Define a tax haven, business lobbies tell government

Before going after multinationals that channel profits through tax havens and low-tax nations, you must define what one is, business lobbies have told the Abbott government.

Treasurer Joe Hockey announced in the May budget that the government would be strengthening anti-avoidance laws to go after 30 companies with over $1 billion revenue, which shift profits through low-tax or no tax nations.

The measure, which was never costed by Treasury, may not raise extra revenue, submissions say.

The draft laws, which are currently going through consultation via Treasury, are supposed to be finalised before the end of the year, and will take hold in January.

Chartered Accountants Australia and New Zealand said the subject of what is a low-tax or no-tax jurisdiction needed clarification.
‘Low-tax’ definition based on a rate

The government could overcome this by picking creating a list of low-tax jurisdictions or giving a specific rate to determine whether a country is low taxed.

The submission by its tax leader Michael Croker said it would be best to pick a specific rate of 10 per cent or less.

The Tax Institute also urges the government to include a definition by stating that the corporate tax rate on the relevant profits needs to be less than 10 per cent.

The laws are intended target situations where a foreign multinational supplies goods or services to Australian customers and books that revenue offshore.

The draft laws also states other criteria including that: the activities of an Australian entity are integral to the Australian’s customer’s decision to purchase the goods or services, the profits from Australian sales are subject to low or no global tax, and one of the principal purposes of the arrangements is to obtain a tax benefit.

Tax Commissioner Chris Jordan will have the power to recoup unpaid tax and issue a fine of an additional 100 per cent of unpaid taxes plus interest.
Concerns about overreach

The lobbies are also worried that more than 30 companies will get hit by the laws.

Chartered Accountants said the government should give taxpayers relief from penalties if they are in discussions with the ATO about confirming “the extent of any exposure under the measure and any required measures to rectify their position”.

The government must also assess its legislation against the OECD action plan against multinational tax avoidance known as Base Erosion and Profit Shifting (BEPS).

The OECD plan, which is being devised on behalf of G20 governments, is due to be handed down in October.

Mr Croker said this may result in some form of multilateral instrument and Australia’s measures “are then likely to be of diminished relevance”.

The Tax Institute’s president Stephen Healey in his organisation’s submission said the government’s draft laws were “ad-hoc integrity measures add unnecessary complexity to our tax system” and would be better left to the OECD.

The tax lobby agreed the measure could apply to more than 30 companies “but the amount of additional revenue that could be generated by this measure in Australia may be minimal”.
Don’t tax companies twice

Its submission also raises concern that companies may be taxed twice.

“For example, in the case of an ultimate US parent company, the profits may be kept out of the US for US tax reasons but Australia seeks under this provision to collect that US tax saving as Australian domestic tax,” the submission said.

In relation to determining Australian residency it said under global tax laws mere physical location is insufficient to establish this, and there needed o be guidance.

The OECD is currently working to help define whether companies should be taxed at source or residency, but it may be left up to countries to compete for revenue.

Chartered Accountants said the draft laws relies on vague terms such as “commercially dependent”, and “substantial economic activity”, which need to be clearly explained.

“It’s not clear for example, whether an independent agent acting at arm’s length that has a high level of sales from a non-resident – say 90 per cent of the business from one non-resident supplier – is intended to be caught,” the submission said.

“For example, there could be offshore leasing companies with on-shore people undertaking activities of an independent nature in Australia.”

The submission also takes issue with references to stateless income and examples used about where this happens.

“One example may be where an MNE has a captive insurance company located in the Cayman Islands, as many do.”