Australia can’t stop multinational profit shifting in isolation



This article is by Philippa Nicole Barr, PhD Candidate in Design at University of Technology, Sydney. It originally appeared on The Conversation.

analysis When Business Council of Australia chief Jennifer Westacott weighed in on plans for an Australian tax crackdown on multinationals last week, she warned the move could risk competitiveness and lead to companies being double taxed.

Last year the Australian government passed new laws to prevent multinational companies shifting their profits to avoid the payment of corporate tax. They did this as part of general effort amongst Organisation of Economic Cooperation and Development (OECD) countries to target profit shifting by companies who are located in multiple countries.

National and international tax regimes have struggled to keep up with technological developments which have made the global economy increasingly motivated and enabled by structures and assets which are intangible and therefore highly mobile.

As they were developed in a period when most tradeable assets were concrete and easy to locate, the taxation systems of different countries have struggled to always account for these assets. Due to this emerging mobility the issue of taxation cannot be resolved by action from individual countries, a point not lost on the BCA’s Westacott.

The management of new challenges requires basic agreement and discussion and group forums like the G20 and OECD. Attempting to resolve these problems on an individual level may expose countries to risk of making themselves less competitive for research and development and lucrative for foreign investment.

Having said that, taxation systems must change to adjust to the changing nature of the economy. Countries like Australia, heavily dependent on foreign direct investment, must make cooperation and even coordination a strong priority at regional and global fora.

International companies use several common techniques to pay less tax. While not necessarily illegal, the results of these actions have been met with incredulity. Stories have abounded in recent years of the removal of profits from one country to others with lower taxation. Earlier in 2014 the Australian Financial Review reported that in the previous year US company Apple had sent an estimated $2 billion profit from local customers to a parent company in Ireland, where it pays less tax than in Australia.

Google also has a major international base in Ireland. From Ireland the money travels for free to the Netherlands as it is a member of the EU market. From here Google can use Dutch tax law to send the money on to Bermuda, where it finally declares a profit.

A 2012 parliamentary inquiry in the UK into Starbucks detailed the companies methods, which ultimately led it to claim it was operating in the UK almost always at a loss for more than a decade in spite of having 31% of market share. The exasperation of those questioning Starbucks executives was evident: “If you made losses in the UK over 15 years, why are you still doing business here?”, one MP asked.

Starbucks were using a few rather common methods to reduce the profitability of their UK business, for the benefit of their partner companies elsewhere. One of them including a 6% payment for IP to a Netherlands based company, another was a 20% mark up the Dutch company paid a Swiss company for coffee buying operations. There was also an intercompany loan from Starbucks US requiring the UK company to pay what was described as extraordinarily high interest.

Ultimately, accounting methods such as transfer pricing, intra group licensing and IP based profit shifting are not illegal. A low tax rate may also be attributable to making use of tax reliefs and incentives and promoting research and development.

Different countries are going to have to start talking to each other to prevent profits being moved around. Methods which are best coordinated between groups of countries include combined reporting, which would require these firms to report their profit and loss in each country in which they are operational; or consolidation of the OECD profit splitting approach. The new laws must be in keeping with international trends, or the country that writes them risks losing the business and employment opportunities provided by multinational companies.

In a global economy it is logical that companies would want to structure their business to take advantage of beneficial rules in different countries. And equally each country will want a competitive corporate tax system to attract and retain economic activity. However, the policies of one country should not undermine the policies of another or cause them economic harm. Organisations such as the G20, EU and OECD must enable cooperation to make sure that countries are in agreement with each other’s policies and to pressure those countries whose policies are disadvantaging their neighbours.

Philippa Nicole Barr 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. This article was originally published on The Conversation. Read the original article.

Image credit: Shane Fullwood CC2.0

The Conversation


  1. It makes me want to go and buy their products.

    It makes me very happy about paying new and increased levies (nee: taxes) to support the country in which I live. Tough times ahead, so Joe Hockey says, we have to bunker down and re-earn our “Aussie battler” tag. So long as we’re not a multi-national with the resources to avoid paying for having a lack of resources to avoid paying.

    What are the rules on grey imports? If it’s not costing the government much in tax revenue then they could relax the rules (further?). Maybe the government would make more tax revenue by allowing carte-blanche grey imports?

    • I hear you…

      Personally I have spent well over $10,000 on Amazon purchases over the last 12 months (using a 28 Degrees M/C so there are no international transaction nor currency exchange fees) and I always ship under A$1000

      Sure the tax man has missed about A$1000 in GST, but then again some Australian retail outlet has missed $10k in revenue. I’ve paid between 80% and 25% (in on case) of the local price on the stuff I am buying, and I’m not spending any more or less than I would if I shopped locally, I’m just getting more stuff overall.

      Grey imports are one thing, but allowing ‘open sales’ is another (where someone can import official goods in parallel to the IP owner). The sooner you take away the “official licensed distributor” protections the better. Australians on the whole get royally shafted by our own local operations of all MNCs.

      Books were always my favourite thing to laugh about. The local price tags at Dymocks/AR were always massive and stuck right over the top of the RRP that was printed on the cover. Guess which one was the higher? I buy all my books for The Book Depository these days; cheaper, and free shipping that usually only takes a week.

      • I’ve posted about this enough times I’m not going over it again, but just to clear something up this is worth mentioning.

        Of the $11k you’ve spent, yes there would have been about $1000 in GST, but the other $10,000 is a bit more complicated. And something central to this whole issue.

        The Aussie business wouldnt earn $10,000 they would earn a whole lot less. They still have to pay for the product, which is more likely than not going to be an amount leaving our shores. So that $10,000 may end up only being $2,000 here for tax purposes.

        Most of these multinationals are in a similar boat. Apple products have manufacturing costs that people ignore for example, meaning the real issue is over a $200 or $300 amount per product, not a $6b turnover.

        Just on the GST issue with the $1000 mark, there was a story earlier this year that this amount is being reviewed. When GST came in, the limit was justifiable, because it was just too expensive to administer lower than around $750 products. Would have cost as much to administer down to $500 products as they would have made. $750 was awkward so it became simpler to just round it off.

        Today, with the proliferation of online companies, and cloud computing, a lot of the dramas have fallen away. It would still be prohibitive to collect on small objects, but theres no reason you couldnt lower the limit to something like $300.

        On that point, the US Government is starting to do that collection for state sales tax purposes, so the data is being collected. It’s not a massive jump to collating the info for international jurisdictions like Australia.

    • Because operating a company in a particular jurisdiction (country) means you benefit from that country’s infrastructure, from the disposable income of their citizens or businesses and the more infrastructure there is the easier it is for you to do business there, the better the education of the people the greater their income and thus the greater the market for your products, the better the public health care the healthier the population is and thus the more they can work and the more money (and time) they have, the greater the market for your products… And so it goes on.

      If you operate your company in a particular jurisdiction you directly benefit from the wealth, stability and health of that nation. So your tax contribution doesn’t just help the government, it helps the whole country, including your own company. If no one pays tax the country collapses and there is no money for anyone. Better to contribute and maintain a sustainable market than bleed it dry for the sake of short term profits.

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