This article is by Antony Ting, Associate Professor, University of Sydney. It originally appeared on The Conversation.
opinion/analysis The war on tax avoidance by multinational enterprises achieved another important milestone last week with the signing of a multilateral agreement on exchange of information.
Australia signed the agreement with 30 other countries – including France, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands and the UK – to enable automatic exchange of country-by-country tax information of multinational enterprises.
The government says it has “instituted a raft of measures to take aggressive action against multinational tax avoidance behaviour”, but changes to Australian law are still to be made to comprehensively deal with the problem.
The multilateral agreement signed last week is an important achievement of the OECD’s base erosion profit shifting (BEPS) project. It is important because the Australian Taxation Office will have timely access to much needed global tax information about multinationals.
In the past, it was difficult for the ATO to obtain groupwide tax information of a multinational from its local subsidiary. This issue has hindered the ATO from effectively assessing tax risks and identifying audit targets. As the subtitle of the interim report of the Senate Economics References Committee inquiry into corporate tax avoidance correctly says: “You cannot tax what you cannot see.”
The US position
A key player missing from the multilateral agreement is the US. It refused to sign the agreement. Instead, it claims that it intends to exchange the country-by-country reports through bilateral agreements entered into separately with individual countries.
The US Treasury has indicated it would enter into such bilateral agreements with countries that agree to restrict the use of exchanged data to “assessing high-level transfer pricing … tax risks and, where appropriate, for economic and statistical analysis”.
The US insists on restricting the use of the country-by-country reports because it is concerned other countries may use the data to determine how much tax its multinationals should pay in those countries. It is unclear why the US is more concerned about this issue than the 31 countries that have signed the multilateral agreement. In any case, this US position is consistent with its general attitude towards the OECD BEPS project, as summarised in a recent statement by a US congressman:
“The OECD’s BEPS recommendations are deeply troubling …the aggressive attempt to impose substantial changes on the international community … seems to unnecessarily target American companies.”
‘Success’ of a Google tax
Without the strong support of the US, will the war against BEPS destined to fail?
There may be hope as demonstrated in some success of unilateral actions such as the “Google tax” imposed by the UK. It has been reported previously that in response to the tax, Amazon has started to pay tax on its sales in the UK rather than in Luxembourg.
Another high profile multinational has responded to UK’s Google tax, suggesting the war against BEPS can achieve and is achieving results. Google announced on January 22 January that it had reached a settlement with the tax authority in the UK to pay £130 million as back taxes and interest covering the 2005-2015 tax periods. It will also start paying UK tax on revenue from UK-based advertisers.
The settlement between Google and the UK tax authority has been controversial. The amount of £130 million appears small compared to the billions of pounds of income generated from the UK over the period. The controversy has been fuelled by the fact that the legal basis of the settlement has been kept secret. This has led to accusations of a “sweetheart deal”. The settlement will be subject to an upcoming parliamentary enquiry in the UK this month, as well as potentially investigated by the EU which has a strong stand against secret tax rulings.
All will be watched closely by Australian regulators and policymakers. Australia has introduced a similar “Google tax” known as the Multinational Anti-Avoidance Law. It’s possible that Google will similarly agree to pay back taxes for its income generated from Australian customers in response to this tax. The ATO may also learn from the UK experience and avoid similar controversy.
Limiting interest deductions
Of course, it will be a long battle to combat BEPS, and there are areas in Australia’s tax law that should be strengthened. A typical example is the aggressive use of interest deductions by multinationals to erode their tax base in Australia.
Despite the government’s repeated claim that tax law has been improved in this area, the current law still allows a multinational enterprise to claim deductions for excessive interest expenses that are artificially created by intra-group debt. It is even possible for an Australian subsidiary of a multinational to claim interest deductions that are more than the total interest expenses incurred by the whole group.
A recent tax case involving Chevron highlights the problem. While the Chevron group as a whole borrowed at 1.2%, its Australian subsidiary attempted to claim deductions of interest expenses on an intra-group loan at 9%. The Federal Court held that 9% was excessive and adjusted it down to around 5%. It is a welcoming win for the ATO, as the result is possibly the best possible outcome under the current tax law.
However, it is puzzling why the tax law allows the group to claim interest expenses at 5% in Australia while the group’s “real” interest expenses paid to third parties are at 1.2%.
Antony Ting, Associate Professor, University of Sydney. This article was originally published on The Conversation. Read the original article.
