Why world governments may not sign up to the plan against tax avoidance
Multinational tax avoidance in the digital economy has become a hot political topic with public reports of companies such as Google, Apple and Starbucks not paying a “fair share” of tax.
The G20 group of rich economies has commissioned the Organisation for Economic Co-operation and Development to tackle corporate profit shifting.
No government wants their tax base to be cannibalised. Yet this is exactly what could happen if the OECD wins its fight against base erosion and profit shifting (BEPS).
The goal of BEPS, which will feature in discussions at the G20 finance ministers meeting, and the G20 summit in Brisbane later this year, is to eliminate “double non-taxation” among multinationals. In theory, everyone likes it. In reality, getting there may be impossible.
Pascal Saint-Amans, director of the OECD’s centre for tax policy, said while all G20 and OECD governments signed up to the BEPS plan, and agree “non-taxation” is an issue, what they “might not necessarily agree on is how do you share the tax, once it’s re-established, between source and residence?”
He says the OECD cannot solve tax competition issues, and if BEPS succeeds, companies may move their bases to low-tax countries such as Ireland and Singapore.
The OECD is examining how tax authorities can rework the old concept known as “permanent establishment” in the modern digital economy. The rules date to a time when the bulk of economic activity took place at a physical location.
The rise of the digital economy, with no physical location, lets multinationals avoid paying tax on income derived from sales to Australian customers. It’s why Google’s Australian arm paid just $74,000 in tax in 2011 despite generating billions in sales revenue.
But Saint-Amans says “governments, including Australia, are finding there are permanent establishments”.
This comes as countries impose unilateral rules to help shore up their tax base. Israel wants to impose royalties on search engine companies. Others want to stop companies moving offshore by offering cheaper tax rates – Britain for example introduced the “patent box” tax incentive, reducing the tax paid on patent profits by companies.
A related issue for the G20 is eradicating tax havens in places such as Bermuda, Cayman Islands, Cook Islands and Liechtenstein. The OECD this week proposed a global roadmap for automatic exchange of information, saying institutions should reveal more about non-residents hiding taxable money.
Some governments want to go further and publicly disclose tax paid by large companies. The Abbott government may wind back Labor changes giving the Tax Office the power to publish the tax paid by big companies, despite moves towards it in countries such as Britain.
Assistant Treasurer Arthur Sinodinos said there was no need for such information to go public. Saint-Amans told the Financial Review publicly revealing the information may “mislead”.
Former Treasury official and G20 finance deputy Mike Callaghan says publishing large companies’ taxable income is a “powerful tool” to address digital economy issues and ensures a shaming of companies not paying a “fair share” of tax.