tag:theconversation.com,2011:/us/topics/google-tax-15853/articlesGoogle tax – The Conversation2020-12-02T18:30:00Ztag:theconversation.com,2011:article/1436672020-12-02T18:30:00Z2020-12-02T18:30:00ZThe U.S. takes aim at Facebook — here’s why the big tech giants must be reined in<figure><img src="https://images.theconversation.com/files/371993/original/file-20201130-17-1j2jep3.jpg?ixlib=rb-1.1.0&rect=0%2C348%2C6128%2C3586&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Big tech giants have become not just omnipresent but omnipowerful. Will their might be reined in in 2021?</span> <span class="attribution"><span class="source">(AP Photo/Ng Han Guan)</span></span></figcaption></figure><p>The COVID-19 pandemic has made it clearer than ever that we are at risk of losing <a href="http://www.oecd.org/coronavirus/policy-responses/social-economy-and-the-covid-19-crisis-current-and-future-roles-f904b89f/">control of our economies</a>.</p>
<p>Our institutions have increasingly struggled to meet the challenges of economic development before the crisis, and yet throughout the pandemic we’ve seen surging <a href="https://www.barrons.com/articles/are-big-tech-stocks-in-a-bubble-not-according-to-this-investment-house-51602738023">stock market valuations of tech giants</a> — including staggering <a href="https://www.vox.com/recode/2019/5/2/18522927/ceo-pay-ratio-tech-employee-salary-2018">CEO salaries</a> — the inability of anti-trust regulators, particularly in the United States, to effectively <a href="https://review.chicagobooth.edu/economics/2019/article/does-america-have-antitrust-problem">regulate markets</a> and the rise of <a href="https://www.scmp.com/magazines/style/news-trends/article/3020895/tencent-xiaomi-7-chinese-tech-giants-are-poised-be">China’s tech companies</a>.</p>
<p>Tech giants are not just surviving the pandemic; they’re thriving.</p>
<h2>The superstar economy</h2>
<p>What’s known as <a href="https://www.jstor.org/stable/1803469?seq=1#metadata_info_tab_contents">the superstar economy</a> is one with a few hyper-productive, gigantic and highly profitable companies. </p>
<p>Superstar firms such as Walmart, Amazon or Facebook use new technologies to redefine markets, and benefit from <a href="https://www.forbes.com/sites/forbescoachescouncil/2018/01/02/how-to-harness-the-power-of-network-effects/">what are known as network effects</a> — simply put, the value of a product is enhanced the more people use it. Facebook is an example — people are more likely to join Facebook if their friends and loved ones are on it.</p>
<p>Initially, superstar companies bring new ways of delivering value to customers, but as they grow, they become powerful monopolies. <a href="https://ir.law.fsu.edu/cgi/viewcontent.cgi?article=1489&context=articles">Our institutions have struggled with how to deal with these relatively new firms</a> and, for example, have allowed many mergers and acquisitions that eroded competition in their respective markets. Prominent examples include <a href="https://theconversation.com/why-the-eu-should-dismantle-facebook-97035">the acquisition of Instagram and WhatsApp by Facebook</a>.</p>
<p>The U.S., finally, appears to be lowering the boom on Facebook, <a href="https://www.usatoday.com/story/tech/2020/12/08/facebook-antitrust-lawsuits-instagram-whatsapp-mark-zuckerberg/6502309002/">filing antitrust lawsuits on behalf of 46 states, Guam and the District of Columbia</a> over its takeover of Instagram and WhatsApp.</p>
<p>Superstar firms have also contributed to the shift in <a href="https://doi.org/10.1016/j.ecosys.2013.04.001">wealth distribution from labour to capital</a>. Wealth was once commonly built through labour, rather than via capital that is often inherited or otherwise privileged.</p>
<p>Many superstar firms also have the <a href="https://www.businessinsider.com/25-giant-companies-that-earn-more-than-entire-countries-2018-7">balance sheets of mid-sized economies</a> and hold more information about us than any country. Take Facebook. <a href="https://www.nytimes.com/2015/01/20/science/facebook-knows-you-better-than-anyone-else.html">Mark Zuckerberg probably knows more about you than your government</a>. However, you have no way of finding out because <a href="https://www.wired.com/insights/2014/02/owns-data/">data ownership</a> is at best a complicated issue, and retaining your data would require you to have next to no online footprint.</p>
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<span class="caption">Facebook CEO Mark Zuckerberg appears on a screen as he speaks remotely during a hearing before the Senate Commerce Committee on Capitol Hill in October 2020 about content moderation leading up to the U.S. presidential election.</span>
<span class="attribution"><span class="source">(Michael Reynolds/Pool via AP)</span></span>
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<p>That citizens don’t have access to data about themselves is problematic. Clearly, the only person who should own your data is you. European data privacy laws are about to become <a href="https://www.economist.com/business/2020/10/07/google-antitrust-and-how-best-to-regulate-big-tech">even stricter</a>, but in North America, the erosion began in the aftermath of the Sept. 11, 2001, terrorist attacks that resulted in laws that dramatically eroded our privacy. Those laws have provided firms with the right to use the abundant data they collect. </p>
<p>Google is an example. One of the reasons Google is the gold standard of search engines is that it uses advanced machine learning algorithms. These algorithms use our data to learn what we want to see when we’re online.</p>
<p><a href="https://hbr.org/2020/01/when-data-creates-competitive-advantage">Any successful competitor to Google would need to outperform years of learning advantage</a>. That makes competition at best <a href="https://www.ft.com/content/fd311801-e863-41fe-82cf-3d98c4c47e26">very challenging</a>. </p>
<h2>What to do?</h2>
<p>Primarily, we have seen two attempts to address the sheer might of tech giants and their lack of competitors.</p>
<p>In China, <a href="https://www.bloomberg.com/opinion/articles/2018-04-12/china-is-nationalizing-its-tech-sector">superstar firms have been largely nationalized</a>. The state is increasingly involved in the most powerful companies in the country. <a href="https://www.npr.org/2020/11/03/930799521/regulators-squash-giant-ant-ipo">Chinese regulators recently quashed the initial public offering of a financial company, Ant Group, in a high-profile example of government involvement</a>. </p>
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<a href="https://theconversation.com/ant-group-is-holding-the-biggest-ipo-of-all-time-heres-what-it-is-147403">Ant Group is holding the biggest IPO of all time – here's what it is</a>
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<p>In such a regime, <a href="https://www.wired.co.uk/article/china-social-credit-system-explained">the state is set up to have unlimited access to your data</a>, so the principles upon which western democracies were built do not apply. </p>
<p>Second, in the western world, we traditionally address issues of market domination with antitrust regulations. Antitrust laws have started to hit the superstar economy hard in Europe. Google alone had to pay <a href="https://www.cnn.com/2019/03/20/tech/google-eu-antitrust/index.html">fines of US$9.3 billion</a> in the last three years. </p>
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<img alt="The Google logo on a glass building with trees in front." src="https://images.theconversation.com/files/371998/original/file-20201130-15-1fl41sf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/371998/original/file-20201130-15-1fl41sf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=411&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371998/original/file-20201130-15-1fl41sf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=411&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371998/original/file-20201130-15-1fl41sf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=411&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371998/original/file-20201130-15-1fl41sf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=517&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371998/original/file-20201130-15-1fl41sf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=517&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371998/original/file-20201130-15-1fl41sf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=517&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Google’s headquarters in Mountain View, Calif.</span>
<span class="attribution"><span class="source">(AP Photo/Marcio Jose Sanchez)</span></span>
