• Great articles on other sites
  • RSS Great articles on other sites

  • Analysis, Internet - Written by on Friday, November 30, 2012 13:31 - 3 Comments

    Digital disruption is eroding Australia’s tax base

    This article is by John Passant, Graduate Teaching Fellow Politics at Australian National University. It first appeared on The Conversation and is replicated here with permission.

    analysis It might well have been a case of a stopped clock being right twice a day, but on the very day I had an article in The Conversation called Giant profits, tiny tax bills: time to close loopholes on corporate tax avoidance, Assistant Treasurer David Bradbury appointed the head of the Revenue Group in Treasury, Rob Heferen, to develop a scoping paper to “set out the risks to the sustainability of Australia’s corporate tax base and look at the potential solutions”.

    As I have previously outlined, the problem is that Google, as one multinational example, earns 96% of its income from advertising. When Australians negotiate a contract with Google to advertise on it, they do so with Google in Ireland or Google in Singapore. So, the locus of the income earning activity by Google is ostensibly Ireland or Singapore. Under the tax treaties we have with Ireland and Singapore, we cede taxing rights to Singapore and Ireland over any business profits residents in those treaty countries make from Australia.

    The exception is where those foreign residents have what is known as a permanent establishment – a concept arising from cross-border arrangements between Germany and Austria in the late 1800s. A branch is one example. It is not a separate entity from the foreign company, but is the foreign company with a fixed physical presence, in this case in Australia. The treaty gives Australia the right to tax the business profits attributable to that branch in Australia.

    If I am contracting with Google Ireland or Google Singapore, then that income is not attributable to its branch in Australia. And Google makes sure that is the case.

    Estimates are that Google last year received about $1 billion in advertising revenue from Australia. Despite that, it paid little Australian income tax. According to the Assistant Treasurer, and quoting from a newspaper source, one figure for the tax that Google paid in Australia was $74,176. However, Bradbury said later: “The same article reported that a spokesman for Google asserted that the correct figure was $781,471.” Even if the latter figure is correct, revenue of $1 billion from sources in Australia and tax of less than $1 million does look like Google isn’t contributing much to Australia’s well-being through tax given the amount of income it earns from us.

    But the story doesn’t end there. As the Assistant Treasurer highlights, arrangements in Ireland or Singapore can leave the money often tax free there or taxed at very, very low rates in places like Luxembourg (perhaps 2.5%) before ending up in other tax havens like the Cayman Islands or Bermuda. The Assistant Treasurer has some detail of this in his recent speech. (You could also Google “Double Irish Dutch Sandwich”.)

    There is nothing illegal in this activity, and it is not limited to Google or to Australia. As the Assistant Treasurer pointed out in discussing the UK Public Accounts Committee examination of the Taxation of Multinational Corporations:

    Media reports of the Committee’s hearings state that Amazon paid no tax in the UK despite £3.3 billion in sales by routing transactions through Luxembourg, where it faced an effective tax rate of 2.5%. And now we see that the weaknesses that technology companies have exposed in the international tax architecture are spreading to other industries and activities.

    The UK Public Accounts Committee was told that Starbucks had paid no taxes in the UK for three years, despite sales totalling £1.2 billion – in part due to royalty payments for the use of the brand.

    What is to be done?

    The Gillard government is strengthening our transfer pricing rules. Transfer pricing is where a multinational manipulates the pricing of goods, services, and interest with a related party to shift the profit from a high-tax country like Australia to a low or no-tax one. A Vanuatu subsidiary of an Australian company, for example, might provide services to an Australian company at an above-market price. The Australian company gets a bigger deduction than if it had contracted on the market for the services, thus reducing its Australian profit and tax paid and shifting it to the Vanuatu subsidiary.

    The problem is that Google-type arrangements do not involve transfer pricing. The changes won’t affect this tax treaty aspect of digital disruption.

    The Gillard government is also proposing changes to one aspect of Australia’s general anti-avoidance provision, known as Part IVA. The High Court and the Federal Court, influenced I suspect by worldviews coming out of the neoliberal cesspit, are in the process of destroying the efficacy of Part IVA.

