Good global citizenship, please Tax arbitrage is costing Australia rightful revenue but a Sydney tax professor has a simple, effective solution to a global issue
A Sydney tax professor has a simple solution to the vexed issue of tax arbitrage
MULTILATERAL talks on combating tax arbitrage by multinationals could be missing the point by not treating the Apples and Googles of the world as truly global companies. Instead, attention is focused on increasing transparency and co-operation between countries, when an examination of the divisions of the global whole might offer the best chance of a solution. Chris Evans, professor of taxation at the University of NSW Business School, has a conceptually simple way of fixing it – requiring multinationals to report as single global entities.
Under the Evans plan, a multinational company’s consolidated profits would be taxed and apportioned on an agreed set of factors such as per country sales, employment or capital levels. Each country would take the share of tax it deserved based on that criteria and the problem would solved. The split would occur at a pre-tax level and Australia, for example, could levy the tax at whatever rate it chose, which might be more or less than that levied by other countries.
If, say, Apple earned $1 billion worldwide, based on individual country sales, capital and employment, and if $100 million was made in Australia, for example, it would be taxed at the regular rate of 30 per cent. This is simple in concept but not so simple in practice; it would require international co-operation and an
‘The right market, rule of law, a business-friendly environment and growth opportunities are all as important as the right tax rate’
assumption that home countries would not take all the spoils.
The question also arises: who would check the books to ensure the numbers are legitimate? However, individual countries would be eager to cross-reference. A small country such as Australia would only get a small part of Google or Apple’s tax payment but that is much better than zero.
Evans argues the system is already used in the United States which shares corporate tax revenue with the states based on income and that a similar model could be adopted globally. Categories used to make the split could be arranged on an industry-sector basis but, logically, the less room for debate the better. The trick is to ensure everyone plays by the same rules; the incentive is simply that if a country does not join the scheme it does not collect any tax.
The B20 summit in Sydney gave continued support to the Organisation for Economic Co-operation and Development’s BEPS formula – base erosion and profit sharing.
The OECD model treats companies as different entities in different countries while the Evans model treats them as single global entities, adding genuine simplicity. He argues that OECD approach creates competition to cut tax rates to attract multinationals. The result is the so-called tax inversion that has seen a flood of international cross-border mergers in which US companies incorporate in low-tax countries such as Ireland. Last month US-based AbbVie merged with Britain’s Shire Shield in a $US54bn pharmaceutical deal that will see AbbVie’s head office move from Illinois to Ireland, slashing its effective tax rate from 22 to 13 per cent. Companies always claim tax is not the main reason for the deal but it certainly helps. It also explains why some 25 former US pharmaceutical companies have moved their bases over the past six years.
The digital age sells trouble for the taxman because multinationals can shop around in lower taxing countries. In an ideal world there would be no company tax because it is just another cost passed on to consumers. Otherwise, it would be best if all countries cut taxes to as low as possible in order to generate more income. At a time when corporate tax accounts for 20 per cent of all revenues, few countries, and certainly not Australia, would want to lose tax revenues. Australia does not want to see its taxation system gamed so companies earning income here are not paying their fair share.
Tax is a key cost of doing business but sometimes its importance is over estimated when other factors determine which countries are more appealing places to invest. The right market, rule of law, a business-friendly environment and growth opportunities are all as important as the right tax rate. Moves by the US to haul in “lost” tax through its Foreign Account Tax Compliance Act means the issue will only get bigger.