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<p>However, antitrust measures have so far not been very effective given there’s little room for action — it’s either none at all or breaking up companies, which authorities are often hesitant to do. </p>
<p>Examples of such limited success from the past are <a href="https://www.latimes.com/archives/la-xpm-1992-12-30-me-2389-story.html">Standard Oil and, later, AT&T</a>. Standard Oil served America as a monopoly before it was broken up into 34 smaller companies in 1911. Many of these companies are known today under the names Chevron, ExxonMobil, BP and Marathon. Decades later, AT&T was also broken apart into seven smaller, regional companies.</p>
<p>The west also seems ill-equipped to regulate new markets that have emerged outside the traditional boundaries of an industry, including the highly digitized sectors that were fuelled by the growth of the internet over the past few decades. </p>
<h2>New ideas needed</h2>
<p>Antitrust regulations for tech companies in the post-pandemic era need to change. Restricting networked companies to expand beyond their core business, and preventing mergers and acquisitions that inhibit the self-regulating character of markets, could increase the competitive forces in the market. </p>
<p>For example, Amazon as a platform for connecting buyers and sellers has transformed how we buy things. However, there is an obvious conflict of interest and a threat to competition when Amazon offers their own products on their own platform. Microsoft, as a provider of the most popular operating system for computers in the world, is a threat to competitors by offering its own browser.</p>
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<img alt="A woman gestures while speaking in front of an Amazon sign." src="https://images.theconversation.com/files/371990/original/file-20201130-17-ldangz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/371990/original/file-20201130-17-ldangz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=366&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371990/original/file-20201130-17-ldangz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=366&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371990/original/file-20201130-17-ldangz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=366&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371990/original/file-20201130-17-ldangz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=460&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371990/original/file-20201130-17-ldangz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=460&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371990/original/file-20201130-17-ldangz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=460&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Margrethe Vestager, vice-president of the European Executive, speaks during a news conference regarding an antitrust case with Amazon at EU headquarters in Brussels on Nov. 10, 2020. Amazon is accused of using data to gain an unfair advantage over merchants using its platform.</span>
<span class="attribution"><span class="source">(Olivier Hoslet, AP)</span></span>
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<p>There is no harm in restricting superstar firms to their core businesses, but a lot of harm when we don’t.</p>
<p>Regulators need to better understand the innovative forces in industries and markets to prevent anti-competitive behaviour rather than looking at traditional measures like market share. More competitive markets would offer better outcomes for consumers. </p>
<p>Better antitrust measures also require applying national data security laws. In practice, this would mean that all online platforms need to fulfil the national regulations in the markets where they’re doing business as opposed to only in their home countries. These ideas are currently being advanced in Europe and will likely be a game-changer for tech giants.</p>
<p>A localized market approach could also reduce the effect of data breaches. Competition would become healthier as well, because superstar firms couldn’t impose the rules of the game in the same way anymore. </p>
<p>We must better define the role of superstars in our economies and decide whether it’s wise to readjust our market principles to accommodate tech giants, or whether we should restrict tech giants to adhere to our market principles. </p>
<p>Capital-rich investors will certainly enjoy reaping the benefits from accommodating the Googles and Amazons of the world but the average customer likely won’t.</p><img src="https://counter.theconversation.com/content/143667/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Felix Arndt 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>Tech giants are not just surviving the pandemic; they’re thriving. In 2021 and in the post-pandemic era, anti-trust regulations in tech must be revamped.Felix Arndt, John F. Wood Chair in Entrepreneurship, University of GuelphLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/618662016-07-10T06:03:38Z2016-07-10T06:03:38ZRemind me again, what did the Coalition promise during the election campaign?<figure><img src="https://images.theconversation.com/files/129058/original/image-20160702-18294-9xtlnr.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C1522%2C995&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">After days of waiting, Malcolm Turnbull will form a government.</span> <span class="attribution"><span class="source">AAP/Lukas Coch</span></span></figcaption></figure><p><em>After a protracted wait Bill Shorten has conceded the election to Malcolm Turnbull, meaning the Coalition will form government. The Conversation’s editors have assembled a guide to what the Coalition says it will do in 11 key policy areas.</em></p>
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<p><iframe id="tc-infographic-197" class="tc-infographic" height="800" src="https://cdn.theconversation.com/infographics/197/b2b0c056c7d030d3c6f04633950ea4f6c9d0b75a/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/61866/count.gif" alt="The Conversation" width="1" height="1" />
What did the Coalition promise during the campaign in 11 key policy areas, from health to infrastructure to jobs?Michael Courts, Deputy Section Editor: Politics + SocietyEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/581532016-05-03T10:49:30Z2016-05-03T10:49:30ZGovernment pitches for ‘integrity’ in tax and super: experts respond<p>In its 2016-17 budget the federal government has released a raft of new measures that it says will help modernise and build integrity into Australia’s tax and superannuation systems.</p>
<p>Small business will be the biggest beneficiary of the measures, while high-income earners building their super for wealth creation will be targeted to help the government raise A$2.9 billion.</p>
<p>From July 1 this year, businesses with turnover of less than $10 million per annum will pay a reduced tax rate of 27.5%. The same rate will only kick in for large companies (with turnover of $1 billion or more) in 2023. The tax rate for businesses both big and small will only hit the headline 25% rate in 2026.</p>
<p>The instant asset write off for small businesses will be extended to businesses with turnover of up to $10 million per annum, and the government will undergo a trial of simpler business activity statements.</p>
<p>The government claims these tax measures will contribute to a 1% increase in GDP, according to Treasury modelling.</p>
<p>There’s little in the way of tax cuts for individuals however, apart from a move on bracket creep that will increasing the upper limit for the middle income tax bracket that pays 37 cents in the dollar from $80,000 to $87,000 per year.</p>
<p>As expected, the government will increase the tax paid on super contributions by those on incomes of $250,000 or more from 15% to 30%. A range of other caps and reductions in concessions aimed at high-income earners will deliver the government revenue to extend the low income super tax offset. This will allow those on incomes of $37,000 or less to receive a refund of tax paid on concessional contributions up to $500.</p>
<p>And in a bid to help women who have career breaks, the government will introduce “catch-up super contributions” that will allow unused concessional contributions to be carried forward for up to 5 years for those with super balances of $500,000 or less.</p>
<p>A new “Diverted Profits Tax” will hit companies found shifting profits offshore with a tax rate of 40%. This is expected to raise $200 million by 2019. The government will also increase penalties for large companies that lodge their tax returns late, and fund a “tax avoidance taskforce” that’s expected to help the government raise $3.7 billion over the next four years. It will also strengthen protection for whistleblowers who report tax avoidance.</p>
