tag:theconversation.com,2011:/id/topics/profit-shifting-8433/articlesProfit shifting – The Conversation2017-11-08T01:39:42Ztag:theconversation.com,2011:article/870022017-11-08T01:39:42Z2017-11-08T01:39:42ZThree strategies to fight the tax avoidance revealed by the Paradise Papers<figure><img src="https://images.theconversation.com/files/193693/original/file-20171108-6758-ptnatb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The first strategy is to require the public disclosure of country by country reporting of company tax affairs.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The release of more than 13 million financial and tax documents known as the “<a href="https://www.icij.org/investigations/paradise-papers/">Paradise Papers</a>” show that the <a href="https://panamapapers.icij.org/">Panama Papers</a> last year and <a href="https://www.icij.org/investigations/luxembourg-leaks/">LuxLeaks</a> in 2014 were just the tip of the tax avoidance iceberg. It also shows that governments have not learnt their lesson and taken action.</p>
<p>Both the <a href="http://www.oecd.org/tax/beps/">OECD</a> and <a href="https://www.ag.gov.au/CrimeAndCorruption/AntiCorruption/Documents/G20High-LevelPrinciplesOnBeneficialOwnershipTransparency.pdf">G20</a> made recommendations several years ago that would have increased transparency of corporate taxes, and <a href="http://onlinelibrary.wiley.com/doi/10.1111/1475-679X.12101/abstract">extensive research</a> shows that this is effective in limiting corporate tax avoidance. Recently, we also <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th/Public_Hearings">recommended to a Senate committee</a> that the government limit the use of some financial products that can be re-purposed for tax avoidance.</p>
<p>The Paradise Papers detail the complex offshore financial and tax activities of celebrities, politicians, world leaders, and more than 100 multinational entities. Here are three things that could help curb the problem.</p>
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Read more:
<a href="https://theconversation.com/explainer-the-difference-between-tax-avoidance-and-evasion-39777">Explainer: the difference between tax avoidance and evasion</a>
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<h2>1) Require public disclosure of tax affairs</h2>
<p>The first strategy is to require the public disclosure of country by country reporting of company tax affairs (CbCR). This idea comes out of the OECD’s <a href="https://www.oecd.org/ctp/BEPSActionPlan.pdf">action plan</a> on Base Erosion and Profit Shifting (BEPS). It would increase tax transparency by requiring corporations to make specific disclosures on the tax paid in different countries, by project and region. </p>
<p>Doing so would allow any interested party to observe and understand how corporations transfer profits from high to low tax jurisdictions. With such specific information it would more difficult for companies to hide their tax affairs and provide impetus and justification for the public to pressure tax avoiders.</p>
<p>This idea <a href="http://www.internationaltaxreview.com/Article/3059190/The-tide-turns-towards-country-by-country-reporting.html">was strongly opposed by the majority of multinational entities’ in most countries</a> on the basis of commercial sensitivity of the information, the compliance burden, and that it might distort the view of a company’s true contribution to an economy. However, such argument is spurious as large corporations already have sophisticated systems in place that are capable of producing this information. </p>
<p>Nevertheless, <a href="http://www.bakermckenzie.com/en/insight/publications/2017/04/country-by-country-reporting-in-the-uk/">some European countries</a> (notably the United Kingdom and France) do require that large multinational companies publicly disclose their tax affairs, country by country. </p>
<p>The laws in the United Kingdom fostered a <a href="http://onlinelibrary.wiley.com/doi/10.1111/1475-679X.12101/abstract">2010 campaign</a> that named and shamed companies who were not disclosing subsidiaries in tax havens. That campaign made the UK authorities tighten disclosure requirements, and after companies started disclosing their tax haven subsidiaries they became less tax aggressive. </p>
<p>Unfortunately, there is no similar mechanism in Australia for the provision of information to the public to pressure corporations that avoid taxes.</p>
<h2>2) Create a register of who benefits</h2>
<p>The next idea <a href="https://www.ag.gov.au/CrimeAndCorruption/AntiCorruption/Documents/G20High-LevelPrinciplesOnBeneficialOwnershipTransparency.pdf">comes from the G20</a>, and is to set up a public register of beneficial ownership (in other words, who owns the companies). </p>
<p>Earlier this year the Australian Treasury released a <a href="https://treasury.gov.au/consultation/increasing-transparency-of-the-beneficial-ownership-of-companies/">consultation paper</a> looking at this idea. At the time, Minister for Revenue and Financial Services Kelly O'Dwyer noted that: </p>
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<p>Improving transparency around who owns, controls, and benefits from companies will assist with preventing the misuse of companies for illicit activities including tax evasion, money laundering, bribery, corruption, and terrorism financing. </p>
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<p>However, the policy is still at the consultation stage. </p>
<p>Interestingly, a <a href="https://www.theguardian.com/australia-news/2017/may/31/beneficial-ownership-register-may-be-waste-of-time-tax-chief-tells-mps">recent comment</a> by ATO Commissioner Chris Jordan seems to both support and dismiss a public register. </p>
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<p>A register of beneficial ownership is just, you know, what someone says someone else owns so, you know, it could be good but it could be just a lot of ‘stuff’ that doesn’t really help us. </p>
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<p>The United Kingdom has <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/606611/beneficial-ownership-register-call-evidence.pdf">set up</a> a beneficial ownership register, but it is too early to know what the impact has been.</p>
<h2>3) Limit some financial products</h2>
<p>A third strategy is one we <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th/Public_Hearings">presented to a Senate committee</a> and might have tackled some of what the multinational conglomerate Glencore was alleged to have been doing in the Paradise Papers. </p>
<p><a href="https://www.icij.org/investigations/paradise-papers/room-of-secrets-reveals-mysteries-of-glencore/">Glencore</a> is alleged to <a href="https://www.theguardian.com/news/2017/nov/05/glencore-australian-arm-moved-billions-through-bermuda">have used cross currency interest rate swaps</a> and is <a href="http://www.smh.com.au/business/the-economy/glencore-reveals-its-being-audited-by-ato-over-taxes-20150513-gh0g51.html">under investigation</a> by the Australian Tax Office. These are financial instruments that may be legitimately used by companies to manage foreign currency risk, for instance when borrowing debt denominated in foreign currencies.</p>
<p>However, these instruments may also be used by multinationals to avoid tax, by shifting profits between subsidiaries in different countries. Unfortunately, it is very difficult to determine whether these instruments are being used for legitimate purposes or for avoiding tax. <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th/Public_Hearings">Our proposal</a> is to prohibit or limit their use, as has been done in Hong Kong. </p>
<p>Hong Kong is a special case, as it has a very low tax rate, but some form of this policy might be adopted in Australia and elsewhere. </p>
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Read more:
<a href="https://theconversation.com/four-things-the-paradise-papers-tell-us-about-global-business-and-political-elites-86946">Four things the Paradise Papers tell us about global business and political elites</a>
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<p>With three large leaks, spanning a number of years, Australians have a right to ask why the problem of tax avoidance seems to be stagnating, if not getting worse.</p>
<p>Perhaps the hackers who leak these documents are getting better. But the likely answer is that it is the result of inaction by governments around the world, and Australia in particular. </p>
<p>Recommendations from the OECD, G20, and even our submission to a Senate inquiry show there are ideas out there to solve some of these issues. And countries such as the United Kingdom, Hong Kong and France have made efforts to increase public transparency of corporate tax affairs and limit the use of certain financial instruments. </p>
<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/1475-679X.12101/abstract">The research</a> from these countries show that these proposals can be successful if enacted. </p>
<p>In the end, failure to cut down on tax avoidance is not due to a lack of proposals. The failure to enact these proposals feeds into the distrust of all governments as they don’t appear to be doing a very good job at limiting tax avoidance.</p><img src="https://counter.theconversation.com/content/87002/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The ideas are already out there to tackle some of the tax avoidance highlighted by the Paradise Papers.Roman Lanis, Associate Professor, Accounting, University of Technology SydneyBrett Govendir, Lecturer, Accounting Discipline Group, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/754552017-04-10T04:47:36Z2017-04-10T04:47:36ZFactCheck: do 679 of Australia’s biggest corporations pay ‘not one cent’ of tax?<blockquote>
<p>… 679 of our biggest corporations pay not one cent of tax. <strong>– Australian Council of Trade Unions (ACTU) Secretary Sally McManus, <a href="http://www.actu.org.au/actu-media/speeches-and-opinion/speech-by-actu-secretary-sally-mcmanus-at-the-national-press-club">address</a> to the National Press Club, Canberra, March 29, 2017.</strong></p>
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<p>Speaking at the National Press Club in Canberra, Australian Council of Trade Unions (ACTU) Secretary Sally McManus called for an increase to Australia’s minimum wage and criticised the Fair Work Commission’s recommendation to cut Sunday and public holiday penalty rates. </p>
<p>McManus said that “679 of our biggest corporations pay not one cent of tax”.</p>
<p>Was that claim correct?</p>
<h2>Checking the source</h2>
<p>When asked for sources to support McManus’ statement, a spokesman for the ACTU pointed The Conversation to a <a href="http://www.abc.net.au/news/2016-12-09/tax-data-transparency-ato/8106178">media report</a> and to the Australian Taxation Office (ATO) <a href="https://data.gov.au/dataset/corporate-transparency/resource/1e8c8ae0-81d1-4780-a669-9e4a2a6ba1a4">Report of Entity Tax Information</a> for 2014-15, and provided this response from McManus:</p>
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<p>According to the most recent ATO Tax Transparency Report, 679 companies with more than $100 million in income paid no tax in Australia in 2014-15.</p>
<p>The list includes such household names as Walt Disney, Sydney Airport, Qantas, Origin Energy and News Australia.</p>
<p>These companies can collectively be considered to be amongst the biggest operating in Australia – both in terms of income, and the prominent position they enjoy in the public eye.</p>
<p>Some of them are not Australian owned, and they may pay tax in other jurisdictions. However, they all operate in Australia, generate revenue from the spending of Australians and utilise existing infrastructure – like roads and ports – that were paid for by Australians.</p>
