Tax avoidance by multinational enterprises—Australian Government initiatives to avoid erosion of corporate tax base

Bernard Pulle, Economics

Key issue
This article examines the measures the Australian Government has introduced recently and measures under consideration in co-ordinated action with Organisation for Economic Co-operation and Development (OECD)/G20 initiatives to protect the erosion in its corporate tax base by multinational enterprises shifting profits to low tax jurisdictions.

Empirical evidence of profit shifting by multinationals

Over the last two years the fact that certain multinational enterprises shift their profits to low tax jurisdictions, thus avoiding paying tax in the source country where the profits are made, has received much media publicity worldwide.

Attention given to large scale tax avoidance by enterprises such as Amazon, Google and Starbucks led the House of Lords Select Committee on Economic Affairs in the United Kingdom (UK) Parliament to inquire into tax minimisation practices of multinational enterprises. On 31 July 2013, this committee published: Tackling corporate tax avoidance in a global economy: is a new approach needed?

In the United States, the President’s Framework for Business Tax Reform, published in February 2012, concluded that empirical evidence suggests that income shifting by multinationals is a significant concern that should be addressed through tax reform.

Treasury examination of the issue

In July 2013, the Treasury prepared a scoping paper on Risks to the Sustainability of Australia’s Corporate Tax Base.

This paper concluded:

there was relatively little evidence of widespread base erosion and profit shifting (BEPS) by multinational enterprises (MNEs) operating in Australia.

The lack of evidence of widespread BEPS in Australia is due, among other things, to the actions by successive governments to ensure the integrity of Australia’s tax laws, the relative effectiveness of the Australian Tax Office in enforcing corporate tax law and the generally good compliance behaviour of companies.

The failure of the international tax rules to keep pace with changes in global business environment poses a significant risk to Australia’s corporate tax base.

The rise of the digital economy and the increased importance of intangibles present challenges to the corporate tax bases of all jurisdictions, including Australia.

The scoping paper noted that the proposed joint OECD and G20 work is an opportunity to make significant progress in modernising global multilateral tax arrangements, and that as G20 Chair in 2014, Australia can play a prominent role in determining and driving this reform agenda.

Significant actions taken by the Australian Government

The Australian Parliament has passed legislation over the last three years to tighten the transfer pricing rules in relation to cross-border transfer pricing in income tax law.

Transfer pricing refers to the prices charged when one entity of a multinational group buys or sells products or services from another entity of the same group in a different country. The prices charged will have an impact on the level of profits of each entity of the multinational group, and therefore the amount of tax they have to pay, in the respective countries.

The rules are intended to require multinational firms to price intra-group goods and services between related parties to reflect the economic contribution of their Australian operations properly by applying the arm’s length principle.

The concept of an arm's length transaction is to ensure that both parties in the deal are acting in their own self-interest and that they are not subject to any pressure or duress from the other party or a related party that controls both parties, as in a multinational group. The Treasury’s forward work program

Consultations were undertaken by the Treasury in June/July 2013 on:

closing loopholes in the Offshore Banking Unit Regime
targeting the deduction for mining/resource exploration to genuine exploration activity and
preventing ‘dividend washing’, which is a device to enable shareholders to claim two sets of franking credits on what is effectively the same parcel of shares.

These and other proposals announced by the former Labor Government await decision by the new Government.

Australia’s commitment to the G20 declaration

The leaders of the G20 meeting in St. Petersburg on 5–6 September 2013 made a declaration that BEPS by multinational enterprises should be dealt with by taxing profits in the jurisdictions where economic activities deriving those profits are performed, and where value is created.

They also endorsed an OECD Action Plan to address BEPS which was included as an annex to the declaration. The Action Plan outlines 15 issues that are to be dealt with by individual jurisdictions as well as by collective action and regular reporting of progress made.

The declaration endorsed the OECD proposal for a global model for multilateral and bilateral automatic exchange of information between jurisdictions to take effect by the end of 2015. It called upon all other jurisdictions to participate with the G20 in the automatic exchange of information as the global standard.

The declaration also made a pledge to assist developing countries to benefit from a more transparent international tax system, and thereby enhance their revenue capacity.

Concluding comments

The introduction to the Treasury scoping paper states that it is in Australia’s interest to monitor and act on developments that pose a risk to its corporate tax base. This is because it collects more corporate tax as a share of GDP than most other OECD countries, despite having a lower statutory tax rate than the OECD weighted average.

This will require the continuing of, and building upon, initiatives undertaken in recent years in the reform of domestic tax law in areas such as the laws relating to transfer pricing and general tax avoidance. It will also require renegotiating Australia’s tax treaties where necessary to ensure that multinationals pay their tax on profits on economic activities performed in Australia, and where value is created, in accordance with the recent G20 declaration.