<p>There will be four annual 12.5% increases in tobacco excise from 2017, which will help the government raise $4.7 billion. This measure will be backed up with a $7.7 million “strike team” to crack down on illegal tobacco activity.</p>
<p>Our experts respond below.</p>
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<h2>What changes will be made to superannuation tax?</h2>
<p><em>Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School</em></p>
<p>The superannuation package will deliver a significant redistribution through scaling back the tax concessions available to people with high superannuation balances and/or the capacity to make substantial contributions to superannuation. The measures, with the exception of the lifetime cap, will commence from 1 July 2017. </p>
<p>The good news is the restoration of a tax offset for low income earners with income of less than $37,000 pa. The new Low Income Superannuation Tax Offset (LISTO) is very similar to the LISC: although the method of calculation is different, it will reduce any tax paid by the fund by up to $500 as long as a concessional contribution has been made during the year. </p>
<p>As expected, the concessional contributions cap has been reduced, although the new contribution is cap of $25,000 is at the higher end of the predictions. This is effectively reduces the current cap by $5,000 pa for people under 50, and $10,000 for people over 50. This cap can also be rolled over to assist people who have interruptions to their workforce participation, as long as their superannuation account balance is less than $500,000.</p>
<p>An associated measure will allow additional tax deductions for people who may not have been able to access the cap. This could arise where an employer will not allow salary sacrificing, or where a person has some income from paid employment but the balance of their income is from self employment. In such cases a person could not claim a tax deduction on topping up their superannuation so that additional contributions were treated as non-concessional contributions. This measure will allow consistent treatment across contributions.</p>
<p>The work test is being withdrawn so that people aged over 65 will no longer have to show that they are gainfully employed, which will allow either concessional or non-concessional contributions to be made up to the age of 75.</p>
<p>The non-concessional cap is being completely restructured. Under the rules that were in place prior to budget night a person could contribute up to $180,000 a year, or $540,000 every three years under the bring-forward rule. </p>
<p>With effect from Tuesday 3 May, the cap has been converted to a lifetime cap of $500,000. This will include all non-concessional contributions made since 1 July 2007, although if the cap has already been reached there will be no penalty imposed. However in future if a person breaches this cap it will be required to be withdrawn or subject to penalty tax.</p>
<p>Other measures to reduce the tax benefits to high income earners are the lowering of the income threshold where contributions are subjected to the higher 30% tax rate to $250,000. However there is a new proposal to limit the tax exemption of superannuation in retirement phase when the member has a balance of more than $1.6m in assets. If a member balance is more than $1.6m, the surplus needs to be left in accumulation phase where it is subject to 15% tax, or penalties will apply. Assets that are used to support transition to retirement income streams are also to be taxed at 15% in the superannuation fund.</p>
<p>In addition to the rollover of concessional contributions, a spouse can receive a tax offset of up to $540 for contributions made on behalf of a spouse who earns less than $37,000 – increased from $10,800. The low income threshold resulted in the existing concession being underutilised. However there is no superannuation guarantee requirement on paid parental leave. </p>
<p>Overall, the package is progressive. The government has estimated that the net increase to the revenue is $2.9bn after redistributing over $3bn to low income earners and in removing some anomalies.</p>
<p>There is evidence that high income earners will continue to save in other environments. The test will be how much of the savings is switched to productive income, and how much goes to other tax shelters, such as the property market.</p>
<h2>How will tax excises change and what will this mean for the cost of alcohol and cigarettes?</h2>
<p><em>Megan Vine, Law Lecturer, UNE</em></p>
<p>The proposed a 12.5% annual increase in tobacco excise over the next four years to 2020, will act as a continuation of the same increase over the previous four years introduced by the Labor government. If <a href="https://theconversation.com/labor-would-slug-smokers-to-boost-revenue-improve-health-51136">previous estimates</a> are correct this means a 25-cigarette pack will cost approximately $40 by 2020. In addition to increases in tobacco tax the government will be decreasing the duty free tobacco allowance in Australia from 50 cigarettes to 25 cigarettes or equivalent.</p>
<p>There will be no changes to excise tax rates for alcohol or fuel and no changes to the way in which wine is taxed. This means inconsistencies in the current tax arrangements for alcohol, where rates of taxation vary considerably for different types of alcoholic beverages will not be addressed by the current budget.</p>
<p>However, as part of its Ten Year Enterprise Tax Plan, the current brewery refund scheme, which provides a refund to independent breweries of 60% of the excise duty paid up to a maximum of $30,000 per financial year, will be extended to domestic distilleries and producers of low strength fermented beverages such as non-traditional cider from 1 July 2017.</p>
<p>Further in response to integrity concerns the government will be reducing the wine equalisation tax (WET) rebate cap from $500,000 to $350,000 on 1 July 2017 and to $290,000 on 1 July 2018 and will be tightening eligibility criteria from 1 July 2019. Hopefully these changes will have some impact on the distorting effects of the rebate discussed in the Senate Committee <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/Australian_wine_industry/Report/c02">report</a> into the grape and wine industry. The Government will also be providing $50 million over four years to the Australian Grape and Wine Authority to promote wine tourism within Australia and Australian wine overseas to benefit regional wine producing communities. While changes to eligibility will likely be welcomed by the wine industry the reduction in the cap may impact smaller producers. </p>
<h2>Will there be a new Australian Google tax to crack down on tax avoidance?</h2>
<p><em>Antony Ting, Associate Professor, University of Sydney</em></p>
<p>The government has introduced the Multinational Anti-Avoidance Law (MAAL), commonly known as the Google Tax, effective from 1 January this year. The MAAL is designed to deal with tax avoidance structures of multinational enterprises such as Google and Microsoft.</p>
<p>Early signs suggest that the MAAL has both positive and negative impact on the behaviour of MNEs. On the positive side, many multinationals have proactively initiated discussion with the Australian Taxation Office with the intention to ascertain whether they will be subject to the MAAL, and if so, to explore how they should restructure to comply with the law. An obvious positive result of the MAAL is that Google recently announced that it will <a href="http://www.afr.com/business/media-and-marketing/google-australia-pays-more-tax-questions-remain-over-revenues-20160429-goiars">restructure its operations</a> and commence to pay more tax in Australia in 2016 </p>
<p>On the negative side, the ATO has recently <a href="https://www.ato.gov.au/law/view/document?DocID=TPA/TA20162/NAT/ATO/00001">released a tax alert</a> to warn multinationals that it is aware that some have entered into “artificial and contrived arrangements to avoid the application of the MAAL”. </p>
<p>The silver lining of this development is that it suggests that the ATO appears to be on top of the issue and the release of the tax alert is likely to have some deterrent effect to curb the zest for aggressive tax planning by multinationals with respect to the MAAL.</p>
<p>To further strengthen the tax law on this front, the Treasurer announced in the Budget that the government will introduce an even stronger anti-avoidance law, a new Diverted Profits Tax (DPT). The new tax will be effect from 1 July 2017. Its design follows largely the DPT <a href="https://theconversation.com/amazon-shows-google-tax-can-work-despite-arguments-against-it-43545">introduced in the UK last year</a>.</p>
