Plans for Australia to adopt a ‘Google tax’ welcomed by advocacy group

Coalition’s proposed diverted profits tax could capture billions in revenue from multinationals using profit-shifting practices, says Tax Justice Network

One of the biggest critics of multinational tax avoidance has welcomed the Coalition’s proposed “Google tax”, saying a similar tax in the UK looks likely to increase corporate tax payments by billions for the British government.

The Tax Justice Network – the group behind the push to review the petroleum resource rent tax regime – says the government’s clampdown on multinational tax avoidance is necessary because the OECD’s base erosion and profit-shifting project has failed.

The Turnbull government plans to introduce a so-called “diverted profits tax,” colloquially called a “Google tax”, to impose a 40% penalty on profits artificially diverted from Australia by multinationals.

It is designed to target entities with annual global income of $1bn or more that shift profits to offshore associates through related-party transactions with insufficient economic substance that reduce the tax paid on profits generated in Australia by more than 20%.

The move follows public outrage about the profit-shifting behaviour of some of the biggest global companies with operations in Australia.

In April 2015, senior executives from Google, Apple and Microsoft used a Senate inquiry to fiercely defend corporate structures that allowed most of the revenue from their Australian operations to be taxed in lower cost offshore jurisdictions.

At the time the treasurer Joe Hockey was warning Australia was “losing control of our destiny from a taxation perspective” because of “holes” in the tax treatment of multinational corporations. He flagged a so-called “Google tax” in the budget similar to the diverted profits tax in Britain, which requires multinationals to pay a rate higher than the company tax rate on profits sent offshore.

The Turnbull government released an exposure draft of the bill in November.

The Tax Justice Network has welcomed the bill in its submission. It says the only effective way to end many of the tax-minimising strategies of multinational enterprises is to accept the economic reality that they operate as unitary firms, rather than separate entities.

“By continuing to accept the fiction of separate entity, the OECD base erosion and profit shifting project failed to deliver on the G20 request to reform the rules so that multinational enterprises could be taxed ‘where economic activities occur and value is created’,” says its submission, seen by Guardian Australia.

However, it also says it is concerned that the 20% tax reduction threshold in the proposed diverted profits tax (DPT) may be too high, because a multinational enterprise with profits of $100m in Australia would be permitted, under such as threshold, to avoid up to $20m before being caught by the DPT.

“Given the threshold test does not require the ATO to take action, but allows them to – provided they have cause to believe the test of the transaction lacking economic substance applies – a lower threshold allows the ATO more ability to take action,” the group says. “It means if a transaction is entered into that obviously lacks economic substance, the ATO will have the option to take action.

“The ATO will still need to assess the amount of revenue to be recovered against the cost of the ATO taking action. Thus a threshold of 10% tax reduction would seem more suitable.”

The group says the ATO should also be able to take action against transactions that result in a $5m tax reduction if they lack economic substance, even if this is below a lower 10% threshold.

The diverted profits tax should be applied up to seven years after the corporate taxpayer has lodged their income tax return for the relevant year, the group says.

Multinational tax avoidance cost Australia $6bn in 2014, Oxfam report claims

It would also like the DPT to apply to a wider group of multinational enterprises than the government is proposing. The government currently wants to target multinational enterprises with annual global income of $1bn or more. The Tax Justice Network would prefer a lower annual income threshold of $200m.

“However, [we] accept that at this point in time the measure be targeted to very large multinational enterprises,” the group says.

The diverted profits tax will start from income years beginning on or after 1 July 2017 if the bill passes parliament.