<p>So there’s something deeply unfair about a system which allows them to not pay any tax in Australia.</p>
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<p>The ACTU also provided The Conversation with a <a href="https://cdn.theconversation.com/static_files/files/27/75455-2017-04-10-tax-paid-by-companies-tax-paid-by-companies-ato-data.xlsx?1518654879">spreadsheet</a> listing the corporations it said had paid no tax. </p>
<h2>Is that figure right?</h2>
<p>The best source for information on how much tax Australia’s biggest corporations pay every financial year is the ATO. The ATO’s <a href="https://data.gov.au/dataset/corporate-transparency">Report of Entity Tax Information</a> – the same report the ACTU referred to in their response – is produced annually and shares information taken from the tax returns of:</p>
<ul>
<li>Australian public and foreign-owned corporate entities with total income of A$100 million or more</li>
<li>Australian-owned resident private companies with total income of A$200 million or more</li>
<li>entities with tax payable under the petroleum resource rent tax, and</li>
<li>entities with tax payable under the minerals resource rent tax. </li>
</ul>
<p>The report includes each company’s name, total income, taxable income, and tax payable.</p>
<p>For the purpose of this FactCheck, the relevant information is the <em>tax payable</em> by each of these companies. By looking at this data, we can see which companies didn’t pay tax in 2014-15, the most recent financial year for which this information is available.</p>
<h2>How many companies don’t pay tax?</h2>
<p>There are 1,904 companies included in the ATO’s 2014-15 report. Of those, 678 – or 36% of the companies listed – had no tax payable.</p>
<p>My count – 678 – is slightly different to McManus’s count of 679, and to the figure the ATO quoted on its pie chart <a href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Corporate-tax-transparency-report-for-the-2014-15-income-year/?anchor=Netlossesandniltaxpayable#Netlossesandniltaxpayable">here</a> (the ATO has since corrected its report to reduce the number of nil tax payable taxpayers by one to 678).</p>
<p>The ACTU provided The Conversation with a spreadsheet listing the 679 companies that, in their view, paid no taxes. When I compared my count with the ACTU’s, I noted the ACTU included a company that I did not, a company named Tal Dai-Ichi Life Australia. </p>
<p>In the <a href="https://data.gov.au/dataset/corporate-transparency">report</a> I downloaded from the ATO website, Tal Dai-Ichi Life Australia is recorded as having total tax payable of A$56,171,148 for the 2014-15 financial year, so it shouldn’t be included in the count of companies that paid no tax. </p>
<p>Nevertheless, the difference is obviously minor. McManus was essentially correct.</p>
<h2>Why do some companies pay no tax?</h2>
<p>In general, there are two reasons why corporate companies pay no tax in Australia.</p>
<p>The first is that some companies are not making any profit. The concept of “total income”, which is used to identify the companies included in the ATO report, relates to revenue – not profit.</p>
<p>So, a company can have income (or revenue) of more than A$200 million, but that doesn’t automatically mean it has made a profit. Its losses or outgoings may outweigh its income. Only companies making a profit have to pay taxes.</p>
<p>Many of the companies that didn’t pay tax in 2014-15 were those in the energy/natural resources and manufacturing sectors – two sectors that were <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8155.0">experiencing a downturn</a> in that year and where profit margins were shrinking.</p>
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<a href="https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Proportion of entities with nil tax payable, by industry segment, 2013–14 and 2014–15.</span>
<span class="attribution"><a class="source" href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Corporate-tax-transparency-report-for-the-2014-15-income-year/?anchor=Netlossesandniltaxpayable#Netlossesandniltaxpayable">ATO corporate tax transparency report for 2014-15</a></span>
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<p>The second reason could be tax avoidance or profit shifting. These situations arise when companies take advantage of the international tax system to reduce the amount of tax to be paid. For instance, companies may set up complex ownership arrangements that allow them to redirect profit to countries with lower tax rates.</p>
<p>While not necessarily illegal, these situations are <a href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Tax-transparency--reporting-of-entity-tax-information/?anchor=Ensuringcorporatetaxpayerspaythecorrecta#Ensuringcorporatetaxpayerspaythecorrecta">closely monitored by the ATO</a> to ensure that Australia receives its correct share of tax under international tax rules. </p>
<h2>Verdict</h2>
<p>Sally McManus’ claim that “679 of our biggest corporations pay not one cent of tax” was essentially correct. According to ATO records, 678 of Australia’s biggest corporations didn’t pay tax in Australia in 2014-15.</p>
<p>McManus’s figure of 679 included one company that did have tax payable in that financial year. But in percentage terms, the difference between 678 and 679 is negligible.</p>
<p>It’s important to note that when a company doesn’t pay tax, it doesn’t necessarily imply tax avoidance or profit shifting. A company might not be paying tax because it isn’t making a profit, even if its total income (that is, revenue) amounts to more than A$100 million or A$200 million. <strong>– Fabrizio Carmignani</strong></p>
<hr>
<h1>Review</h1>
<p>This is a sound FactCheck.</p>
<p>The ATO’s annual corporate tax transparency <a href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Corporate-tax-transparency-report-for-the-2014-15-income-year/?anchor=Netlossesandniltaxpayable#Netlossesandniltaxpayable">reports</a> can provide useful insights to inform public debate regarding how effectively our tax system is working. </p>
<p>As the author rightly points out, the information must be used with caution. There are legitimate reasons why a company with substantial income does not have to pay income tax. For instance, it may make a loss in that particular year, or has substantial carried forward losses from previous years.</p>
<p>Or, as the author has also rightly noted, tax avoidance may be the reason why a large company is not paying any income tax. <strong>– Antony Ting</strong></p>
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<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
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<p><em>The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/75455/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its macroeconomic applications.</span></em></p><p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In a speech to the National Press Club in Canberra, ACTU Secretary Sally McManus said 679 of Australia’s biggest corporations pay “not one cent of tax”. Is that right?Fabrizio Carmignani, Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/745522017-03-17T05:24:49Z2017-03-17T05:24:49ZUnpicking the labyrinth that is India’s Adani<p>Indian multinational <a href="http://www.adani.com/">Adani Group</a> is becoming a more familiar name in Australia, as the company’s interest in its proposed Carmichael coal mine <a href="https://theconversation.com/india-is-hedging-its-bets-on-coal-to-bring-power-to-the-people-54657">in Queensland grows</a>. At the same time, there’s concerns the arrangement <a href="http://www.abc.net.au/news/2017-03-14/adani-carmichael-coalmine-to-shift-millions-to-cayman-islands/8350704">may shift some of its likely revenue</a>, even if it does deliver on all of <a href="http://statements.qld.gov.au/Statement/2016/10/9/queensland-government-steps-up-to-progress-adani-mine-project">the promised business and job opportunities</a> for Australia.</p>
<p>Profit shifting has been tied to the labyrinth of financial structures and ownership, related to different companies within the publicly listed Adani Group and/or family members. Even though this setup draws scrutiny in developed countries like Australia, it’s common and makes sense in the context of emerging markets like India.</p>
<p>Since 2013, Adani’s growing interest in the Carmichael mine has been tied to volatility of global coal prices and sea-borne freight rates. However <a href="http://www.reuters.com/article/adani-ent-australia-coal-idUSL3N0T126820141112">the financial viability</a> of the project has remained questionable. Most Indian companies’ overseas interests and large investments, barring that of Tata Motor’s acquisition of Jaguar Land Rover, during the 2008 crisis, have not yet been <a href="http://blogs.economictimes.indiatimes.com/Swaminomics/why-foreign-acquisitions-need-opportunism-not-gigantism/">financially rewarding</a>.</p>
<h2>Why Adani is structured the way it is</h2>
<p>Family-run diversified conglomerates are the norms of many developing nations. In India, older family-run business conglomerates like <a href="http://www.tata.com/company/index/Tata-companies">Tata</a> and <a href="http://www.adityabirla.com/businesses/companies">Birla</a> have lately seen others joining the club – from <a href="http://fortuneindia.com/2016/april/mukesh-ambani-s-big-balancing-act-1.3310">Mukesh Ambani</a> (and his brother’s <a href="http://www.relianceada.com/ada/rgroup_businesses.html">ADAG part</a>) to Adanis, <a href="http://www.mahindra.com/investors">to Mahindras</a>. In Japan, such structures are known as <a href="https://hbr.org/2013/09/the-new-improved-keiretsu">Keiretsu</a> and in South Korea, as <a href="https://www.cnet.com/news/the-chaebols-the-rise-of-south-koreas-mighty-conglomerates/">Chaebol</a>.</p>
<p>While this might seem like organised chaos in the context of developed countries, studies have shown that centralised and <a href="https://hbr.org/1997/07/why-focused-strategies-may-be-wrong-for-emerging-markets">focused, core competency driven strategies</a> in businesses may not be the best choice in emerging markets like India. This is because of uncertainty around government policy and the need to “manage” government expectations. </p>
<p>Many emerging countries like India have seen a rise in <a href="https://www.forbes.com/sites/forbesasia/2013/03/13/what-the-billionaires-list-tells-us-about-asian-emerging-markets/#5ffc5d346328">industrial billionaires</a> from businesses that rely on government policies that allocate natural resources. The rise of the Adani’s private individual or publicly-listed companies in the group are historically linked with coal trade - starting with when it was private back in the 1980s.</p>
<p>Doing business in developing nations or with companies in developing nations has never been easy. Some businesses like, Adani Group, have mastered that art well by creating a series of connections with the government. </p>
<p>The key man behind all of Adani’s business interests and fortunes is <a href="https://theconversation.com/does-gautam-adani-really-need-galilee-basin-coal-45759">Gautam Adani</a>. Many view the rise of the group as interwined with the <a href="http://www.thecitizen.in/index.php/NewsDetail/index/1/3375/The-Incredible-Rise-and-Rise-of-Gautam-Adani-Part-One">rise of the political career</a> of India’s Prime Minister, Narendra Modi, starting with the days when he was the Chief Minister of Gujarat.</p>
<p>In businesses controlled and founded by a family there’s usually a haze of subsidiary companies, with opaque corporate governance and structures. However there are exceptions in some of these diversified groups, like the <a href="http://auto.economictimes.indiatimes.com/news/industry/mahindra-group-chairman-anand-mahindra-among-barrons-2016-top-30-global-ceos-list/51513830">Mahindras</a>, who exhibit exemplary corporate governance and transparency. </p>