<p>The new DPT will have a wider scope than the MAAL. It will apply to large multinationals (with a global revenue of at least $1 billion) if among other things, a multinational has artificially shifted profits from Australia and the foreign tax paid on that profits is less than 80% of the Australian tax otherwise payable. </p>
<p>In other words, if the profits are shifted to a jurisdiction with a corporate tax rate of less than 24%, the DPT may apply. This threshold will cover most of the low tax countries commonly used by multinationals in their tax avoidance structures.</p>
<p>If properly designed, the new DPT is likely to have strong deterrent effect. This is because its tax rate is 40%, which is 10% higher than the standard corporate tax rate in Australia. The experience in the UK with its version of the DPT suggests that this penalty rate will be an important factor for MNEs to consider before entering into aggressive tax avoidance structures.</p>
<p>The new DPT is a welcome move by the government to combat tax avoidance by multinationals.</p>
<h2>Do the tax changes represent real reform?</h2>
<p><em>John Freebairn, Professor, Department of Economics, University of Melbourne</em></p>
<p>The Treasurer has proposed tax reforms which in aggregate are approximately aggregate revenue neutral. The question then is will the reforms reduce distortions to productive decisions to work, invest and spend, and what are the implications for distribution of the tax burden?</p>
<p>The decision to extend special tax concessions to small businesses (a lower rate of 27.5%, immediate write-off for investments less than $20,000, and extend the small business definition from turnover of $2 million to $10 million) while maintaining the current higher taxation of larger businesses might be politically popular, but it involves a revenue loss for no productivity gains. While the Treasurer indicated funds to pay for the current changes, mostly from greater integrity of the taxation of multinational companies. However, no indications were given for funding to extend the 27.5% rate to all businesses by 2023-24. </p>
<p>There is no compelling evidence that small businesses are more or less important or successful than large businesses in creating jobs, developing and implementing new products and production processes. There are many examples of successes and failures across both small and large businesses. The revised $10 million cut-off for the concessions is just as arbitrary as the preceding $2 million number. A more nationally productive reform would have identical and lower tax rates on comprehensive business income tax bases independent of size.</p>
<p>Budget proposal to reduce some of the tax concessions for superannuation for high income earners and use the revenue saved to raise the personal income tax bracket from an annual income of $80,000 to $87,000 for those on upper middle and above incomes represents a very tentative move towards a more equitable and less distorting system of personal income taxation. Of course, part of the change is no more than a return of bracket creep and the associated increase of average tax rates for all. </p>
<p>Those who are making large superannuation contributions will lose more from the reduced concessions than the gain from the lower tax rates. For many with average decisions the gain and loss will roughly cancel. A broad and comprehensive labour income tax base would tax all forms of remuneration, including super and fringe benefits, the same as wages and salary income. The broader base and lower rate approximately revenue neutral package would reduce distortions to decisions to work and encourage participation.</p>
<p>The Treasurer in defending no changes to the lower income tax brackets fell back on the argument that these people received income tax cuts as compensation for the carbon tax introduced in July 2012. Bracket creep is causing larger increases in average tax rates for the two-thirds of taxpayers with incomes below average weekly earnings. When the carbon tax was removed in July 2014, the income tax cuts were retained. This seems a tough equity argument to sell.</p><img src="https://counter.theconversation.com/content/58153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson receives funding from AHURI. Helen Hodgson is a member of the ACOSS Tax Advisory Panel and the NFAW Social Policy Committee. Helen Hodgson was a member of the WA Legislative Council between 1997 and 2001 as an Australian Democrat. She is not currently a member of any political party.</span></em></p><p class="fine-print"><em><span>Antony Ting has received research funding from CAANZ. </span></em></p><p class="fine-print"><em><span>John Freebairn and Megan Vine 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>Wins for small business; significant superannuation reform; multinational tax avoidance addressed; and more.Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin UniversityAntony Ting, Associate Professor, University of SydneyJohn Freebairn, Professor, Department of Economics , The University of MelbourneMegan Vine, Law Lecturer, University of New EnglandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/554132016-02-26T15:27:02Z2016-02-26T15:27:02ZGoogle tax deal sparks frustration as UK MPs struggle with information void<figure><img src="https://images.theconversation.com/files/113066/original/image-20160226-26697-1mz17ix.jpg?ixlib=rb-1.1.0&rect=1%2C1%2C1022%2C702&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shedding little light. Google under scrutiny.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/wwarby/3892695545/in/photolist-6VZ5Lr-GYR47-dq2qko-8YgUu-ebN4ta-ixDqJN-feoXuX-dPfQQ9-kfxq5F-dRT7eB-pApJ5e-rtdFen-9tHezG-82nDFX-t8d8A-8S6yC-nyk3BG-7mhJW5-3B4hy6-rLEmSX-AnamKK-7Hda6u-33Wab-uFbdLX-9Y9uz9-83UyHn-eQFBVi-dCm1CM-cC3HD7-QqVsf-dY2gYF-jENtjb-646ynp-yxTqtv-iMX1f6-7WEiKe-dK1VUE-r68j2x-s3b28v-dV3ghy-cJronE-nWDvpe-2XV9qC-HGmDx-fKcLAV-fKxWWF-9khJux-6W49gq-sv6M9-s8gCBQ">William Warby/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Google’s tax deal with the British government came under renewed scrutiny from both the heart of parliament, and from across the English Channel. As the public accounts committee was revealing its misgivings and frustrations about the <a href="http://www.publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/788/788.pdf">£130m settlement</a>, news broke that France would be seeking <a href="http://www.bbc.co.uk/news/business-35655743">€1.6 billion</a> from the internet company. </p>
<p>The committee concluded that although the settlement seemed “disproportionately small” it was impossible to determine if it was fair to taxpayers. The truth is that without a better understanding of the flows of global money at multinationals, no one really knows who owes what, or to whom. </p>
<p>The committee report has highlighted public anger but is light on suggested wider reforms. Its call for greater transparency signals why it had such trouble. MPs were hindered by the statutory obligation of taxpayer confidentiality, with Google providing a limited amount of additional information which was simply not enough for the committee to conduct a full assessment. No surprise then that one of its recommendations is that the HMRC tax authority consult widely to alter the rules protecting corporate taxpayer confidentiality</p>
<p>HMRC also received criticism about how the investigation was carried out, and was urged to devote resources to ensure investigations are completed in a timely manner, while being clearer about the costs and benefits of its investigations.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=500&fit=crop&dpr=1 754w, https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=500&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/113072/original/image-20160226-26701-1fqiwy2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=500&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Writing on the wall?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/42231620@N07/4152809148/in/photolist-7jYetJ-7jYewy-7jUkpz-7jUkw4-7jYeCQ-7jYesb-7jUktZ-7jUkya-7jUkxr-7jYey9-7jYezw-7jYeqf-7jUkCF-7HMYsK-r9NFyB-rqQeES-qwkCGv-bms6Hw-bms6KJ-bzmXZn-3Kr68G-bms6MC-8s4soa-3Kr6wJ-H5WeB-arfpgM-6CLPK7-4PvHT8-8LV3f-e2UPqE-8s4sqe-8s7vdb-5h5AN5-3Kr6KN-8LV1F-4tP8EQ-GMox4-GMowt-Dfabwo-DvS6Qj-GMmub-GMoyD-2U2HR-8EdWLi-GMozT-fcBKug-dMJvs3-oKCrDW-8s7Ve5-nRMayG">abductit</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Although many have <a href="https://theconversation.com/google-deal-in-defence-of-the-taxman-54582">defended the actions of HMRC</a> the committee report found several areas of contention. The Google case was centred on complex <a href="https://www.gov.uk/guidance/transfer-pricing-transactions-between-connected-companies">“transfer pricing” rules</a> which govern how companies deal with transactions between its divisions. A good example is the perfectly legal “double irish” <a href="https://theconversation.com/irelands-move-to-close-the-double-irish-tax-loophole-unlikely-to-bother-apple-google-33011">scheme</a> <a href="http://www.ft.com/cms/s/0/ba95cff0-4fcd-11e4-a0a4-00144feab7de.html#axzz41Gz5Qs17">used by Microsoft, Google and others</a>. </p>
