Washington resists Hockey’s tax crackdown on Silicon Valley giants
OHN KEHOE
The global tax plan being pursued by Australia as G20 president, to compel low-tax paying multinationals such as Google and Apple to contribute more revenue to government coffers, could be derailed by political resistance in the United States.
A prominent US senator in congress who would likely become the powerful finance committee chairman if Republicans win a majority at elections next month, has labelled the G20’s base erosion and profit shifting (BEPS) project as a way “foreign countries can raid the American Treasury or American businesses”.
Senator Orrin Hatch is pressuring the US Treasury to “aggressively represent American employers and their workers in the BEPS negotiations”.
The Obama administration is cautious about committing to an international tax agreement with other countries if it impinges on the US’s taxing rights, or is perceived to target its companies.
US Treasury, while supportive of the BEPS project being pursued by the G20 and Organisation for Economic Co-operation and Development (OECD), has raised concerns that some measures could erode the US tax base or increase double taxation on its companies.
The international jockeying coincides with an Australian Taxation Office investigation into the tax strategies of eight major internet companies, believed to include Google, Apple, eBay and Amazon, as revealed by The Australian Financial Review last month.
INVESTIGATION COMPLAINTS
US technology firms are understood to have made complaints about the Tax Office’s intensive audits, to the US Treasury in the hope that the US government will pressure the Abbott government to back off.
Silicon Valley technology giants are among the most influential political donors and lobbyists in Washington, and their staff are contributing significant amounts to Democrat and Republican candidates in the lead up to congressional elections on November 4.
Google spent $US9.3 million ($10.7 million)and Apple $US3.5 million lobbying Congress in 2013, according to figures from the Senate Office of Public Records, analysed by Open Secrets.
Microsoft and Google employees and their families were the second and third largest block of financial donors to President Barack Obama’s presidential campaign in 2012, contributing $US814,645 and $801,770 respectively.
In Washington this week, Treasurer Joe Hockey will meet G20 finance ministers including US Treasury secretary Jack Lew on the sidelines of the International Monetary Fund annual meeting.
An overhaul of international tax rules to crackdown against the use of low tax and no tax jurisdictions by multinationals is expected to be discussed.
LOCATION SPECIFIC PROFITS
Mr Hockey said on the weekend the G20 was aiming to put in place “processes to ensure that companies and individuals pay their fair share of tax”.
The AFR reported last week Mr Hockey is pressing the Tax Office to tackle “location specific profits” by technology companies.
US tech giant Apple shifted almost $9 billion in profits from its Australian operations to a tax-haven structure in Ireland over the past 10 years, an investigation published by AFR in March revealed.
US business fears the proposed international tax reforms by the G20 and OECD are a “target on the backs of US companies”, US Council for International Business international tax counsel Carol Doran Klein said.
If Republicans pick up six seats in the Senate at the November 4 election – considered more than a 50 per cent chance – they will control both houses of Congress.
Senator Hatch, currently the Republican minority ranking member on the influential Senate finance committee, is in line to be promoted to chairman.
POWERFUL INFLUENCER
He would command huge power in tabling or vetoing proposed legislation.
In order for the US to legislate any international agreement among members of the G20 and OECD, Congress would almost certainly need to pass legislation.
Senator Hatch told a Congress hearing that US companies should be allowed to more effectively compete with foreign counterparts.
“Sadly, when it comes to our international tax system, much of the attention gets placed elsewhere.
“For example, in 2013, the OECD launched its Base Erosion and Profit Shifting or BEPS project,” Senator Hatch said at the July 22 hearing.
“While we appreciate the OECD’s efforts in bringing tax authorities together to discuss and work through issues, many of us have expressed concern that the BEPS project can be used by other countries as a way to increase taxes on American taxpayers.”
FAIR RULES FOR ALL
US House of Representative ways and means committee chairman, Republican Dave Camp, reiterated Senator Hatch’s sentiments in a matching statement that noted the “aggressive actions by some foreign countries to levy more taxes on US taxpayers”.
US Treasury deputy assistant secretary for international tax affairs Robert Stack said in response to Senator Hatch, it was commendable that countries were working together to resolve gaps in existing international rules and the US has a strong interest in the success of BEPS. However, the US must “guard against bad outcomes”, he said.
“Echoing Senator Hatch, those bad outcomes would include international norms that increase tax disputes, because they are vague and easily manipulated by tax authorities, or international norms that could erode the US tax base or increase double taxation,” Mr Stack said at the July hearing.
A US Treasury spokeswoman declined to elaborate on Friday, pointing to Mr Stack’s previous statement.
Australia, as G20 president in 2014, has made a concerted effort to dampen the perception that the proposed reforms are targeting US companies.
INNOVATIVE STRATEGIES
The Australian Treasury believes innovative firms in the technology space are leading the way in tax strategies for intellectual property and intangibles, but other sectors will soon follow.
There is also a recognition that the United Kingdom, while publicly denouncing the tax strategies of Google, is encouraging tax minimisation by multinationals through its low tax “patent boxes”. Several US pharmaceutical firms have redomiciled to the UK to take advantage of the Britain’s tax incentives for research and development.
Ms Doran Klein, a former senior US Treasury and Internal Revenue Service official, said she sensed from public comments that US Treasury was most concerned about the OECD’s work on transfer pricing on intangibles, including allocation of risk and high-value transactions.
“Historically residual returns go to the country of residence and the shareholders,” she said.
“So the big loser if there is a move away from that is going to be the US Treasury.”
In the US there is a push to reform its own corporate tax system including the taxation of foreign earnings, in response to some companies, such as Burger King, to flee offshore to lower tax jurisdictions such as Britain, Ireland and Canada.
LOST REVENUE CONCERN
Ms Doran Klein said if the US gave up taxing rights, paying for corporate tax reform would become more difficult.
“If you are going to do minimum tax on foreign earnings, but you gave away taxing jurisdiction to another country then that’s not going to be a revenue raiser,” she said.
“If you make corporate tax reform harder to pay for, then you make it even more unlikely.”
The European Commission gave a preliminary ruling last week that Apple’s tax deals with Ireland were state subsidies and could be subject to large fines.
The OECD in September released details of seven of a proposed 15 measures under its action plan on Base Erosion and Profit Shifting for G20 finance ministers to finalise.