<p>Conservative accounting norms suggest businesses should factor in the worst possibilities, both in terms of liabilities as well as assets. But the discretion on what exactly is reported has always remained opaque. </p>
<p>Accounting standards allow listed companies to merely disclose, without recognising, <a href="http://www.investopedia.com/terms/c/contingentliability.asp">contingent liabilities</a>. These standards also don’t require disclosure nor recognition of <a href="http://www.investopedia.com/terms/c/contingentasset.asp">contingent assets</a>, where potential economic benefit is dependent solely on future events that can’t be controlled by the company. This can lead to accounting and legal complexities. </p>
<p>More importantly, there is a need for transparency on what all business interests top management may have, whether those business interests are privately held (and onshore or offshore), or listed. Business leaders should also report any potential conflicts arising from the same person representing multiple boards, or taking key decisions in different companies. </p>
<h2>The success of the group</h2>
<p>The rise of the Adani group over the last three decades has been phenomenal. It now has <a href="http://www.adani.com/businesses">keen interests and operations</a> in three equally vital components, namely resources, logistics and energy.</p>
<p>Indian media have scrutinised <a href="https://thewire.in/58640/black-money-investigation-a-feast-of-vultures/">Adani Group</a> from obvious and visible allegations of cronyism, to accounting malpractices related to <a href="https://thewire.in/27907/from-adani-to-ambani-how-alleged-over-invoicing-of-imported-coal-has-increased-power-tariffs/">under-invoicing or over-invoicing</a>. </p>
<p>The group also remains one of <a href="https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=1021449371&extdocid=1021449371_1_eng_pdf&serialid=9IEtj9tC9wxAGa5r2NuYSCyQ3AtHVhY88a0%2bhKfpy3E%3d">the most leveraged groups in India</a>, meaning it borrows a lot of capital for investment, expecting the profits made to be greater than the interest payable. This is at a time when India’s state-owned banks have been suffering from <a href="https://scroll.in/article/829895/the-daily-fix-indias-npa-crisis-points-to-the-crony-capitalist-rot-at-the-heart-of-the-economy">chronic non-performing loans or assets</a>, usually funded by the government, with taxpayers’ money. </p>
<p><a href="http://www.business-standard.com/article/companies/lower-demand-widens-adani-power-s-q3-standalone-loss-16-fold-to-rs-478-cr-117012000961_1.html">Adani’s key listed companies</a> are Adani Power, Adani Ports and Adani Enterprises (other one being Adani Transmissions Ltd).</p>
<p>Adani Enterprises, the arm of the group involved with Carmichael coal project, had <a href="http://in.reuters.com/article/adani-ent-restructuring-idINKBN0L30W620150130">a demerger back in 2015</a> from a more complex holding structure. The demerger created shareholder value in the other listed group companies, because of a loss of the risk of uncertainties related to the big Carmichael mine’s liabilities. Naturally, Adani Enterprises’ stock <a href="http://www.business-standard.com/article/markets/why-the-80-per-cent-drop-in-adani-enterprises-is-justified-115060300653_1.html">tanked 80%</a> with that demerger.</p>
<p>Adani Power’s problems are twofold – the <a href="http://www.business-standard.com/article/companies/lower-demand-widens-adani-power-s-q3-standalone-loss-16-fold-to-rs-478-cr-117012000961_1.html">unavailability of domestic fuel</a> and local demand for power in the power-surplus Gujarat state of India. This means the company’s plants are underutilised, leading to low financial performances. </p>
<p>Even though Indian business houses might have similar structures, they don’t all act the same. Some have matured after burning their fingers; and follow best accounting and corporate governance practices. </p>
<p>Adani group is comparatively a new kid in the block. So the question remains on whether the Adanis would help improve perceptions of Indian business and investment overseas in the years to come. Developments so far in the Carmichael mine do not indicate an easy ride.</p><img src="https://counter.theconversation.com/content/74552/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ranjit Goswami does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even though the setup of the Indian Adani Group draws scrutiny in developed countries like Australia, it’s common and makes sense in the context of emerging markets like India.Ranjit Goswami, Vice-Chancelllor, RK UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/580412016-05-04T01:40:58Z2016-05-04T01:40:58ZThin capitalisation – the multinational tax avoidance strategy the budget forgot<p>It is now apparent that multinational tax avoidance and aggressive tax planning is a significant fiscal risk to the country. </p>
<p>We have already seen major amendments to Australia’s tax regime to tackle base erosion and profit shifting (BEPS). <a href="https://theconversation.com/government-pitches-for-integrity-in-tax-and-super-experts-respond-58153">Several more significant measures</a> were announced in the federal budget, most notably the diverted profits tax, aimed at multinationals which shift tax to a lower taxing jurisdiction. </p>
<p>Yet to date, a very simple tax minimisation strategy has been largely ignored in the ongoing reforms and was ignored in the federal budget.</p>
<p>Excessive debt loading is a problem that not been afforded the same attention as other aggressive tax planning strategies adopted by multinationals. Nevertheless, excessive debt loading is a very simple technique used by multinational entities to reduce their overall tax liability. And, it is recognised as a global problem. Another term for excessive debt loading is thin capitalisation. </p>
<p>Money is mobile so a multinational can simply shift debt into high tax counties to ensure that a tax deduction is received for the interest paid. This reduces the overall profits in the high tax country, thereby reducing their tax liability. In Australia’s case, the entity loads up their Australian operations with tax-deductible debt. </p>
<p>Excessive debt loading was highlighted as an aggressive tax practice by the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance">Senate Inquiry</a> into Corporate Tax Avoidance. In part two of its <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_2">report</a>, handed down on 22 April 2016, the Senate Inquiry highlighted the fact that debt-related deductions span a number of related areas including thin capitalisation and transfer pricing. They also emphasised the difficulty in finding publicly available “real life” examples. </p>
<p>The OECD has also recognised that the ability of multinationals to adjust the amount of debt to achieve favourable tax results is a serious global problem. The <a href="http://www.oecd.org/tax/beps-2015-final-reports.htm">report</a> on Action Item 4 of the OECD/G20 BEPS program specifically addresses the BEPS risk arising from three different types of strategies:</p>
<ul>
<li><p>Groups placing higher levels of third part debt in high tax countries</p></li>
<li><p>Groups using intragroup loans to generate interest deductions in excess of the group’s actual third party interest expense</p></li>
<li><p>Groups using third party or intragroup financing to fund the generation of tax exempt income</p></li>
</ul>
<p>Australia already has a thin capitalisation regime designed to tackle this sort of behaviour. Thin capitalisation rules have existed in Australia since 1987. The current regime, introduced in 2001 and found in Division 820 of the Income Tax Assessment Act 1997, is designed to prevent multinationals from claiming excessive debt deductions to reduce their Australian taxable income. </p>
<p>The rules operate by disallowing a proportion of the otherwise deductible interest expense where the debt allocated to Australia exceeds certain limits. The limits are determined by reference to what is known as the “safe harbour” debt amount, an “arm’s length” debt amount, and a “worldwide gearing” debt amount. However, the problem of excessive debt loading still exists. </p>
<p>Of particular interest is the safe harbour debt amount generally referred to as the allowable debt to equity ratio. Prior to the budget there was a suggestion that Australia’s thin capitalisation rules would be tightened for the second time in as many years with an adjustment to the ratio. However, instead reform proposals centred around the diverted profits tax and “anti-hybrid” rules, with thin capitalisation ignored. </p>
<p>When the OECD’s final report on BEPS was released last October, Treasurer Scott Morrison indicated in a <a href="http://sjm.ministers.treasury.gov.au/media-release/003-2015/">media release</a> that Australia had already tightened its thin capitalisation rules and intimated that no further changes would be made. Clearly, the Federal Government is again sending a message that it does not see any problems with the current regime. </p>
<p>However, Australia is not moving towards the OECD’s suggested “best practice” approach. The Federal Government seems to be at pains to ensure the OECD leaves it alone when it comes to thin capitalisation rules. </p>
<p>No one doubts that thin capitalisation rules require a balance between maintaining the integrity of the tax base, or preventing BEPS, and not impeding the efficient allocation of capital. The OECD however points out that there is evidence that excessive debt loading is a serious problem to the erosion of the tax base. It provides a model which it argues is best practice for domestic law. The ratio aspect of the OECD recommendation is similar to Australia, but the approach is not. </p>
<p>Australia’s current approach relies on a ratio of debt to equity. The OECD BEPS recommendation is a fixed ratio rule but one that is a percentage of its earnings before interest, taxes, depreciation and amortisation (EBITDA). It then recommends a ratio of between 10-30%. Alongside the fixed ratio, the OECD recommends a group ratio rule. </p>
<p>There is an argument that Australia’s current regime is relatively close to the common approach suggested by the OECD. There is a ratio test, albeit based on different factors. There is also a worldwide gearing option similar to the OECD’s group ratio rule. However, the different ratio approach can make a significant difference. Australia links its ratio to debt and equity of the entity, an approach that the OECD argues is easy to manipulate. The OECDs model links its ratio to interest and earnings. This approach is aimed at ensuring that net interest deductions are directly linked to the taxable income generated by its economic activities. </p>
<p>The OECD proposals are designed to ensure that profits are taxed where the underlying economic activity occurs and where value is created. We need to ask ourselves whether a thin capitalisation regime that focuses on debt, equity and assets achieves this goal. Perhaps this is a forgotten means of aggressive tax planning that needs to be explored and also targeted for reform.</p><img src="https://counter.theconversation.com/content/58041/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq has previously received funding from the International Centre for Tax and Development and CAANZ. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>Loading companies with excessive, tax deductible debt is a commonly used by multinationals to avoid tax - so why has the government ignored it?Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/435452015-06-22T20:17:24Z2015-06-22T20:17:24ZAmazon shows Google tax can work, despite arguments against it<figure><img src="https://images.theconversation.com/files/85844/original/image-20150622-9021-v2l6s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Book publishing giant Amazon has responded to the UK's Google tax by restructuring its European tax affairs.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>In late May, Amazon announced it had <a href="http://www.afr.com/news/policy/tax/amazon-caves-in-on-paying-tax-uk-sales-20150524-gh8ceh">started to pay tax on its sales in the UK</a> rather than in Luxembourg. This came about after Amazon restructured its tax structure in Europe in response, at least in part, to the UK’s diverted profits tax (commonly known as the Google Tax) that came into effect in April.</p>