    The Gillard government’s proposed Band-aid changes might keep the provision functioning for a few more years until the judiciary highlights another fundamental error in it. Be that as it may, establishing a subsidiary in Ireland or Singapore for worldwide advertising contract arrangements does not appear to be the tax avoiding treaty shopping that might, at a pinch, be caught by Part IVA. It is just good tax planning.

    That means the solution has to be systemic. Assuming the government wants some money from the rivers of gold flowing out of Australia and into the hands of Google and other digital multinationals to Ireland or Singapore or wherever else they set up, what can it do?

    It can work with the OECD to develop a treaty solution and then renegotiate all the 44 current treaties. That might be finished about the time my grandchildren become grandparents. Australia could act unilaterally.

    A solution may include withholding payments to the likes of Google. It might work if done through payment companies — for example withholding tax on interest paid to foreign residents is currently collected from the payers, the banks and other lending and financial institutions. A similar arrangement could be put in place for payments to the likes of foreign residents like Google, Amazon and Facebook. The amount withheld at a set percentage of the payment could be a final tax. The compliance costs imposed on the intermediaries, however, might be too high. That would be a matter for the Heferen inquiry to investigate.

    Maybe we need to think outside the tax box. Free-to-air television companies have made the point that they are losing advertising revenue to the likes of Google. While this might reflect shifts in technology and communication preferences rather than pricing differences caused by tax differentials, the fact that television stations have to pay a licence fee to operate in Australia might present one solution to digital disruption.

    The Heferen inquiry could consider the imposition of a fee on Google and the other digital multinationals to allow them to operate in Australia as one way of recouping some of the revenue foregone due to international positioning. That fee could be measured against the digital multinational’s gross revenue from Australian sources.

    Would it work in practice? I’ll leave that to the technology experts.

    In any case, the Heferen inquiry will have its work cut out trying to solve the challenge that the mobility of global digital capital presents to Australia’s tax base.

    John Passant does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations. However this article is part of his secret plot to impose a Leninist dictatorship of the proletariat in Australia.

    This article was originally published at The Conversation. Read the original article. Image credit: Google

    The Conversation

    submit to reddit

    3 Comments

    You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

    1. Bob.H
      Posted 30/11/2012 at 3:40 pm | Permalink |

      The existence of Tax Avoidance in one form or another has been around for as long as there has been tax. I am talking about the legal efforts here.

      What is now happening is that the world is getting smaller in a business sense and most Governments are so moribund they have never made an effort to determine if the current reliance on Income Tax as the main source of revenue is the most efficient method in the modern world.

      Until Governments are able to impose an equitable charge on businesses who are interacting with the country’s population to derive their income there will continue to be inequities.

      To be successful the revenue collection system must be non-discriminatory, equitable and acceptable. What such a system would look like I am not sure but suspect that it would be based on turn over rather than profits or anything else which has deductions which can be open to interpretation..

    2. Trevor
      Posted 01/12/2012 at 5:46 pm | Permalink |

      Why not scrap the whole system, remove cash altogether and impose a 0.1% tax on every financial transaction? Make it illegal for any domestic entity to operate using foreign banking systems. Instant equality for all, more money than the current system brings in, no more money wasted on complicated taxation systems and expensive tax accountants & lawyers, change the name of the Taxation Dept overnight to the Audit Dept, and they can spend their time looking into entities that try to game the system (and maybe wholesale corruption in general). Oh and no more necessity for individuals to submit tax returns ;-)

      • GongGav
        Posted 03/12/2012 at 9:24 am | Permalink |

        Because a Debit Tax setup wont work. Stop suggesting it.

        You’d put entire indutries out of work, redirect the bulk of the important work to private industry, and disrupt the worlds most stable economy for decades, not to mention what it does to the rest of the world as they adapt..

        Its a crazy idea that has some benefits, but a lot of detriments.




    Get our 'Best of the Week' newsletter on Fridays

    Just the most important stories, one email a week.

