International tax treaties were largely set up before online multinational businesses like Google existed.
The fact that companies like Google and Apple use complex structures to minimise Australian tax payments is a serious issue that requires an international response.
Australia isn’t the only country facing this challenge – we should be making common cause with countries like the United Kingdom, where the same issues have been in the news. And, unless we want to unilaterally tear up international tax treaties with countries like Ireland or introduce retrospective legislation when we lose a big tax case, our only hope is in co-ordinated international action.
The federal government’s proposal to force multinationals to reveal their tax bills – describe as a “naming and shaming” program by tax experts – is all very well but it’s a stop-gap measure, not a solution.
Tax experts quoted in The Australian Financial Review argue that such transparency would result in the vilification of business and stymie foreign investment. I disagree. Frankly, I don’t see any reason why the tax returns of large corporations should be shrouded in secrecy – the reporting burden is not onerous, it’s not a privacy issue and it’s not really going to alter a company’s desire to invest in Australia if they think they can make money here.
The real issue is that it wouldn’t achieve much.
At best, you’d wind up with a situation like in the UK, where the payment of tax by multinationals has become somewhat voluntary in nature, depending on how susceptible they are to public pressure. In Britain, Starbucks pledged to voluntarily pay £20 million in corporation tax even if it makes no profit – a response that commentators describe as a “gift” that makes a “joke” of the tax system. On the other hand, other companies have remained impervious to the criticism. Google is defiantly proud of its tax arrangements, with chairman Eric Schmidt reportedly saying: “It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”
It is a problem worth solving. In the case of Google alone, Australia could be losing as much as $300 million in tax revenue that could be funding our schools and hospitals. Notwithstanding that, it’s a major business issue too because it leaves Australian companies at a huge disadvantage. If Apple pays $40 million in tax on revenue of $6 billion and Harvey Norman pays $51 million on revenue of $1.4 billion, that is a problem for the competitiveness of our home-grown businesses. (Gerry Harvey should note that the issue of whether the 10 per cent GST should apply to online purchases from overseas is trivial in comparison).
As a basic principle, companies should pay tax where it’s earned – defined by a reasonable person’s understanding of where the business activity took place – and governments should design tax systems that achieve that.
However, Australia has very few options open to it on its own. Last year, Graeme Wood’s publishing venture The Global Mail did a big report on Google’s tax arrangements – the company minimises its tax obligations by officially basing most of its operations in Ireland, the Netherlands and Bermuda. When Australians do business with Google Australia, legally speaking they are actually conducting e-commerce in Ireland. According to the article, transfer pricing is not the real issue.
Michael Dirkis, professor of taxation law at Sydney University Law school, is quoted saying that Australia could theoretically make any taxation rules that it wants but in practice it is bound by 44 different tax treaties to prevent double taxation. The treaty with Ireland, for example, dates back to the 1970s or 1980s and has a whole range of shortcomings.
“When Australia struck its treaty with Ireland, e-commerce didn’t exist. Google didn’t exist. Of course, treaties get renegotiated. But with Ireland now doing very nicely from its tax-haven status, is it disposed to be helpful in addressing Australia’s problem?” says The Global Mail article.
Countries like India are aggressive about making multinational companies pay tax and they are prepared to pass retrospective legislation to achieve their goals. It’s a strategy not without risk and it’s hard to see Australia – which is not a high-growth economy with 1 billion consumers – doing the same.
The only hope is for an international response and so far the Organisation for Economic Co-operation and Development has reportedly fudged the issue.
In the meantime, perhaps the government will push on with its disclosure rules. It lets the government look like it is doing something and provides plenty of fodder for journalistic outrage. It just may not do much else.