<p>According to HMRC, the average duration of a transfer pricing investigation is 22 months, yet the Google investigation took six years. You might argue that HMRC should take its time to reach an accurate settlement figure, rather than rush to incomplete assessments, but it couldn’t provide the committee with the total cost of the investigation, which meant MPs were able to question HMRC’s broader claim that it recoups £75 for every £1 spent.</p>
<p>The committee also took exception to Google’s calls for tax simplification and public statements that “governments make tax law, the tax authorities independently enforce the law, and Google complies with the law”, contrasting this with its admission that it would not be altering its business practices. The committee report said:</p>
<blockquote>
<p>Google told us that it had ‘looked at our structures to make them simpler and clearer,’ but admitted that nothing of substance had changed in how it organises its tax affairs as a result of HMRC’s investigation.</p>
</blockquote>
<h2>Information void</h2>
<p>The main source of ire from the committee related to the lack of information available as opposed to the actual amounts involved. There needs to be a large amount of trust placed in HMRC that the calculation was correct, which is frustrating to the public and to the parliamentary committee. There are moves to take action, and the report makes note of the <a href="https://www.gov.uk/government/news/government-ramps-up-efforts-to-tackle-digital-multinational-tax-risks">“E6 project”</a> with other tax authorities designed to address the problem of digital multinationals shifting profits to tax havens.</p>
<p>In April, the European Commission will announce plans to ensure multinationals with annual turnover above €750m to <a href="http://www.theguardian.com/world/2016/feb/07/eu-multinationals-tax-arrangements-us-google-amazon">disclose their tax bills</a>. </p>
<p>Beyond these measures, however, the report recommendations do have flaws in assuming HMRC is able to allocate further resources in this area. HMRC’s overall budget has been reduced over a <a href="http://www.telegraph.co.uk/finance/economics/11989681/HMRC-to-merge-170-offices-into-13-hubs-as-part-of-major-overhaul.html">number of years</a>. In order to conduct complex transfer pricing investigations the department must be properly resourced. The report acknowledges this disparity yet assumes more resources can be allocated.</p>
<p>Other potential reforms were also overlooked. There have been calls to change the focus <a href="http://www.telegraph.co.uk/technology/2016/02/01/lord-lawson-google-tax-row-shows-that-corporation-tax-has-had-it/">to taxing sales</a> within a country, a suggestion that the report failed to address. In addition, other departments may be able to assist HMRC in its operations, for example <a href="http://www.ft.com/cms/s/0/c2ef60b2-dafa-11e5-98fd-06d75973fe09.html?siteedition=uk#axzz417DTPTDb">Judith Freedman has suggested</a> that a branch of the National Audit Office could provide scrutiny expertise in a system similar to the US’ <a href="https://www.jct.gov/">Joint Committee on Taxation</a>. </p>
<h2>Penalties</h2>
<p>Despite the problems, HMRC was confident that it had obtained the full tax due based on the evidence. It couldn’t however sanction Google for underpayment as part of the settlement. To do that, HMRC must not only demonstrate that the amount of tax paid was incorrect, but also demonstrate that insufficient care was taken in <a href="http://www.hmrc.gov.uk/manuals/chmanual/CH81120.htm">producing the self-assessment</a>. </p>
<p>That’s why the committee of MPs indicated strong support for the introduction of <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483488/Draft_clause_70_-_1.pdf">a clause to the Finance bill (2016)</a> which would remove the insufficient care element and would allow HMRC to apply penalty payments in similar cases in the future. Of more concern to Google will be a suggestion that HMRC should monitor the outcome of other tax authorities’ investigations into the company, and re-open its own probe if new evidence becomes available. That made the French move all the more interesting.</p>
<p>The committee’s final recommendation is a simple one. HMRC should press for changes in international tax rules. And in truth, there have been efforts globally to combat tax avoidance and tax evasion, for example <a href="http://theconversation.com/multinationals-unfazed-by-g20-tax-crackdown-23421">at the G20</a> and <a href="http://theconversation.com/oecd-plan-means-governments-no-longer-taxing-in-the-dark-48681">by the OECD</a>. Domestically, the diverted profits tax, the so-called “Google Tax”, which came into effect in April 2015 is <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443232/50325_Summer_Budget_15_Web_Accessible.pdf">forecasted to raise £300m in 2016-17</a>. </p>
<p>And yet aggressive tax planning by multinational companies remains. This leads to the argument that the means by which to ensure full payment of taxes is to <a href="http://theconversation.com/if-you-want-google-to-pay-more-tax-change-the-law-53669">change the law accordingly</a> and to actively enforce regulation in the most transparent way possible. Otherwise, we can expect more frustrated MPs on parliamentary committees publishing critical reports long into the future.</p><img src="https://counter.theconversation.com/content/55413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Randall 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>Scutiny of the £130m settlement leaves the Public Accounts Select Committee
struggling to follow the HMRC strategy.Michael Randall, PhD Candidate in European Law, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/538762016-02-24T19:02:47Z2016-02-24T19:02:47ZWhen ‘innovation’ fails to fix our finances<p>One of the most unassailable <a href="https://theconversation.com/translated-the-baffling-world-of-business-jargon-52795">buzzwords</a> of our time is “<a href="http://www.theatlantic.com/business/archive/2013/06/innovation-the-history-of-a-buzzword/277067/">innovation</a>”. We are repeatedly told that our economies aren’t working properly simply because we aren’t “getting enough <a href="http://www.wsj.com/articles/SB10001424052702304791704577418250902309914">innovation</a>” these days. </p>
<p>However, what our singular attention to the innovation <a href="http://link.springer.com/chapter/10.1007/978-0-387-35634-1_2">mantra</a> misses is that the knowledge economy is <a href="http://www.emeraldinsight.com/doi/abs/10.1108/EUM0000000005869">harder to measure</a>, and therefore to tax.</p>
<p>The very aspects that define the knowledge economy are the ones that make it so difficult to tax. These include its <a href="http://www.emeraldinsight.com/doi/abs/10.1108/13683040410524702">intangible nature</a>, <a href="http://www.jstor.org/stable/2118291?seq=1#page_scan_tab_contents">global structure</a> spread across <a href="http://www.sciencedirect.com/science/article/pii/S0165410101000453">multiple jurisdictions</a> and its seemingly endless components, including: information, bio and financial technology “<a href="http://www.inc.com/magazine/201509/maria-aspan/2015-inc5000-fintech-finally-lifts-off.html">fintech</a>”, smart renewables and cities, social networks, and the <a href="http://search.proquest.com/openview/00c3f127a46b194079e4a02ab4e2b12d/1?pq-origsite=gscholar&cbl=27157">sharing economy</a>.</p>
<p>The knowledge economy is now a <a href="http://grattan.edu.au/wp-content/uploads/2014/07/814-mapping-australia-economy.pdf">defining factor</a> for countries around the world. If fiscal policy regulation does not catch up, the gap between the outcomes for financially successful multinational companies and the broader society will only <a href="http://www.jstor.org/stable/29737691?seq=1#page_scan_tab_contents">widen</a>.</p>