<p>This development is important not only for the UK, but also for Australia. Treasurer Joe Hockey has announced that the government will introduce a <a href="https://theconversation.com/close-look-at-tax-avoidance-laws-shows-they-lack-teeth-41887">similar Google Tax in 2016</a>. It is especially important when some submissions to the draft legislation of our Google Tax have argued that it is <a href="http://www.lawcouncil.asn.au/lawcouncil/images/3012_-_Exposure_Draft_Tax_Laws_Amendment_Tax_Integrity_Multinational_Anti-avoidance_Law_Bill_2015.pdf">not a good idea for Australia to introduce the tax</a>. </p>
<p>The Law Council of Australia has argued in its submission that the proposed regime is: </p>
<blockquote>
<p>…inconsistent with the design principle for a tax … system that tax rules should be applied to commerce in accordance with the structure and mechanisms by which commerce operates. </p>
</blockquote>
<p>It basically argues that the tax law should respect the corporate structures of multinational enterprises even if they are tax driven. In other words, its submission does not support the idea that the Australian Taxation Office (ATO) should have the power to deem Google or Amazon to have a taxable presence in Australia.</p>
<p>That argument is questionable. The hard practical matter of fact is that multinationals at present are able to design their tax structures in such a way that substantial activities are being done in Australia but profits are booked in low or even no tax jurisdictions. And these structures are perfectly legal under the current tax law. </p>
<p>It is important to remember that the current international tax regime has been developed largely at a time when multinationals were much less integrated than today. The rules were designed primarily for a bilateral scenario in which, for example, a US company sells goods directly to Australia. None of these countries were tax havens. </p>
<p>However, the stories of Apple, Google and Microsoft have proved that the scenario is very different today. Multinational companies have been successfully converted this kind of bilateral transaction into multilateral transactions by <a href="https://theconversation.com/australia-eyes-missing-billions-with-very-own-google-tax-35249">inserting low-tax countries between Australia and the US</a>.</p>
<p>If we believe that this outcome is not acceptable, the tax law has to be improved to address this issue. The general principle of “applying tax rules to commercial operations” should be premised on the assumption that the transactions are genuine with commercial substance. However, if a transaction is artificially created primarily for the purpose of generating low-taxed income, there is a good basis to argue that the tax law should empower the ATO to look through the legal form of the transaction and impose tax according to the economic substance. Therefore, a deeming provision is not only desirable but also necessary in these cases.</p>
<p>Some submissions have also argued that the proposed Google Tax should not apply to existing tax structures. For example, the Law Council suggested that the proposed rule “ought not to apply to existing, well understood and generally accepted business arrangements, particularly where many of the arrangements are longstanding … Existing arrangements ought to be quarantined from any application of the measure”.</p>
<p>If the government follows this suggestion, the proposed law will not apply to the existing tax avoidance structures of Google, Microsoft and Amazon. As most multinationals would presumably have been well served by their tax advisers and have their tax structures in place long before the government’s proposal, one would wonder whether this grandfather treatment will leave any major multinational subject to the proposed law at all.</p>
<p>To be fair, many submissions to the government have rightly pointed out that the draft legislation needs substantial improvements before the proposal can be effective as well as satisfying as far as possible the tax policy objectives of simplicity and fairness. </p>
<p>For example, the Law Council’s submission has highlighted the need to have clear definitions of some new concepts in the proposed law. The meaning of “no or low corporate tax jurisdiction” – which is one of the conditions before the proposed law will apply - should be stipulated explicitly in the legislation. This will not only provide certainty to both the ATO and multinational companies, but also serve more effectively as a clear signal of the level of tax that is not acceptable to the government.</p>
<p>The recent restructure of Amazon suggests that the government’s proposal to introduce a Google Tax in Australia is in the right direction. The experience of UK’s Google Tax shows that such a tax can change the behaviour of these large corporations. </p>
<p>Of course, more work has to be done to improve the drafting of the legislation before the tax can be an effective weapon to deal with aggressive tax avoidance structures used by multinationals.</p><img src="https://counter.theconversation.com/content/43545/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Law Council of Australia has claimed Australia’s proposed Google tax should not be implemented - but a backflip by Amazon in the UK shows it can work.Antony Ting, Associate Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/368212015-01-29T05:09:29Z2015-01-29T05:09:29ZWithout US support, multinational tax crackdowns will fail<p>It’s no secret that companies including Apple, Google, Amazon, Uber, Airbnb and Ikea seem to pay less than their fair share of tax in Australia. Despite <a href="http://www.smh.com.au/business/apples-803-million-australian-tax-bill-revealed-20150127-12yrqq.html">booking huge revenues</a> from sales to Australian customers they are able to reduce their profits in this country by shifting profits to tax havens such as Ireland, the Netherlands, Luxembourg and the Cayman Islands, to name a few.</p>
<p><a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">Apple, for instance,</a> transfers its intellectual property rights for all markets outside the Americas to a subsidiary in Ireland through a cost sharing agreement. The agreement allows Apple to circumvent the US transfer pricing rules. All international sales outside the Americas are routed through Ireland where Apple negotiated a 2.5% tax rate.</p>
<p>Appple further reduces its tax liability by exploiting the different rules regarding tax resident status in Ireland. This enabled it to have an entity with no declared tax jurisdiction that booked over US$30 billion in profits between 2009 and 2012.</p>
<p>Most countries, including Australia, currently rely on transfer pricing rules based on arm’s length principles to prevent transfer pricing abuse between wholly owned subsidiaries. This allows tax authorities to vary transactions to what it would be if the two entities involved were separately owned and transacting in a transparent market.</p>
<p>This approach is realistic when there is a market for the products or services, such as with commodities, but is unsuitable for the transfer of intellectual property rights or online sales and services, as there is no market or acceptable technique for valuing them. Samsung and Apple have fought many <a href="http://www.slashgear.com/apple-demands-sky-high-samsung-patent-licensing-fee-11320242/">legal battles over the level of licensing fees they charge each other</a> for the use of each other’s intellectual property.</p>
<h2>No easy fix</h2>
<p>Australia, like many other countries, has finally woken up to this problem. </p>
<p>Many of the companies involved are being <a href="http://www.itnews.com.au/News/399560,ato-investigates-25-tech-giants-in-tax-hunt.aspx">investigated by the Australian Taxation Office</a> and will be the subject of a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance">Senate inquiry</a> starting next month. However, practical solutions to the problem are not obvious. </p>
<p>One solution, in which Joe Hockey showed some interest, is the UK Diverted Profits Tax, or <a href="https://theconversation.com/australia-eyes-missing-billions-with-very-own-google-tax-35249">“Google tax”</a>, the details of which were <a href="https://www.gov.uk/government/publications/diverted-profits-tax-guidance">announced</a> late last year. Essentially it is a 25% tax on company profit that is designated (by the tax authority) to have been “inappropriately” shifted out of the UK to a tax haven. In fact the 25% rate is higher than the UK statutory corporate tax rate and has the objective of deterring companies from shifting profits to lower-tax jurisdictions. </p>
<p>Unfortunately, that may be all the “Google tax” will accomplish. Many agree that the subjective nature of determining the amount of profit transferred out “inappropriately” will create more court cases than results. </p>
<p>Another problem is that many of the multinational tech companies sell services online and record revenues via a registered entity in a tax haven. The UK government has no jurisdiction over these transactions. Hence it is unclear how the UK will tax entities registered in a foreign jurisdiction. The UK “Google tax” may also lead to double taxation of some profits.</p>
<h2>An alternative</h2>
<p>Another approach, which has the support of Labor MP Andrew Leigh and is theoretically less judgement-based, is an agreement between all governments on a set of rules by which multinationals record revenues and transfer profits. This is known as formula apportionment. US states use it to apportion profits from corporations that operate across state boundaries.</p>
<p>This system was adopted to prevent companies setting up headquarters in a low-tax state but undertaking most of their business elsewhere. Having all the profits declared in a low-taxing state allowed those states to lower their taxes even further and reduce the overall tax revenues to all states.</p>
<p>There is an agreement on the total profits of the corporation and the proportion of business undertaken in each state. Each state then applies their tax rate to their portion of the profits. This approach also allowed the consolidation of profits of corporations and their subsidiaries, and simplified the system of accounting for state taxes.</p>
<p>International corporate taxation faces the same issues that existed between the US states before this system was introduced. However, there are substantial problems with introducing it on an international scale. </p>
<p>Firstly, the US states were all operating under the same accounting rules, similar tax rules and a common set of judicial doctrines. This allowed for common definitions of income, deductions and profits. While most countries have adopted the International Financial Reporting Standards, each country has customised them to their own situation. </p>
<p>Secondly, the political will to introduce the system within the US was assisted by a strong federal government commitment to overcome the objections from those low-taxing states that would lose their tax base. The third difficulty is that there is no international body with the jurisdiction to enforce this system. </p>
