquiry has not yet been decided upon but it is likely to be held early next year.
The Luxembourg revelations concerning domestic companies come at a politically tricky time for the government, which has vowed to focus on multinational tax evasion at the upcoming G20 summit in Brisbane.
Senator Cormann said the government would continue to pursue multilateral change through the G20, and would also take action by implementing “effective domestic policy changes” and working closely with the Commissioner of Taxation to strengthen administration.
