Durie’s Ver­dict

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

The Australian - The Deal - - News -

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.

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