<p>There are estimates that over two-thirds of world trade are currently routed, on paper, through tax havens, and this will still exist. However, there have been examples of similar co-operation between countries on other issues and it may be possible to get such an agreement.</p>
<p>Unfortunately, the US has so far resisted attempts to prevent its corporations from aggressively reducing their foreign taxes as many in the US believe this strengthens these corporations and leads to better economic outcomes for the US itself. Without US involvement this approach will fail.</p>
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</figure><img src="https://counter.theconversation.com/content/36821/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s no secret that companies including Apple, Google, Amazon, Uber, Airbnb and Ikea seem to pay less than their fair share of tax in Australia. Despite booking huge revenues from sales to Australian customers…Roman Lanis, Associate Professor, Accounting, University of Technology SydneyRoss McClure, PhD Candidate, casual academic, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/352492014-12-09T05:50:37Z2014-12-09T05:50:37ZAustralia eyes missing billions with very own ‘Google tax’<p>Joe Hockey has <a href="http://www.abc.net.au/news/2014-12-09/tax-crackdown-on-multinationals-hockey/5953782">hinted</a> he may introduce a “Google tax” as a new weapon to tackle profit shifting by multinational enterprises. The Treasurer’s suggestion is not only political as a counter to aggressive tax avoidance by multinationals, but also suggests the government may not have full confidence in a successful outcome of the G20/OECD work on base erosion profit shifting (BEPS).</p>
<p>The suggestion of a “Google tax” in Australia appears to be a coordinated action with the UK. Last week, the UK Treasury <a href="https://www.gov.uk/government/consultations/tackling-aggressive-tax-planning-implementing-the-agreed-g20-oecd-approach-for-addressing-hybrid-mismatch-arrangements">announced</a> the introduction of a “Diverted Profits Tax” (commonly dubbed the Google tax). The tax will be imposed on profits artificially shifted from the UK at a rate of 25% from 1 April 2015. The tax is <a href="http://www.theage.com.au/business/world-business/britain-slaps-google-tax-on-multinationals-20141204-11zxsr.html">expected</a> to generate more than £1 billion over the next five years.</p>
<p>Details of the Australian tax are yet to be delivered, but it’s likely to work as follows, using Apple’s tax structure as an example. Apple has successfully sheltered US$44 billion in Ireland for four years, and that amount has never been taxed anywhere in the world. The US$44 billion represents the profits shifted from Apple’s sales in many countries, including Australia.</p>
<p>If Australia had a Google tax, the ATO would impose 30% tax on a portion of the US$44 billion that represented the profits derived from sales in Australia.</p>
<h2>Will it work?</h2>
<p>The proposal, if properly designed, should be a powerful weapon for two reasons. First, it provides the much-needed legal basis for the ATO to impose tax on profits shifted from Australia to “taxpayer-friendly” countries such as Ireland. At present, even though the ATO is aware of the US$44 billion sitting in Ireland, the existing international tax regime does not empower the ATO to lay its hands on the profits. </p>
<p>Second, a Google tax would be a unilateral action. Its introduction does not require international consensus and Australia does not have to wait for that to happen before taking action on profit shifting by multinationals. </p>
<p>The G20 and OECD have been working very hard in an attempt to achieve consensus on measures to address the issues of BEPS. However, one major player may not support the project wholeheartedly. The US has been knowingly <a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">facilitating</a> avoidance by its multinationals of foreign income taxes through its own tax system. To make matters worse, its participation in the G20/OECD BEPS Project has been <a href="http://www.itpf.org/itpf_blog?article_id=2070">described</a> by a prominent US tax commentator as “a polite pretence of participation with quiet undermining”.</p>
<p>International consensus is the ideal course of action to comprehensively resolve the issues of BEPS. However, without full support from the US, it is doubtful the project will be able to achieve meaningful measures to curb tax avoidance by multinationals. Therefore, unilateral actions may be the pragmatic response of other countries like Australia to protect their tax bases.</p>
<h2>Not so fast…</h2>
<p>The proposal will face a number of challenges. First, the tax would apply only if a multinational has shifted profits from Australia under a tax avoidance structure. This raises the question: what is a tax avoidance structure? </p>
<p>Apple’s example is clear-cut. As the US$44 billion has never been taxed anywhere in the world, it will be difficult for Apple to argue it is not engaged in a tax avoidance structure.</p>
<p>However, what about profits shifted to a country where the tax rate is 10%? This is one of the technical issues policymakers will have to address.</p>
<p>Second, the ATO will have to find a way to determine the amount of profit shifted from Australia. Going back to the Apple example, how should the ATO estimate how much profit out of the US$44 billion booked in Ireland should be subject to the Google tax? This issue may be difficult and controversial, but should be manageable.</p>
<p>The third and possibly most formidable obstacle to the introduction of a Google tax is that multinationals are likely to offer significant resistance to its introduction. They can be expected to apply intense political pressure, lobbying against this proposal. </p>
<p>A common argument by multinationals is that unilateral action by a country will scare businesses away. This may or may not be a concern, depending on the types of businesses of multinationals. </p>
<p>One important factor that policymakers should remember is that the location of customers is not mobile. Apple can generate A$600 sales income only if it sells an iPad to a customer in Australia. It is highly unlikely, and does not make any commercial sense, that Apple would give up the Australian market because it does not want to pay 30% tax on sales profits.</p><img src="https://counter.theconversation.com/content/35249/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Joe Hockey has hinted he may introduce a “Google tax” as a new weapon to tackle profit shifting by multinational enterprises. The Treasurer’s suggestion is not only political as a counter to aggressive…Antony Ting, Senior Lecturer of Taxation Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/342372014-11-16T19:21:17Z2014-11-16T19:21:17ZG20 tax reform plan should prevent another Lux leaks<figure><img src="https://images.theconversation.com/files/64642/original/qqd36xbs-1416132183.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">OECD Centre for Tax Policy and Administration Director Pascal Saint-Amans has been leading the charge against tax avoidance.</span> <span class="attribution"><span class="source">Dominika Lis/G20 Australia</span></span></figcaption></figure><p>The G20 Communique is good news on the international tax reform front. As part of the G20 commitment to boost economic resilience the Communique commits G20 nations to taking action to ensure fairness in the international tax system. This means they are looking at ways to ensure profits are taxed where economic activities deriving the profits are performed and where value is created. </p>
<p>The most positive statement is the endorsement of the global Common Reporting Standard for the automatic exchange of information between revenue authorities. The G20 also provides strong support for the recommendations coming out of the OECD project on Base Erosion and Profit Shifting (BEPS). And so it should. </p>
<p>The reform program is ambitious and not yet finished but the G20 has committed to continuing the reform program in 2015. As such, the tax scandals we have seen recently coming out of <a href="https://theconversation.com/luxembourg-leaks-how-harmful-tax-competition-leads-to-profit-shifting-33940">“Lux leaks”</a> as well as multinationals such as Apple, Google and Starbucks being named as engaging in highly aggressive tax planning strategies will hopefully become a thing of the past.</p>
<p>Despite the ongoing nature of the OECD BEPS project we have broad agreement from the world’s largest economies on what are complex and multifaceted problems. Developing nations will also be pleased to see a commitment to deeper engagement with them to address their concerns.</p>
<p>There is a great deal of work still to be done and it would be easy to argue that the OECD has not gone far enough in its proposal for reform, but now is not the time to do so. Now is the time to take a breath and reflect on achievements to date. These achievements, reflecting a half-way point in the reform program for the OECD are significant. It is also time to consider the next step for nations which have endorsed the OECD recommendations. </p>
<p>The high level support requires action at a domestic level. Top down political support is apparent but that needs to translate into action. The political will must exist if outputs are to be realised in a practical sense. Governments are going to continue to be lobbied by those with vested interests. Some groups and authors suggest multinationals are doing nothing wrong, while others suggest there are no solutions to a broken tax system. Clearly, the G20 leaders do not agree and these voices are likely to become less vocal. </p>
<h2>Government action must be coordinated</h2>
<p>Governments must act but need to do so in concert with other governments. A coordinated effort is needed and this is not lost on the OECD. Here we are already seeing cracks appear with some too slow, others too fast and some just not wanting to play. </p>
<p>Australia was slow to agree to endorse the Common Reporting Standard for the automatic exchange of information. Fortunately it has now done so. Other nations are potentially too keen. On Friday Pascal Saint-Amans, Head of the Centre for Tax Policy at the OECD, raised concerns about too much momentum. As he said, unilateral action may lead to chaos. </p>
<p>Mexico is one such example of a nation keen to enact new laws to curb BEPS. In fact, it did so earlier this year. </p>
<p>India is also a good example of a nation not liking some of the recommendations. It has made it clear it is opposed to the proposal to make arbitration binding and mandatory under the mutual agreement procedure (MAP) to resolve disputes in tax treaties. India argues such a requirement will impinge on its sovereign rights. </p>
<p>Despite the need for domestic legislation to introduce new rules, the OECD reform program is about nations agreeing to common rules. However, nations have options: agree to the common rules or act unilaterally. The latter would be less than satisfactory as tax evasion is a global problem that must be addressed with global solutions. In fact, as we have seen recently with the Lux leaks scandal, often it’s because nations act unilaterally that base erosion is occurring. </p>
<p>We are yet to see whether Jean-Claude Juncker, current European Commission President, and previous Prime Minister of Luxembourg views tax avoidance in the same way as other nations or sees it as an important issue. On Saturday he said that he is in favour of tax competition as long as it is “fair” tax competition in Europe. </p>