<p>A very recent example of this fiscal challenge can be seen in the <a href="http://bloombergview.com/articles/2016-01-28/the-u-k-gives-google-a-sweetheart-tax-deal">lenient tax deal</a> the UK government signed with Google, a vanguard of the knowledge economy, for a paltry 130 million pounds. This amount was seen by many policymakers as “<a href="http://www.bloomberg.com/news/articles/2016-01-26/mcdonnell-presses-osborne-over-google-s-derisory-u-k-tax-deal">derisory</a>”, although Google insists that the deal is fair.</p>
<p>Another example is the comparison of the finances of the State of California as opposed to its residing Silicon Valley tech giants. Whereas the State of California has suffered from budget difficulties for decades and considers maintaining fiscal balance to be “<a href="http://www.ebudget.ca.gov/FullBudgetSummary.pdf">an ongoing challenge</a>”, the Silicon Valley companies <a href="http://www.forbes.com/sites/liyanchen/2015/10/27/apple-still-leads-cash-rich-silicon-valley-nearly-doubling-microsoft/#44aea08e16a8">have more cash</a> than they know what to do with. </p>
<p>Turning innovation into a <a href="http://www.econstor.eu/handle/10419/108180">vehicle</a> for broader prosperity requires that both the redistribution of taxation and increasing the amount of public services offered, in accordance with the notion of <a href="https://www.kpmg.com/Ca/en/External%20Documents/Tl0408-Tax-Transparency-Report-Final-Web.pdf">tax morality</a>, which argues that there is a normative, moral imperative for large economic entities to contribute to the tax base.</p>
<p>To implement this, financial regulators must adapt to the demands of the digital age, and engage in responsible and active oversight of the knowledge economy. In the case of the Google-UK debate, it was the <a href="http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/112/11202.htm">Parliamentary Accounts Committee</a> that acted as a vehicle of <a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/tax-avoidance-google/">fiscal scrutiny</a>. <a href="http://siteresources.worldbank.org/EXTPARLIAMENTARIANS/Resources/Legislatures_and_Oversight.pdf">Legislative involvement</a> in budgetary oversight is more necessary now than ever.</p>
<p>Additionally, institutions that are responsible for financial regulation need to collaborate at an international level if they are to increase <a href="http://www.parliamentarystrengthening.org/budgetmodule/additionalresources/supplemental/The%20Legislature%20and%20the%20Budget%20by%20Rick%20Stapenhurs.pdf">democratic leverage</a> on behalf of citizens.</p>
<p>There is a negative backlash to all this, as explained by the economic phenomenon of <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=927478">tax reactance</a>, whereby taxes are perceived as a threat to the exercise of individual freedom, this includes increasing profit. This <a href="http://www.wired.com/2015/04/big-tech-companies-make-tax-bills-vanish/">inflexibility</a> helps to explain in part the low effective tax rates paid by many large participants in the knowledge economy.</p>
<p>All this is not to imply in any way that the rate of innovation in society should be slowed or stalled. Instead, it is important for fiscal policy to innovate in tandem with the rest of the participants along the <a href="http://journals.ama.org/doi/abs/10.1509/jmkg.69.3.152.66361">technological curve</a>.</p>
<p>There is some room for optimism. Some <a href="https://theconversation.com/amazon-shows-google-tax-can-work-despite-arguments-against-it-43545">recent cases,</a> including Amazon, show technology companies can be made to contribute to the tax framework. Furthermore, the OECD has been at the <a href="http://www.oecd.org/ctp/BEPSActionPlan.pdf">forefront</a> of designing an action plan for addressing tax base erosion.</p>
<p>The question that we must ask is: <a href="http://www.sciencedirect.com/science/article/pii/S0048733306001399">how many</a> lenient tax deals are governments willing to offer before driving more concerted reform?</p><img src="https://counter.theconversation.com/content/53876/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Usman W. Chohan 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 rest of society won’t see the benefits of innovation until governments figure out a way to effectively tax the knowledge economy.Usman W. Chohan, Doctoral Candidate, Economics, Policy Reform, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/545822016-02-11T13:39:20Z2016-02-11T13:39:20ZGoogle deal: in defence of the taxman<figure><img src="https://images.theconversation.com/files/111122/original/image-20160211-29185-7v17yy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">YanLev/Shutterstock</span></span></figcaption></figure><p>Google came under a <a href="http://www.theguardian.com/technology/2016/feb/04/google-uk-tax-deal-share-options-scheme">barrage of criticism</a> for paying less than its “fair share” of tax and HMRC has been accused of being soft or incompetent for the “<a href="https://theconversation.com/if-you-want-google-to-pay-more-tax-change-the-law-53669">sweetheart deal</a>” it negotiated. </p>
<p>Publicly available information is not sufficient to judge whether this is a “good” or “bad” deal for the UK. Critics have no way of knowing if HMRC interpreted and applied the law correctly and neither do we. But we need to look at some context.</p>
<p>When <a href="http://press.labour.org.uk/post/138086048999/john-mcdonnell-writes-to-osborne-for-answers-over">writing to the chancellor of the exchequer</a> on the matter, John McDonnell, the shadow chancellor, noted that there had “been much comment and discussion about the rights and wrongs of this case specifically, as well as the general principle of large companies being able to negotiate settlements such as this with the UK’s tax authorities”. Settlements are clearly viewed with suspicion in some quarters. The term often used to describe such settlements – “sweetheart deals” – has clear undertones of impropriety and favouritism. Settlements have been portrayed as a luxury afforded to large multinationals to negotiate down the amount of tax due.</p>
<p>In fact, there is nothing untoward or suspect in settlements; settlements are a legitimate feature of a tax system and facilitate its smooth operation. Given the number of taxpayers under HMRC’s charge, the number of issues on which a single taxpayer and HMRC can disagree, the limitations of time and resources, and the genuine uncertainty surrounding such issues, it is only reasonable for HMRC to seek to reach agreement.</p>
<p>But why do HMRC and taxpayers disagree so often on the tax due under the law? This is partly because some taxpayers push the law to the limit, but also because tax law is uncertain and the associated processes that are used to establish a tax charge, such as valuation, are not exact sciences. The notion that one can plug a series of figures into a tax computation machine and it will spit out the “right” amount of tax due is fanciful. Different people can have wholly respectable but differing views on the interpretation of the law and its application to the facts. It is for this reason that <a href="https://www.supremecourt.uk/cases/docs/uksc-2010-0041-judgment.pdf">judges overturn each other’s decisions</a> – and even the five judges sitting in the Supreme Court at times disagree with each other.</p>
<p>Criticism of this specific settlement was sparked by the “<a href="http://www.theguardian.com/technology/2016/jan/23/google-uk-back-tax-deal-lambasted-as-derisory">derisory</a>” amount of tax paid by Google. We cannot judge if this was due to the wrong or soft application of the law by HMRC, but we know that the <a href="https://theconversation.com/double-trouble-why-landmark-oecd-tax-reform-is-doomed-before-it-starts-48115">current law is inappropriate</a> for taxing multinational companies such as Google. It is not at all surprising that it produces this result. </p>
<h2>Going public</h2>
<p>Some critics have called on the government to <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447313/Improving_Large_Business_Tax_Compliance.pdf">publish the information</a> necessary for the public to assess these settlements, a move that would require a change in the law. This is a questionable idea. One would require voluminous information to properly assess the “correctness” of a multinational’s tax charge, not to mention very significant expertise, time and resources. </p>
<p>More importantly, to properly understand why a company pays a certain amount of tax would require information at a level of detail which runs into confidentiality and competition issues. Making less than this amount of information publicly available is unlikely to be very useful and may easily lead to misinterpretation and misinformation. </p>