Image credit: Robert Scoble, Creative Commons
Much as politicians might wish it otherwise, the international community acting as a whole can only tax a profit once lest, thanks to the greed of politicians, they kill the golden geese.
Will this important milestone of apparent international co-operation of commercial disclosures shine the spotlight on how countries have been undertaking beggar my neighbour policies to attract investment within their shores? So far it is the multinationals that have been the bad guys.
Seems to me that known tax havens are not on the signed up list so what is the point? And probably not a coincidence that most if not all of these big tax avoiders are US companies, hence why the US won’t sign the agreement.
The last paragraph really discredits the article: “However, it is puzzling why the tax law allows the group to claim interest expenses at 5% in Australia while the group’s “real” interest expenses paid to third parties are at 1.2%.”
The author is puzzled why Chevron Australia, which is primarily invested in the Gorgon gas project (the single largest resource project in Australia, ever, and one of the largest in the world, financed and constructed near the peak of the mining boom, amd running years behind schedule), might represent a higher risk (and therefore justify a moderate 380bp risk premium) over the Chevron Corp, a heavily diversified multinational with countless, high quality income streams. I’m puzzled if he really understands what he’s talking about.
It’s an internal loan, aka funny money. Chevron Australia did not go out to the market and source the funds, it’s an internal fund transfer booked as a loan to reduce the Australian companies taxable income.
Exactly!
If tax law here doesn’t prevent that, it should.
As usual, its never that easy. There are legitimate reasons for intra company loans, and you cant just blanket refuse all of them. In the end it should balance out, for the most part, as those loans need to be repaid at some point. Easy enough to disallow debt writeoffs for related entities, that doesnt take much to block, or deem the interest as 0%, or something like that.
End of the day, its still up to the multinational to substantiate their claim, and if you ask the simple question “are you a related entity?” and they say no, there are penalties for lieing. As those penalties are a percentage of the tax avoided, it starts getting pretty high.
There’s nothing wrong with internal company loans and I have no issue with it at all … however when the parent company is borrowing funds at 1.2% and then “loaning” a subsidiary money at 9% there is clearly artificial cost inflation going on. There’s only 1 reason to artificially inflate your subsidiary’s costs, to reduce its taxable income.
Pretty sure thats the sort of thing the ATO slugs them with when auditing these big companies.
There would be a deemed cost associated with those loans, usually admin costs rather than the interest component, and its one of the few areas the ATO does have control over.
Things like that are whats behind the stories that end up in court.
The admin cost in this case is a furphy, paying off a high interest loan to your parent company is just a clever way of transferring profits off-shore without paying tax on them.
Oh, definitely. Its a cost, but its not going to be a massive one versus the interest being “charged”. Was more pointing out that the ATO does have powers to accept the cost or not, they just need to be caught.
Chevron might get away with it if they can justify the 9% amount, but thats a hell of an amount to justify.
Lots of people comment that the ATO needs the power to do something, but this is the very area they DO have power, and DO act. The hardest part is the size of the job, and catching them out.
This wouldnt be an audit where you have one guy sitting at a desk going through the books and invoices, this is the sort of thing where a full team could take years to go through everything, for a single year.
And when there are around 100 companies at the middle of this, thats a lot of work to be done.
Morriscum did a great job of protecting big biz tax rorts by firing over 17% of the ATO staff – they’d be lucky to catch anyone cheating now!
Not many of those 17% came from compliance areas, most came from the client services, analytical, and support areas. Most positions (positions, not people) were decided to be irreplaceable so were put to the back of the queue, so to speak.
And by the time they got there, the redundancies had run out.
I’m glad the focus is moving on to Chevron, because they are likely to be dodging far more than tech companies like Apple, but the problem is still the same regardless.
Break down the supply chain, and look at what each leg costs. The most important leg is the distribution leg, or whatever leg it is that diverts the money into the laundering loop of Ireland/Netherlands.
You can make a rational guess at the manufacturing cost to that point, and demand the information on what it cost for the Aussie retailer, and then start to figure out whats getting shifted. For most products, the information isnt hard to figure, or at least get a reasonable ballpark estimate. Look at what it costs an Aussie refinery for example, and extrapolate from there.
Its only then you can start to figure out a solution, when they fully start to understand the amounts involved.
And they are wrong about not being able to tax what you cant see, the laws allow for default assessments, which can be key to all of this. If they wont release the information, you can always deem their costs to be $0, and have them pay tax on their whole turnover.
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