<p>It is easy to blame multinationals, and no doubt, they deserve some of the blame. But once the behaviour of the multinationals is addressed, it is necessary to look at what nations themselves are doing. Nations offer tax incentives to attract investment. The question becomes one of when do such incentives constitute legitimate tax competition and when do they constitute harmful tax practices. Patent boxes, or the preferential tax treatment of intellectual property is one such area of dispute amongst countries. </p>
<p>As I said, the G20 is supporting an ambitious tax reform program by the OECD so this is a “good news” story for the international community. Now we need to keep up the momentum.</p><img src="https://counter.theconversation.com/content/34237/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq receives funding from the International Centre for Tax and Development. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>The G20 Communique is good news on the international tax reform front. As part of the G20 commitment to boost economic resilience the Communique commits G20 nations to taking action to ensure fairness…Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/338902014-11-11T19:30:57Z2014-11-11T19:30:57ZKey events in the G20 push on tax avoidance<figure><img src="https://images.theconversation.com/files/63919/original/89qy3hf3-1415324913.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Pressure is building ahead of the Brisbane G20 Leaders' Summit for action on tax avoidance by multinationals.</span> <span class="attribution"><span class="source">Andrew Sutherland/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Tax avoidance by multinational enterprises is not new. But the current level of political will and public outcry on the issue is uncommon in the history of taxation. </p>
<p>The upcoming G20 meeting in Brisbane promises to keep the momentum and reiterate the determination of political leaders to address base erosion and profit shifting by corporate groups.</p>
<p>The timeline below reviews the development and key events of the anti-corporate tax avoidance movement so far.</p>
<p><em>To navigate the timeline below, hover your mouse on the right (and on the left to move back). If you can’t see the timeline, click refresh on your browser.</em></p>
<iframe src="https://s3.amazonaws.com/cdn.knightlab.com/libs/timeline/latest/embed/index.html?source=1y-etB1UmOUXFec2Bdr_VAfj0jRpkoUROxVzhD-A9AWc&font=Bevan-PotanoSans&maptype=toner&lang=en&height=650" width="100%" height="650" frameborder="0"></iframe>
<p><strong>Further reading</strong></p>
<p><a href="https://theconversation.com/irelands-move-to-close-the-double-irish-tax-loophole-unlikely-to-bother-apple-google-33011">Ireland’s move to close the ‘double Irish’ tax loophole unlikely to bother Apple, Google</a></p>
<p><a href="https://theconversation.com/g20-host-australia-faces-hard-truths-of-multinational-profit-shifting-31514">G20 host Australia faces hard truths of multinational profit shifting</a></p>
<p><a href="https://theconversation.com/information-is-power-oecd-tax-plan-puts-apple-and-google-on-notice-31472">Information is power: OECD tax plan puts Apple and Google on notice</a></p>
<p><a href="https://theconversation.com/whats-needed-for-australia-to-seriously-tackle-tax-avoidance-32272">What’s needed for Australia to seriously tackle tax avoidance</a></p>
<p><a href="https://theconversation.com/multinationals-unfazed-by-g20-tax-crackdown-23421">Multinationals unfazed by G20 tax crackdown</a></p>
<p><a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">Apple iTax: made in Ireland, designed in the US</a></p><img src="https://counter.theconversation.com/content/33890/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Tax avoidance by multinational enterprises is not new. But the current level of political will and public outcry on the issue is uncommon in the history of taxation. The upcoming G20 meeting in Brisbane…Antony Ting, Associate Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/339402014-11-10T05:16:21Z2014-11-10T05:16:21ZLuxembourg leaks: how harmful tax competition leads to profit shifting<figure><img src="https://images.theconversation.com/files/64070/original/sdh6m9sh-1415583394.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Leaked documents reveal how multinational companies use PwC in Luxembourg to shift profits and avoid tax.</span> <span class="attribution"><span class="source">Nicolas Bouvy/AAP </span></span></figcaption></figure><p>Hundreds of advance tax agreements between Luxembourg and more than 300 taxpayers were <a href="http://www.icij.org/project/luxembourg-leaks">leaked and published</a> by the International Consortium of Investigative Journalists last week. The taxpayers involved include multinational enterprises (MNEs) like Amazon, IKEA and Pepsi, and also – possibly to the embarrassment of the government - Australia’s Future Fund.</p>
<p>Advance tax agreements are common practice in many countries. For example, the Australian Tax Office regularly issues advance tax rulings to taxpayers clarifying and confirming tax implications of a particular transaction. This practice is often regarded as good tax administration as it provides certainty to taxpayers. However, last week’s leaks reveal Luxembourg is routinely providing favourable advance tax agreements allowing taxpayers to pay minimal tax.</p>
<h2>Typical tax avoidance structures</h2>
<p>Using a group finance company in Luxembourg is one of the most common tax-avoidance techniques for MNEs.</p>
<p>A typical structure involves a subsidiary incorporated in Luxembourg with the sole purpose of lending money to its sister companies. Funds are often raised at interest rates reflecting the credit rating of the corporate group, for example, at 1%. The subsidiary then lends the money to its group companies in high-tax countries (like Australia) at, say, 9%. The interest payments made by the Australian group company effectively erode the tax base in Australia.</p>
<p>The subsidiary in Luxembourg is often subject to very low effective tax rates due to the country’s preferential tax regime for group finance companies. This means the tax structure creates deductions in high-tax countries like Australia from internally generated interest expenses, but the interest payments are subject to a much lower tax rate in Luxembourg.</p>
<h2>Harmful tax competition – the other side of tax avoidance</h2>
<p>Use of tax havens in international tax-avoidance structures is not new. Over the past 60 years, globalisation and the rapid advance of communications technology have contributed to the substantial growth and use of tax havens.</p>
<p>The Luxembourg leaks highlight a critical issue in the reform of international tax rules. A couple of prominent <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459646">tax scholars</a> recently wrote: “MNE tax avoidance is just the flipside of harmful tax competition.” MNEs cannot easily minimise their tax liabilities without the vast array of “preferential” tax regimes available in different countries. </p>
<p>Luxembourg is just one of the many countries that are willing to facilitate tax avoidance of MNEs. It is not just small countries that are willing to do so. </p>
<p>Apple’s international tax structure revealed the United States has been knowingly facilitating its MNEs to avoid foreign tax through a glaring loophole in its tax law. The United Kingdom recently introduced changes to make it one of the most preferential tax regimes for MNEs to locate their intangibles. These measures were introduced to allow the UK to better compete with tax havens. </p>
<p>Both developed and developing countries often strive to have a “competitive” tax system to attract investment. Recent tax reforms in most countries are driven primarily by the tax policy objective of competitiveness. Yet where should we draw the line between acceptable and unacceptable tax competition?</p>
<h2>A lesson from tax history</h2>
<p>In 1998, the OECD attempted to address the issue of <a href="http://www.oecd.org/ctp/harmful/2000progressreporttowardsglobaltaxco-operationprogressinidentifyingandeliminatingharmfultaxpractices.htm">harmful tax competition</a> and tax havens. It initially identified nearly 50 “potentially harmful” preferential tax regimes in OECD countries and compiled a list of tax havens.</p>
<p>However, the scope of the project was scaled back significantly in 2001. This was in response to pressure from the US Congress, which threatened to deny funding for the OECD if it continued the project in its prevailing form. The result is that most tax havens survive and continue to facilitate tax avoidance.</p>
<p>Harmful tax competition is now one of the key action items of the <a href="http://www.oecd.org/tax/countering-harmful-tax-practices-more-effectively-taking-into-account-transparency-and-substance-9789264218970-en.htm">OECD/G20 Base Erosion Profit Shifting Project</a>. The final proposal is due from the OECD by the end of 2015. Its highly political nature renders prediction of the outcome almost impossible. </p>
<p>However, countries like Australia need not despair. Defensive measures are available to tackle harmful tax regimes if the government has the political will to do so. For example, tax rules can be introduced to deny deductions of payments made to tax havens.</p>
<h2>The importance of transparency</h2>
<p>Another important issue highlighted by the leaks is the importance of transparency. The leaks not only reveal the extensive use of Luxembourg for tax avoidance but also demonstrate the power of information. Extensive media coverage now places Luxembourg under intense political pressure to reform its tax laws.</p>
<p>Major tax reform is always political. It is difficult to predict whether any meaningful reform will occur in Luxembourg as a result of the leaks. However, the recent developments in Ireland – another notorious tax haven in the European Union – give hope. Following extensive media exposure of the international tax structures of Apple and other US MNEs, the Irish government finally succumbed to political pressure and announced it would change tax laws to close the “double Irish” loophole.</p>
<p>The present level of public anger and political will to tackle tax avoidance by MNEs is rare in the history of taxation. Media exposure like the Luxembourg leaks plays a critical role in informing the public and maintaining political momentum.</p>
<p>The G20 Brisbane meeting will endorse the OECD work on its Base Erosion Profit Shifting Project. One of the key endorsements will be of the country-by-country reporting regime. Under these changes, a MNE will have to disclose to tax authorities its income, taxable profits and taxes paid in each of the countries that it operates. This regime, if properly designed, will significantly enhance the ability of tax authorities to identify global tax-avoidance structures.</p><img src="https://counter.theconversation.com/content/33940/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Hundreds of advance tax agreements between Luxembourg and more than 300 taxpayers were leaked and published by the International Consortium of Investigative Journalists last week. The taxpayers involved…Antony Ting, Senior Lecturer of Taxation Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/315142014-09-17T06:34:40Z2014-09-17T06:34:40ZG20 host Australia faces hard truths of multinational profit shifting<figure><img src="https://images.theconversation.com/files/59245/original/64njsjjz-1410926066.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Finance Ministers meeting in Cairns is a chance for Treasurer Joe Hockey to show leadership on OECD-recommended tax reform.</span> <span class="attribution"><span class="source">Dan Himbrechts/AAP</span></span></figcaption></figure><p>The G20 Finance Ministers have the opportunity this weekend to endorse the initial <a href="http://www.oecd.org/ctp/beps-2014-deliverables.htm">recommendations</a> of the OECD on how to address the global problem of multinational tax avoidance.</p>
