Google tax to hit multinationals in budget

The federal government is set to target profit shifting by multinationals in the May budget using a so-called Google tax in a bid to raise revenue and wrest the political initiative back from Labor.

While Australia is leading a push within the Group of 20 for a joint approach to combat tax minimisation through profit shifting, there is a frustration at the slow pace of global progress and a recognition Australia must lead.

On Tuesday, Treasurer Joe Hockey all but confirmed Australia was set to go after tax “thieves” by following the United Kingdom’s Diverted Profits Tax.

Australia’s response will be based on information gleaned from Australian Tax Office officials who have been “embedded” inside multinational companies so as “to understand their business model”.

“Because of that embedding, we now understand how they make their money in Australia, and now can appropriately formulate the way to tax it for that activity in Australia,” he said.

“We are determined to do it. I see people who do not pay the legitimate level of tax in Australia as thieves. It means you pay more tax than you should, and I think that’s unfair. That’s unfair. So, we’re on to it, and there’s more action to come.”

Mr Hockey said he had been in frequent contact with British chancellor George Osborne as he formulated new legislation for Australia.

The UK’s diverted profits tax would tax companies profits they declare overseas but which come from local activity.
It would be levied at 25 per cent, which is higher than the UK’s standard 21 per cent company tax rate, all to encourage the companies to declare profits locally.

Before Christmas, the Abbott government was working on a plan that would involve levying the current 30 per cent company tax rate on profits declared overseas, which were made from revenues earned in Australia.

If the government goes ahead with the plan, it would be the second tax increase in the May 12 budget, coming on top of plans to adopt Labor’s proposal for a bank deposit levy.

At the same time, there will be tax cuts for small business.

One month ago, Labor got the jump on the government on profit shifting by releasing its own four-pronged policy approach, which, it said would save the budget about $2 billion over three years in lost tax revenue.

The central element would be to change the current thin-capitalisation rules to reduce the amount of debt against which companies can claim tax deductions in Australia. Now, companies can claim up to a 60 per cent debt-to-equity ratio for their Australian operations.

Under Labor’s policy, a company’s tax deduction would be assessed on the debt-to-equity ratio of its entire global operation. For example, if a company averaged a debt-to-equity ratio across all its subsidiaries of 30 per cent, then it could only claim tax deductions of that level in Australia.

The development came as split emerged between Prime Minister Tony Abbott and Mr Hockey over plans to crack down on superannuation tax concessions for the wealthy.

Despite Mr Hockey and shadow treasurer Chris Bowen both agreeing on Monday that change was needed, Mr Abbott shot this down on Tuesday by attacking Labor.

“It’s so typical of the Labor Party that they immediately want to see more tax, not less,” he said.

Coalition frontbencher Steven Ciobo said “this so-called consensus view – that there needs to be a crack-down on superannuation concessions for the wealthy – is complete rubbish.”

Changes to superannuation tax concessions are suggested in the tax discussion paper released on Monday, as are changes to combat tax avoidance through profit shifting.

“These developments … can weaken the ability of tax systems to raise revenue from traditional tax bases and they can increase the economic costs of taxation, dampening economic growth,” it said.

With the budget just over a month away, the government insisted it would again pursue plans to deregulate universities, despite losing the support of key lobby group, the Group of Eight. While the Group supports deregulation, it believes the government has no hope of having the twice-rejected legislation passed by the Senate and believes it should back off, hold a review and try and gain a political consensus.

“The only way to get it through would be to dilute it so much that it wouldn’t solve the problem it was designed to solve,” Go8 chief executive Vicki Thomson said.

But Mr Abbott and Education Minister Christopher Pyne said the system had been reviewed many times over the past 60 years and they would try again. If the amended package rejected last month was rejected again, the government would have a trigger for a double-dissolution election.

Sources said that was exactly what it was seeking, even though there was no plan to pull the trigger.

“The sector has faced 33 reviews since 1950 and another review is not a substitute for action. The government does not plan another review,” Mr Pyne said.

“The government has the right policy for higher education and we will continue to press it.”