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Senate inquiry into corporate tax avoidance



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Senate inquiry into corporate tax avoidance

Posted 19/12/2014 by Jaan Murphy

In October, the Senate referred an inquiry into corporate tax avoidance (the Inquiry) to the

Senate Economic References Committee (the Committee). The Inquiry will examine tax

avoidance and aggressive minimisation by multinational companies operating in

Australia. Public submissions close on 2 February 2015, and the Committee will report in

June 2015.

Background

A report by the Tax Justice Network shows that of Australia’s largest 200 publicly listed

companies, 29 per cent have an effective tax rate of 10 per cent or less, and 14 per cent

have an effective tax rate of 0 per cent, well below the statutory tax rate of 30 per

cent. Recent media coverage has also highlighted that some multinational companies pay

little income tax, despite operating profitable businesses.

Multinational corporation tax avoidance and minimisation practices

Multinational corporation tax avoidance and minimisation are generally achieved through

profit shifting to low tax countries or utilising intra-company or related party dealings

among subsidiaries. In Australia, it was estimated that in 2009, the volume of related party

dealings exceeded 20 per cent of Gross Domestic Product (GDP). Common jurisdictional

profit shifting mechanisms include intra-company:

 sale of products and services

 provision of debt financing and

 charging of royalties for the use of intellectual property (IP) rights.

These techniques allow multinational companies to shift revenue to low tax countries and

expenses to high tax countries, leading to the reduction of taxable profits in individual

countries and a minimisation of the overall tax liabilities of the consolidated entity.

Tax avoidance structures and practices adopted by multinational corporations can be very

complex, and can involve exploiting differences in tax rules (residence shopping) and

taxation treaties (treaty shopping).

Current multinational corporation taxation legislation in Australia

Both the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act

1997 (ITAA 1997) contain anti-tax avoidance provisions. Part IVA of the ITAA 1936

counters arrangements entered into for the dominant purpose of avoiding tax. Specific

provisions relating to multinational intra-company dealings, including transfer pricing, the

arm’s length principle and thin capitalisation are governed under Division 815 of the ITAA

1997. Recent legislative reform in 2012-13 was aimed at strengthening the general anti-avoidance rules and implementing an internationally aligned, comprehensive and robust

transfer pricing regime.

Difficulties in ‘policing’ tax avoidance

Although tax authorities in many countries impose stringent measures to ensure the

genuine commercial nature of intra-company dealings, there are often difficulties in finding

truly comparable independent arms-length transactions. These are often caused by the

complexity of related party relationships and corporate structures, or the uniqueness of

products, services or IP rights involved in intra-company transactions. These complexities

significantly impact on the monitoring cost of tax authorities.

Recent international responses to tax avoidance

Organisation for Economic Co-operation and Development (OECD) and G20

In July 2013, the OECD presented to G20 finance ministers an Action Plan on Base Erosion

and Profit Shifting (BEPS), outlining 15 clearly defined actions for implementation within a

two-year period aimed at improving international tax cooperation and transparency. In

September 2014, the OECD released the first BEPS recommendations to the G20, dealing, in

part, with model tax treaty provisions.

European Union (EU)

The EU loses an estimated 1 trillion euros tax revenue every year to tax fraud, avoidance and

aggressive tax planning. In response, the European Parliament passed a resolution in May

2013 calling for improved intergovernmental cooperation and information sharing, and

urging member states to crack down on corporations abusing tax rules and non-transparent

and non-cooperative tax havens.

United Kingdom (UK)

In the UK, the Select Committee on Economic Affairs of the House of Lords launched an

inquiry into multinational corporation tax avoidance practices in 2013. The inquiry

recommended the review of the existing UK corporate taxation regime and the

establishment of a joint parliamentary committee to exercise greater oversight of tax

settlements with multinational corporations. In December 2014, the Chancellor, George

Osborne, announced that the UK Government would introduce ‘a 25% tax on profits

generated by multinationals from economic activity here in the UK which they then

artificially shift out of the country’, an initiative that is being closely monitored by the

Australian Government.

United States (US)

Between 2012-2014, the Permanent Subcommittee on Investigations (PSI) held hearings on

profit shifting by multinational corporations, and conducted case studies of Microsoft,

Hewlett-Packard, Apple and Caterpillar. PSI’s recommendations included strengthening the

tax code on transfer pricing and US participation in OECD multinational corporate tax

efforts.

Alternative approaches to taxation of multinational corporations

Many of the proposed approaches noted above focus on combating tax avoidance to

improve the existing tax base of company profits. The European Parliament for example, is

of the view that ‘broadening already existing tax bases, rather than increasing tax rates or

introducing new taxes, could generate further incomes for the Member States’.

One option is to tax multinational companies as a single entity, attributing company profit

in individual tax jurisdictions according to a predetermined formula based on turnover,

number of employees, or tangible assets in each jurisdiction. However, some argue that

this ‘unitary tax’ model relies on global coordination and exchange of information, and

hence would be difficult and time-consuming to implement.

Others believe that the existing company profit tax base is in need of a radical reform and

introducing an alternative tax base would be a more effective solution. For example, the UK

parliamentary inquiry recommended the examination of a destination-based tax on

corporate cash flows, based on a UK Institute of Fiscal Studies review. This model taxes

cash sales to customers instead of company profits, and is designed to tackle the challenge

of profit shifting (as, unlike profits, a company’s ability to shift its customer base is

limited). As a tax base, cash sales are also easier to calculate than profit, potentially

reducing monitoring cost of tax authorities and compliance effort of companies. This

model also does not require cross country coordination, making it easier to implement than

the ‘unitary tax’ model. * This FlagPost was prepared by Daphne Cockerill, an intern from the University of Canberra.