<p>The <a href="http://www.oecd.org/ctp/BEPSActionPlan.pdf">work</a> of the OECD on the issue to date is substantial. Most notable is the adoption by many nations, including Australia, of the Common Reporting Standard for the automatic exchange of tax information. This standard will allow significant inroads to be made into tax avoidance, particularly by individuals sheltering money offshore. This is the first step in an ambitious tax reform program. </p>
<p>There is a long way to go if we are to end the issue now known as Base Erosion and Profit Shifting (BEPS). This week’s release of the first of the OECD recommendations contains some positive signs that further advances will be made. It also recognises some hard truths. </p>
<h2>Transparency: a three-pronged approach</h2>
<p>Three key OECD recommendations address international tax transparency: country-by-country reporting, harmful tax practices, and a multilateral instrument.</p>
<p>The most positive recommendation is county-by-country reporting, which will complement the information obtained via the Common Reporting Standard with the onus on the taxpayer to provide information to tax administrations. It will also extend the net of information captured to all multinationals. </p>
<p>A revamp of the OECD work on harmful tax practices is also welcome. This measure focuses on nations that engage in harmful tax competition. The OECD recommendations place an emphasis on improved transparency in relation to taxpayer rulings for individual taxpayers which relate to preferential regimes. However, the focus will be on distinguishing between preferential regimes which encourage real activity and those which encourage profit shifting. The “spillover” effect, or the impact that one country’s choices have on other countries, highlighted recently by the <a href="http://www.imf.org/external/np/pp/eng/2014/050914.pdf">IMF</a>, is unlikely to be examined by the OECD. </p>
<p>Steps towards a multilateral instrument to expedite and streamline the implementation of BEPS measures are a positive sign. Tangible outcomes rely on nations adopting G20 endorsed recommendations of the OECD. Success will only occur if a consensus framework is maintained. The suggested multilateral instrument is an administrative tool and, if used effectively, will streamline processes and potentially express a nation’s in-principle commitment to tax reform.</p>
<h2>Hard truths</h2>
<p>I have previously <a href="https://theconversation.com/developing-nations-need-more-than-words-from-g20-tax-reform-30608">argued</a> that the current international tax system is broken and it’s going to take significant global effort to fix it. </p>
<p>Global effort needs to go beyond transparency. Most multinationals are not breaking the law. Morality aside, they are taking advantage of current laws which allow profit shifting through tax advantaged structures. These structures allow the use of transfer pricing rules and treaty provisions to minimise tax, and lie at the heart of the problem. While acknowledging the systemic challenges of ensuring profits are taxed where economic activities occur and where the value is created, the first set of OECD recommendations understandably raise more questions than answers. </p>
<p>The most telling is the report into the challenges of the digital economy which is the result of information and communication technologies. We are seeing rapidly evolving technologies and business structures leading to problems including a nation’s ability to establish the right to tax transactions. The OECD and G20 countries have reached a common understanding of the challenges raised by the digital economy but leave much of the work to the rest of the Action Plan. Those recommendations are not due until 2015. </p>
<p>More progress has been made in relation to treaty abuse and specifically treaty shopping. Tax treaties are entered into between two countries to determine taxing rights and prevent double taxation. They are not intended to be used to generate double non-taxation. </p>
<p>Currently, we are seeing multinationals obtaining benefits under treaties where they are a resident of neither country. It is positive to see that treaty anti abuse rules have been drafted and will be included in the OECD Model Tax Convention. However, again, more work is needed in this area. </p>
<p>Progress has also been made in the area of transfer pricing, but the majority of this work will form the basis of the 2015 recommendations.</p>
<p>Many of the BEPS problems are created by the hard truth that from a business perspective multinationals structure their operations in a truly global manner. Yet, from a tax perspective, we continue to treat the multinational entity as having separate parts. By treating a multinational as having separate parts, they are able to shift profits. </p>
<p>Despite recognising the systemic challenges, the OECD is committed to addressing flaws in the current regime. It is not considering other approaches such as <a href="http://en.wikipedia.org/wiki/Formulary_apportionment">“formulary apportionment”</a> which is suggested by civil society groups and academics as being a possible solution to the current separate entity approach. </p>
<p>The recommendations reflect OECD and G20 countries consensus on a number of solutions to end BEPS. Australian Treasurer Joe Hockey should endorse the OECD’s recommended measures as a positive step to address profit shifting and promote the welfare of Australia’s citizens through a sound tax regime. </p>
<p>At the same time, the Australian Parliament has the responsibility to legislate a resilient tax regime which is both robust and adaptable to the modern global economy. As host of the G20 in 2014 we must also been seen to be a leader in tax reform.</p><img src="https://counter.theconversation.com/content/31514/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq receives funding from the International Centre for Tax and Development. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>The G20 Finance Ministers have the opportunity this weekend to endorse the initial recommendations of the OECD on how to address the global problem of multinational tax avoidance. The work of the OECD…Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/314722014-09-16T20:26:05Z2014-09-16T20:26:05ZInformation is power: OECD tax plan puts Apple and Google on notice<figure><img src="https://images.theconversation.com/files/59130/original/3zxkvw4k-1410851353.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Google books much of its Australian profit to offshore operations.</span> <span class="attribution"><span class="source">Tawel/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Public outcries over tax avoidance by multinational enterprises like Apple and Google have pushed politicians to act. The unprecedented international political will to combat base erosion profit shifting by multinationals led to the <a href="https://theconversation.com/the-g20-and-the-taxing-issue-of-making-big-business-pay-21466">endorsement of the G20</a> in September 2013 for the OECD to embark on an ambitious project aiming to eliminate double non-taxation. </p>
<p>The OECD has just released the first package of proposals addressing seven action items. These will be presented to G20 Finance Ministers in Cairns this weekend. </p>
<p>One of the key proposals is to increase transparency through a country-by-country reporting regime. Under the proposal, multinationals would have to report the amount of income, profit before tax and income tax paid in each of the countries where they have operations. In addition, they would have to disclose their total employment, capital and assets in each of the countries.</p>
<p>A properly designed country-by-country reporting regime is critical in the war on profit shifting for two reasons. First, it would provide much needed information for tax authorities to identify targets for tax investigations. For example, if such reporting were in place when Apple implemented its <a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">international tax avoidance structure</a>, the substantial profits booked in Ireland and the minimal tax paid in that country would be immediately apparent to the ATO. </p>
<p>Second, the country-by-country reporting regime would have a deterrent effect. As the tax benefits from an international tax avoidance structure would be disclosed to tax authorities around the world, the risk of a tax investigation would be much higher. Multinationals would likely think twice before engaging in aggressive tax structures.</p>
<h2>Multinationals are campaigning against change</h2>
<p>The strong opposition from business against the country-by-country reporting regime suggests it would be an effective anti profit shifting weapon for tax authorities. The OECD consultation on this regime has been one of the most controversial action items of the profit shifting project so far. It has attracted over 130 submissions in total, with 79 from businesses and 43 from tax lawyers and accountants. </p>
<p>The overwhelming enthusiasm from the business and professional communities reflects their strong desire to keep as much tax information as possible “hiding from light”. One of their arguments against the country-by-country reporting regime is the compliance costs associated with preparing the required information. But compliance costs under the proposed reporting regime are likely to be a small fraction of the tax advisory fees that multinationals are willing to pay for tax avoidance structures. </p>
<p>In a recent US congressional hearing it was revealed Caterpillar Inc, an iconic US multinational, paid US$55 million to PwC for a tax structure under which it has successfully shifted US$8 billion from the US to Switzerland. </p>
<h2>Transparency compromised</h2>
<p>NGOs and academics, on the other hand, have argued for the country-by-country information to be made public. The deterrent effect is likely to be more powerful if the information is disclosed in the public financial statements of the multinational. The reputational issue is now a boardroom concern and can be a deal breaker when a multinational contemplates a profit-shifting structure. </p>
<p>But the concerns of multinationals have made inroads in the OECD proposal, in which the country-by-country information would be reserved for the eyes of tax authorities and not disclosed to the public. It appears that the OECD’s preference hinges to a large extent on its focus of the first function of the regime, namely, providing essential information for tax authorities to identify tax audit targets.</p>
<p>A successful implementation of the country-by-country reporting regime would be good news for “honest” companies which pay their fair share of tax. As the regime helps tax administrators to focus on the right targets for tax investigations, it would minimise the risk of wasting time and effort on honest taxpayers.</p>
<p>Of course, the devil may be in the detail. The OECD will undertake additional work in the coming months to develop detailed implementation and reporting rules. </p>
<p>It is unclear at this stage how much additional useful information will become readily available to tax authorities. For example, the proposal suggests that information about related party transactions of a multinational in a country would be provided to that country in a “local file”. It is not clear if these local files would be readily available to other countries where the multinational has operations. </p>
<h2>Possible loopholes</h2>