<p>What question would we be asking: whether the law was interpreted and applied correctly or whether the “fair share” of tax was paid? If the latter, one has to decide whose idea of fairness ought to apply. Again, two reasonable individuals can disagree on what is fair. And while critics have argued that this kind of transparency is necessary to restore trust in HMRC, this call and its accompanying criticism does the exact opposite – it sends a message to the public that HMRC cannot be trusted to do their job properly.</p>
<h2>Checks and balances</h2>
<p>This is not to say that HMRC will never get things wrong. They will, but we should deal with that by ensuring that internal and external checks are in place to pick up mistakes. Internal checks <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/444911/How_we_resolve_tax_disputes.pdf">have been bolstered</a> in the past few years. This, together with the knowledge that all eyes were on the tax affairs of the big multinationals – but especially Google, Amazon and Starbucks – would make it surprising, if HMRC did not do its job properly when reaching this settlement. Of course, that does not necessarily mean that they did. However, we should keep internal process under review and if necessary improve them further. We should also think more carefully about the need for <em>ad hoc</em> or regular external reviews by the NAO or other independent bodies.</p>
<p>An SDP MP and the Labour Party <a href="http://www.ft.com/cms/s/0/dc1e3cd4-c592-11e5-808f-8231cd71622e.html#axzz3zqniQy5v">have asked the European Commission to investigate</a> whether this settlement breaches state aid rules, which <a href="http://ec.europa.eu/competition/state_aid/overview/index_en.html">forbid government support</a> that gives a company advantages over its competitors. There are serious questions to be raised about the commission’s state aid <a href="http://europa.eu/rapid/press-release_IP-15-5880_en.htm">investigations into the tax affairs of multinationals</a>, but that is beyond the point of this comment. Certainly, the UK cannot rely on the commission to investigate the tax affairs of multinationals operating in the UK who appear to pay less than their “fair share”.</p>
<p>Surely, it must be more sensible and sustainable in the long term to ensure that the internal and external review processes in the UK are up to scratch. We must also improve the tax law itself. These steps, and not the current criticism of HMRC, will lead to a better tax system and restore the public’s trust in it.</p><img src="https://counter.theconversation.com/content/54582/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Centre for Business Taxation receives funding from the ESRC and various companies from the Hundred Group. A full list is available on the CBT's website: <a href="http://www.sbs.ox.ac.uk/ideas-impact/tax/about/funding">http://www.sbs.ox.ac.uk/ideas-impact/tax/about/funding</a></span></em></p>The finger of blame has been pointed at HMRC over the multinational’s ‘sweetheart deal’. That’s not fair.John Vella, Associate professor and Senior Research Fellow at the Oxford University Centre for Business Taxation (CBT), University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/511112015-11-30T19:19:53Z2015-11-30T19:19:53ZExplainer: how Uber and Airbnb are reducing their Australian tax bill<p>The current international tax regime was developed in the last century when the internet was not yet invented. At that time, a foreign company would typically require a substantial physical presence in Australia before it could be in a position to earn significant amount of income from Australian customers. This is what’s known in the tax world as permanent establishment. </p>
<p>The concept of permanent establishment is embedded in most domestic tax laws as well as virtually all the 3,000 plus tax treaties in the world. It dictates that in general, business profits of a foreign company will be subject to tax in Australia only if the company has a permanent establishment in Australia. In other words, the ATO cannot tax a foreign company’s profits if it has no permanent establishment in Australia. </p>
<p>The recent <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Public_Hearings">hearings</a> of the Senate inquiry into corporate tax avoidance made it clear the tax structures of Uber, Airbnb, like their older peers Google and Microsoft, are designed to ensure income from Australian customers is earned by a foreign company that does not have a permanent establishment here. The permanent establishment concept is not effective for today’s digital economy.</p>
<h2>Uber’s business and tax structure</h2>
<p>Take Uber, which though established in the US, has a wholly-owned subsidiary in the Netherlands, which in turn has a wholly-owned subsidiary in Australia.</p>
<p>The most important asset of Uber is its digital platform that supports the app linking individual drivers and their customers. It’s unlikely this app was developed in the Netherlands. Despite this, Uber-Netherlands has the right to book income generated from customers in Australia.</p>
<p>For example, if a customer pays $100 for a ride in Sydney booked through the Uber app, the money is in fact paid to Uber-Netherlands. Out of the $100, Uber pays the driver about $75. The gross profit of $25 is booked in the Netherlands. This is so even though the transaction happens largely in Australia, including the driver, the customer and the ride.</p>
<p>Uber-Australia receives a service fee from Uber-Netherlands for its marketing and support services performed in Australia. The fee is determined based on the operating costs of Uber-Australia, plus a mark-up of 8.5%. The mark-up is effectively the taxable profit of Uber in Australia under its tax structure.</p>
<h2>Airbnb’s business and tax structure</h2>
<p>Airbnb, another young business founded in the US, has a structure very similar to that of Uber. Airbnb’s parent company in the US has a wholly-owned subsidiary in Ireland, which in turn has a wholly owned subsidiary in Australia.</p>
<p>Airbnb charges fees to both hosts and guests for accommodation booking through its digital platform. Instead of Airbnb-Australia, Airbnb-Ireland books the fee income generated from accommodation bookings in Australia. This is so even if the host, the guest and the accommodation are all in Australia. For example, if a Sydneysider uses the Airbnb app to book accommodation in Melbourne, the payment is in fact paid to Airbnb-Ireland. The host of the accommodation is then paid by Airbnb-Ireland which charges a fee of 3%.</p>
<p>Airbnb-Australia is responsible for the marketing activities in Australia. It receives a service fee from Airbnb-Ireland for those activities, and the fee is again computed based on its operating costs plus a mark-up.</p>
<h2>Déjà vu – Google and Microsoft</h2>
<p>Comparing the tax structures of Uber and Airbnb with that of Google and Microsoft reveals striking similarities. It suggests that the appetite for tax planning is comparable between established and relatively “young” technology companies. </p>
<p>The common pattern: a parent company in the US establishes wholly owned subsidiaries in market jurisdictions (such as Australia) as well as in low-tax countries. </p>
<p>While the commercial reality is that all companies in a group are effectively one single enterprise, the tax law in general treats each company as a separate taxpayer.</p>
<p>On one hand, the Australian subsidiary typically is responsible for marketing and support services that have to be physically done in Australia, and earns a service fee on a cost plus basis. The amount of profits subject to tax in Australia is usually very small compared to the income generated from Australian customers.</p>
<p>On the other hand, intellectual properties – which are often the most important and valuable assets of technology companies – are located in low-tax jurisdictions such as Ireland, the Netherlands and Singapore. This structure allows those low-tax subsidiaries to book the income generated from customers in Australia, and effectively shields the income from the Australian tax net.</p>
<h2>Policy responses</h2>
<p>Action item 1 of the OECD’s base erosion and profit shifting (“BEPS”) project is “tax challenges of digital economy”. </p>
<p>The original intention of the OECD was to explore how the 20th century international tax regime should be reformed in response to the digital economy in the 21st century. It quickly realised it was extremely difficult, if not impossible, to achieve international consensus on the intended reform. The often conflicting and vested interests among countries present a formidable obstacle to international consensus on meaningful reform of the international tax regime. </p>
