Multinationals should be made to pass “common sense” test on where they get taxed

The Australian Taxation Office should be given the power to ignore multinational transactions that fail to pass the “common sense test” and ensure that technology company profits are taxed where they are earned, the Australia Institute submission to the inquiry into corporate tax avoidance says.
The submission takes a swipe at companies like Apple, Google and Microsoft that channel profits through low-tax or no-tax jurisdictions.
“The fairest approach would be to allocate the profit associated with the tech to the regions where it makes its profit and in proportion to that profit,” the submission said.
“That indeed is exactly what would happen if Apple did not attempt to avoid tax and permitted itself to be taxed everywhere at the local tax rate.”
It urges governments to ignore international arrangements through which intangible assets such as intellectual property are held in other jurisdictions but within the same company or company group.
“When Apple puts its assets in an Irish subsidiary it is not really alienating the profit on the licensing of the tech as it would if it sold its technology to a third party and had to itself hire back the technology it needed,” the submission said.
“The Committee should recommend that the government introduce amendments to the Tax Act that would have the effect of nullifying licence fees for IT and similar payments for other business services between closely-owned subsidiaries. That would have the effect of ensuring tax is paid in Australia in proportion to the profits that derive from Australia.”
It also suggests that the ATO “ignore any transaction between 100 per cent owned affiliates of a multinational unless it can be shown that there is a genuine trade between the two”.
“On these matters the government is always going to be at a disadvantage since the taxpayer knows much more about its business than the ATO can discover,” it said. “Hence there is a case for reversing the onus of proof when there is good reason to suspect the motive of various overseas transactions.”
More than half of Australia’s trade is money being sent offshore by companies to their overseas arms. In 2012-13 Australian companies sent more than $100 billion to related parties in the low-tax nation of Singapore and another $15.6 billion to “hubs” in Switzerland.
Many technology companies in their submissions to the federal inquiry admit using hubs. Microsoft, for example, said that the income it reported on its US tax return was “fully taxable in the US without regard to the location of the customer” and defended its right to use hubs in Ireland, Singapore and Puerto Rico, which helps reduce its tax rate.
Apple in its submission said the Tax Office has now rejected extending an agreement to lock in the future taxes the company pays, an indication the agency may use its existing powers to try and collect greater tax from Apple. The agreements, known as Advanced Pricing Agreements, have been growing in use (up 12 per cent over the past three years) although last year the ATO rejected at least nine of these applications.
The use of hubs is also common outside the tech sector, although companies such as Toll said Singapore and Hong Kong were “regional hubs for doing business” and were not associated with tax secrecy.
The Tax Office says the main program it is using to target multinational profit shifting – known within the ATO as the International Structuring and Profit Shifting (ISAPS) program – has so far raised $250 million in liabilities from 13 multinationals.
It is not clear whether the companies involved will be disputing the tax bills, but at a senate hearing last month Tax Commissioner Chris Jordan signalled that some of these cases may end up in court. Nevertheless, Mr Jordan thinks that the ATO is on track to raise $1 billion in potential revenue under this program.