    Email address:


  • Enterprise IT stories

    • Super funds close to dumping $250m IT revamp facepalm2

      If you have even a skin deep awareness of the structure of Australia’s superannuation industry, you’ll be aware that much of the underlying infrastructure used by many of the nation’s major funds is provided by a centralised group, Superpartners. One of the group’s main projects in recent years has been to dramatically update and modernise its IT platform — its version of a core banking platform overhaul. Unfortunately, the $250 million project has not precisely been going well.

    • Qld’s Grant joins analyst firm IBRS peter-grant

      This week it emerged that Peter Grant, the two-time former Queensland Whole of Government CIO (pictured), has joined well-regarded analyst firm Intelligent Business Research Services (IBRS). We’ve long had a high regard for IBRS, and so it’s fantastic to see such an experienced executive join its ranks.

    • Westpac dumps desk phones for Samsung Android mobiles samsung-galaxy-ace-3

      The era of troublesome desk phones tied to physical locations is gradually coming to an end in many workplaces, with mobile phones becoming increasingly popular as organisations’ main method of voice telecommunications. But some groups are more advanced than others when it comes to adoption of the trend. One of those is Westpac.

    • Ministers’ cloud approval lasted just a year reverse

      Remember how twelve months ago, the Federal Government released a new cloud computing security and privacy directive which required departments and agencies to explicitly acquire the approval of the Attorney-General and the relevant portfolio minister before government data containing private information could be stored in offshore facilities? Remember how the policy was strongly criticised by Microsoft, Government CIOs and Delimiter? Well, it looks like the policy is about to be reversed.

    • WA Govt can’t fund school IT upgrades oops key

      In news from The Department of Disturbing Facts, iTNews revealed late last week that Western Australia’s Department of Education has run out of money halfway through the deployment of new fundamental IT infrastructure to the state’s schools.

    • Turnbull outlines Govt ICT vision turnbull-5

      Communications Minister Malcolm Turnbull has published an extensive article arguing that the Federal Government needed to do a better job of connecting with Australians via digital channels and that public sector IT projects needn’t cost the huge amounts that some have in the past.

    • NZ Govt pushes hard into cloud zealand

      New Zealand’s national Government announced a whole of government contract this morning for what it terms ‘Office Productivity as a Service’ services. This includes email and calendaring services, as well as file-sharing, mobility, instant messaging and collaboration services. The contract complements two existing contracts — Desktop as a Service and Enterprise Content Management as a Service.

    • CommBank reveals Harte’s replacement whiteing

      The Commonwealth Bank of Australia has promoted an internal executive who joined the bank in September after a lengthy career at petroleum giant VP and IT services group Accenture to replace its outgoing chief information officer Michael Harte, who announced in early May that he would leave the bank.

    • Jeff Smith quits Suncorp for IBM jeffsmith4

      Second-tier Australian bank and financial services group Suncorp today announced that its long-serving top technology executive Jeff Smith would leave to take up a senior role with IBM in the United States, in an announcement which marks the end of an era for the nation’s banking IT sector.

    • Small business missing the mobile, social, cloud revolution iphone-stock

      Most companies that live and breathe the online revolution are not tech startups, but smart smaller firms that use online tools to run their core business better: to cut costs, reach customers and suppliers, innovate and get more control. Many others, however, are falling behind, according to a new Grattan Institute discussion paper.

  • Blog, Enterprise IT - Jul 5, 2014 13:53 - 0 Comments

    Super funds close to dumping $250m IT revamp

    More In Enterprise IT


    Blog, Telecommunications - Jul 5, 2014 12:12 - 0 Comments

    What should the ACCC’s role be in guiding infrastructure spending?

    More In Telecommunications


    Analysis, Industry, Internet - Jun 23, 2014 10:33 - 0 Comments

    ‘Google Schmoogle’ – how Yellow Pages got it so wrong

    More In Industry


    Blog, Digital Rights - Jun 30, 2014 22:24 - 0 Comments

    Will Netflix launch in Australia, or not?

    More In Digital Rights