<p>Taking Apple’s tax structure as an example, Apple Australia buys products from Apple Singapore, which in turn buys the products from Apple Ireland. The ATO would have the local file showing the information about the intra-group sales between Australia and Singapore. However, unless it can readily obtain information about the intra-groups sales between Singapore and Ireland, the ATO would not have enough information to complete the puzzle. Without a global understanding of the whole tax structure, it would still be difficult for the ATO to effectively assess and challenge the arrangement.</p>
<p>Obtaining full global information about the tax structure of a multinational is the correct first step in the battle against profit shifting. However, it will take much more to win the war. </p>
<p>The tax structures of Apple and Google, etc. are in full compliance of tax law. Even with the whole picture of Apple’s tax structure in front of the ATO, it will still need effective tax law to collect the fair amount of tax. The challenge for the ATO is: how can it lay its hands on the profits booked in Ireland that have not been taxed anywhere in the world? The current tax law does not empower the ATO to claim a share of that income. Tax administrators in most countries are in the same boat.</p>
<p>This is the most challenging part of the project. A fundamental rethink of the underlying principles of the taxation of multinationals is necessary for a comprehensive solution to the profit shifting issues. The OECD will have to do much more work on some highly controversial issues in the coming months. International consensus would likely to be more difficult to achieve on these issues.</p><img src="https://counter.theconversation.com/content/31472/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Public outcries over tax avoidance by multinational enterprises like Apple and Google have pushed politicians to act. The unprecedented international political will to combat base erosion profit shifting…Antony Ting, Senior Lecturer of Taxation Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/214662014-01-05T19:10:19Z2014-01-05T19:10:19ZThe G20 and the taxing issue of making big business pay<figure><img src="https://images.theconversation.com/files/38331/original/6b4q7krj-1387494336.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Profit shifting by multinationals will be a key focus of the G20 under Australia's presidency this year.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Australia has officially commenced its presidency of the <a href="http://www.g20.org/">G20</a> and preparations are underway for the <a href="http://www.dpmc.gov.au/g20/">November 2014 Summit</a>, when the leaders of the world’s biggest economies will meet in Brisbane. </p>
<p>The G20 has a range of topics on its agenda (see <a href="http://theconversation.com/what-does-the-g20-actually-do-17464">here</a>). In 2014, as in the last couple of years, international taxation of multinational corporations is a big part of it.</p>
<h2>Base erosion and tax arbitrage</h2>
<p>A key focus will be further work on the OECD Base Erosion and Profit Shifting (<a href="http://www.oecd.org/ctp/beps.htm">BEPS</a>) project which the G20 “fully endorsed” at the September 2013 <a href="http://www.oecd.org/g20/meetings/saint-petersburg/">St Petersburg Summit</a>. As I’ve <a href="http://theconversation.com/the-tussle-over-australias-company-tax-16354">explained</a>, the OECD BEPS <a href="http://dx.doi.org/10.1787/9789264202719-en">Action Plan</a> states that company tax bases of governments are at risk because tax rules “may not have kept pace with changes in global business practices” and “the tax practices of some multinational companies”. The OECD, and <a href="http://www.ato.gov.au/Business/.../Large-business-bulletin--June-2013">Australia</a>, are throwing considerable resources at the BEPS project. </p>
<p>Many BEPS reforms will be unilateral country tax law “fixes” that aim to prevent international tax arbitrage, resulting from the mismatch in country tax treatment of corporate financial and business arrangements (for a discussion, see <a href="http://sydney.edu.au/law/parsons/ATTA/docs_pdfs/conference_papers/Cross_Border_Tax_Arbitrage_and_convergence_of_tax_systems_a_law_and_economics_approach.pdf">here</a>). </p>
<p>Successful international tax arbitrage does not breach any one country’s tax rules. It reduces a multinational enterprise’s global tax burden by exploiting the mismatch in tax treatment - for example, for hybrid finance instruments as illustrated <a href="http://theconversation.com/chasing-tax-across-countries-a-test-case-14756">here</a>. The aim is to deliver co-operative international tax approaches to prevent arbitrage and align key company tax rules. Unilateral tax change is hard enough in this complex area. More challenging is the BEPS goal to establish multilateral rules or treaty provisions that all G20 countries could sign up to, so as to ensure consistent taxation of hybrid instruments.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Australia has officially commenced its presidency of the G20.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<h2>Thin capitalisation</h2>
<p>Another big issue is “thin capitalisation” or “debt loading” by multinationals. For example, debt loading occurs when a multinational corporation that is foreign-owned with Australian operations or Australian-owned with foreign operations, leverages high levels of debt in Australia, and this debt carries interest that is tax-deductible in Australia. The interest deduction reduces the net profit subject to Australian tax, contributing to “erosion” of the company tax base. </p>
<p>The previous Labor government had announced law reform to limit the scope for debt loading. Most countries cap tax-deductible interest by limiting the debt to equity ratio of multinationals (although specific rules vary widely). Australia allows a generous debt: equity ratio of 3:1, that is, 75% debt to 25% assets, compared to many other countries. Former treasurer Wayne Swan <a href="http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2013/065.htm&pageID=003&min=wms&Year=&DocType=0">proposed</a> to limit this ratio to 1.5:1, that is, 60% debt to 40% assets. Swan also planned to eliminate a deduction for Australian debt that finances foreign investment. These BEPS measures were expected to raise A$1.5 billion over the next four years.</p>
<p>New Coalition treasurer Joe Hockey will <a href="http://jbh.ministers.treasury.gov.au/media-release/017-2013/">continue</a> with the policy of reducing debt loading, setting a debt:equity ratio of 1.5:1, but has abandoned the other reform proposed by Swan. He says this is too difficult to administer - it’s too hard to trace Australian debt that finances foreign investment - so instead he will introduce a targeted anti-avoidance rule to address abuse of debt deductions. According to the estimates, this will still raise about A$900 million to help the budget bottom line.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">G20 countries are sharing more information to strengthen the tax system.</span>
<span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Information exchange</h2>
<p>The G20 appears to be well on the way to strengthening international tax cooperation in tax administration and information exchange as well as joint country tax audits and enforcing tax debts. The “new standard” of automatic exchange of tax information and enhanced cross-country assistance in tax enforcement and collection have been widely accepted. The G20 <a href="http://www.oecd.org/g20/meetings/saint-petersburg/">expects</a> to begin to exchange tax information automatically by the end of 2015. </p>
<p>Many G20 countries including Australia are <a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2012/Intergovernmental-agreement-to-implement-FATCA">signing agreements</a> for their banks to provide financial information to the US under its strict Foreign Account Tax Compliance Act (FATCA) regime. Meanwhile, in Jakarta, the November 2013 meeting of the <a href="http://www.oecd.org/tax/exchange-of-tax-information/a-boost-to-transparency-and-international-tax-cooperation.htm">Global Forum</a> saw tax havens Liechtenstein and San Marino become the 62nd and 63rd signatories to the <a href="http://www.oecd.org/ctp/exchange-of-tax-information/MAC_Background_Brief_for_Jounalists_November_2013.pdf">Multilateral Convention</a> on Mutual Administrative Assistance in Tax Matters. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=692&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=692&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=692&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=869&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=869&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=869&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Russia rates poorly for corruption, a problem for G20 countries.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>While the legal architecture for international tax cooperation is developing rapidly, not all taxpayers will be comfortable knowing that their tax information may be provided automatically to countries, including previous G20 president Russia, where individual freedoms are often under attack. Russia ranks 133 out of 174 countries in Transparency International’s latest <a href="http://www.transparency.org/cpi2012/results">Corruption Index</a>. It’s crucial for legitimacy of the system that G20 countries demonstrate that the rule of law will be respected in tax matters.</p>
<h2>Some tensions</h2>
<p>The G20 also <a href="http://theconversation.com/for-g20-leaders-poverty-is-a-taxing-issue-17963">says</a> that fixing global tax regulation is key to fighting poverty. A 2012 UN General Assembly <a href="http://www.un.org/en/ga/search/view_doc.asp?symbol=%20A/RES/66/191">Resolution 66/191</a> calls on the international community to develop effective international company tax rules and to increase participation of developing countries in tax policy processes. But as I explain <a href="http://elgarblog.wordpress.com/2013/07/03/tax-law-and-development-by-miranda-stewart/">here</a> it is only recently that OECD member countries have begun to acknowledge that their own tax rules and harmful tax competition are making it more difficult for developing countries to raise adequate taxes.</p>
<p>There may be some tensions in the G20 about how to reform our fundamental international tax principles for the future. The OECD BEPS project mostly aims to protect the residence basis of taxation for multinationals. This will help prevent corporate tax base erosion for rich, capital and intellectual property-exporting countries. Current OECD profit shifting rules, which emphasise the <a href="http://www.oecdguidelines.nl/guidelines/taxation/">arm’s length transfer pricing principle</a>, can be strengthened. But these current rules for allocation of the right to tax business profits between countries are under attack from capital importing countries who seek to protect and enhance source taxation of business activity. </p>
<p>India, South Africa, Brazil and China may benefit more from a “formulary apportionment” approach, which has also been <a href="www.oxfam.org/sites/www.oxfam.org/files/fix-the-cracks-in-tax.pdf">called for</a> by activist organisations such as Oxfam and Christian Aid. We might begin to see cracks in the G20 on these fundamental international tax principles in 2014.</p><img src="https://counter.theconversation.com/content/21466/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart receives funding from the Australian Research Council.</span></em></p>Australia has officially commenced its presidency of the G20 and preparations are underway for the November 2014 Summit, when the leaders of the world’s biggest economies will meet in Brisbane. The G20…Miranda Stewart, Professor and Director of Tax Studies, Melbourne Law School, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.