<p>Instead of relying on the BEPS project to resolve the issue, Australia has followed the lead of the UK and is in the process of introducing the Multinational Anti-Avoidance Law – commonly known as the <a href="https://theconversation.com/australia-eyes-missing-billions-with-very-own-google-tax-35249">Google tax</a> – to address the issue. As the new law incorporates concepts that are new and untested, it is not clear whether it will be effective. </p>
<p>In any case, it’s important to remember that multinational corporations are very agile. They may replace their “avoided permanent establishment” structures to circumvent any Google tax or to incorporate new tax avoidance tools.</p><img src="https://counter.theconversation.com/content/51111/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 tax law established pre-internet is failing to keep up with the digital economy.Antony Ting, Associate Professor, University of SydneyLicensed 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/396812015-04-02T04:07:22Z2015-04-02T04:07:22ZGoogle tax debate pits corporate ‘thieves’ against state sovereignty<figure><img src="https://images.theconversation.com/files/76844/original/image-20150402-31305-746bni.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Google remains at the centre of international debates over corporate tax practices, but its power should not be underestimated.</span> <span class="attribution"><span class="source">Trey Ratcliff/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>In the lead-up to the May budget Treasurer Joe Hockey is talking tax. Without mincing words he has referred to corporations who don’t pay the “legitimate” amount of tax as <a href="http://www.brw.com.au/p/business/treasurer_joe_hockey_vows_to_tax_7aSliuByAxKONfglufepsJ">“thieves”</a>.</p>
<p>In response it is <a href="http://www.smh.com.au/federal-politics/political-news/joe-hockeys-google-tax-could-derail-international-tax-treaties-budget-office-20150401-1mczq7.html">mooted</a> that Australia will implement a “diverted profits tax”, commonly called a <a href="https://theconversation.com/australia-eyes-missing-billions-with-very-own-google-tax-35249">“Google tax”</a>, levied on revenues that corporations earn in Australia but report overseas.</p>
<p>Hockey’s attack on thieving corporations comes as part of ongoing worldwide debate over the scale and ingenuity of tax avoidance by multinationals. Combatting tax avoidance was, for example, a key topic at last year’s Brisbane G20 meeting and Australia <a href="https://theconversation.com/g20-host-australia-faces-hard-truths-of-multinational-profit-shifting-31514">responded positively</a>.</p>
<p>For Hockey tax avoidance, even within the law, is a matter of justice. He says that paying tax in the country where it was earned “not just an essential tax principle, it is rational and fair”.</p>
<h2>The Google tax</h2>
<p>Google Inc has been central to international debates over corporate taxation practices. In Australia this has concerned the <a href="http://www.smh.com.au/business/google-paying-a-fraction-of-the-tax-in-australia-it-should-20150208-139176.html">billing of revenues to the Singapore business</a> to avail of their lower tax rates. Such matters are currently under consideration by the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance">Senate inquiry into corporate tax avoidance</a>.</p>
<p>In Britain the Public Accounts Committee <a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/tax-avoidance-google/">reported in 2013</a> that instead of paying the standard 20% corporation tax on its US$18 billion UK revenues between 2006 and 2011, Google paid just US$16 million. That is less than 0.1%.</p>
<p>Margaret Hodge, Chair of the committee accused corporate tax avoiders such as Google of being “immoral”. The traditionally right wing UK tabloid The Daily Mail headlined Google as an “illegal tax avoider”.</p>
<p>UK Labour opposition leader <a href="http://www.politics.co.uk/comment-analysis/2013/05/22/ed-miliband-s-google-speech-in-full">Ed Miliband said</a>:</p>
<blockquote>
<p>“When Google goes to extraordinary lengths to avoid paying its taxes, I say it’s wrong.” </p>
</blockquote>
<p>Around the same time Vice Chancellor of Germany, Sigmar Gabriel, slammed Google as an “anti-social” purveyor of <a href="http://graphics.wsj.com/google-vs-eu-meet-the-players/">“brutal information capitalism”</a>.</p>
<p>The diverted profits tax being considered in Australia is based on a similar one announced in the UK in late 2014, and it’s no coincidence it’s been dubbed the “Google tax”.</p>
<h2>Legal but ‘immoral’</h2>
<p>When politicians from both sides of politics start attacking corporations on a global scale something must be amiss. Even more astounding is that these attacks are delivered on moral grounds, replete with references to thieving, wrong-doing and brutality.</p>
<p>In responding to the issues raised about its tax practices, Google has been entirely unrepentant. Rejecting all moral criticisms, Google extols the virtue of what it is doing. “I am very proud of the structure that we set up,”<a href="http://www.smh.com.au/business/world-business/google-on-tax-schemes--its-called-capitalism-20121212-2batw.html"> executive chairman Eric Schmidt said</a> in 2012. “It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”</p>
<p>Google explicitly <a href="http://www.google.com/about/company/philosophy/">states a philosophy</a> that “you can make money without doing evil”.</p>
<h2>More than tax</h2>
<p>There’s clearly a fundamental schism on what counts as being moral for some corporations. </p>
<p>For politicians it is right that corporations make a fair contribution to the states in which they operate through taxation. For corporations what is seen as moral is to pursue the interests of capital through whatever means possible, so long as they adhere to the law.</p>
<p>Responding to the criticisms in the UK, Schmidt stated that “Our position is very simple: taxes are not optional, we pay the mandatory amount”. Perhaps so, but Google’s position is not that simple.</p>
<p>In its submission to Australia’s Senate inquiry Google reminded the government that in a globalised world economy “nations compete for tax revenue”. Such competition, through tax rates and incentives, is clearly the driving force not just for investment, but for where revenues will be booked for tax purposes.</p>
<h2>The power of corporations</h2>
<p>The issues surrounding the Google tax go far beyond matters of public revenue. </p>
<p>What is most telling about the Google case is that it does not divide politicians on either side of politics. In Australia’s case, while the government might still be pronouncing that it is “open for business”, the state still wants its cut of the revenues generated by that opening. Google is saying that’s ok, so long as you compete for it.</p>
<p>Google is not just a paradigm case for tax avoidance, it reflects more generally the changed relationship between the state and the corporation.</p>
<p>Once corporations only existed at the behest of government and in the name of public good. Now they hold the state for ransom with promises of capital investment and tax revenue.</p>
<h2>Tomorrow’s world</h2>
<p>What is really at stake here is the power of democracy in a world where multinational corporations have vastly increased in size and power. </p>
<p>If anything the Google tax is a test case for democracy. A case which sees state power and sovereignty come into direct conflict with corporate might. Australia’s Parliamentary Budget Office has reportedly <a href="http://www.smh.com.au/federal-politics/political-news/joe-hockeys-google-tax-could-derail-international-tax-treaties-budget-office-20150401-1mczq7.html">warned the government</a> it risks breaking Australia’s international tax treaties if it introduces a diverted profits tax. There is a suggestion Australia could provoke “revenge taxes” being imposed on Australian businesses operating overseas if it moves independently on the issue.</p>
<p>How this plays out over the coming months and years may well determine whether the authority of democratically elected governments is superseded by a world reigned over by sovereign corporations beholden only to their own financial interests.</p>
<p>The real moral question is: who will rule the world of tomorrow?</p><img src="https://counter.theconversation.com/content/39681/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carl Rhodes 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>With Australia planning its own Google tax, we’re likely to see state power and sovereignty come into direct conflict with corporate might.Carl Rhodes, Professor of Management and Organization Studies, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.