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AUSTRALIA: More taxing times loom for hi-tech dodgers

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THE AUSTRALIANFEBRUARY 13, 2016 12:00AM

Despite foreign cash reserves of more than $US170 billion ($240bn) — the largest of any company — US tech giant Apple reportedly has borrowed more than $US23bn during the past few years to buy back shares and pay dividends, even paying more in interest than its cash earns.

This is rational for Apple: bringing it home to the US would incur a 35 per cent tax bill, not to mention the benefit of tax deductible interest.

But it represents the largest — and perhaps the easiest to understand — example of multinational tax avoidance, a growing problem the OECD reckons is costing rich-country governments up to $US240bn a year.

How much is slipping through Canberra’s fingers is highly uncertain, but Tax Commissioner Chris Jordan, emboldened by a raft of new powers that began on January 1, has put companies on notice he intends to find out soon.

The federal government — nursing a chronic deficit and chastened by popular outrage at the seemingly pitiful amounts companies such as Google, Apple and Microsoft have been paying — hopes it’s a lot. Inquirer understands Google, at least, is bracing to pay more and probably Apple too, which paid $85m in tax from $7.9bn in sales in Australia in the 2015 financial year.

“Australia’s laws are stronger than ever and we are determined to secure this revenue,” Jordan told an enthralled Senate committee this week, mocking recalcitrant technology firms.

“The excuses we hear from (them) are frankly over the top — how is it possible that companies known for their new-age technol­ogy and innovative products and services fail to be able to furnish us with basic reports showing their business structure, profits, how much tax they’ve paid and where?” he asked.

The commissioner revealed more than 300 firms are under active investigation, either under audit or review, and that the number of firms with turnover above $5bn whose behaviour is “high risk” had jumped to six from one (reported to be News Corp, publisher of The Australian) since December. “These companies have pushed­ the envelope on reasonableness: they play games, they string us along, they believe we can be stooged. No more,” Jordan added, singling out firms for requesting 90-day extensions for providing basic information about their structure to the Australian Taxation Office that had been requested over a year ago.

While Jordan couldn’t reveal the companies targeted, it’s not too hard to guess they are mainly big tech firms, whose global scope and highly mobile production inputs — namely, intellectual capital — are easily shifted to jurisdictions with lower corporate tax rates, such as Ireland, The Netherlands or Singapore.

“I have no idea, I’m not sure who they are but I could try to Google it using my Apple device or Microsoft computer,” says independent senator Nick Xenophon, who sat on last year’s corporate tax inquiry and has been a vocal critic of the amount of tax paid by multinational tech companies.

Australia’s tax authority is far from alone in the pursuit of the major technology players. Mark Zuckerberg’s Facebook is being audited by Her Majesty’s Revenue and Customs, and has reportedly stockpiled $US2.46bn to settle global tax disputes.

It also was revealed recently that Facebook had handed over $US123m to foreign tax authorities (outside the US) last year, according to recent filings with the US stockmarket. This was despite profits of $US3.4bn outside its home country, meaning it paid just 4 per cent tax on profits outside its home country.

Facebook has vowed to fight the HMRC audit and other audits by European authorities tooth and nail, vowing to “defend any such claims”.

But Google is the pinata of choice for revenue authorities. The Italian Guardia di Finanza, found time out of chasing the Mafia to slap it with a €300m ($480m) bill for allegedly unpaid taxes between 2008 and 2013.

How the Italians arrived at this figure is unclear, but it is part of a pattern. Only a week earlier HMRC and Google agreed the latter would repay £130 million ($266m) in back taxes across 10 years. Despite the Conservative government hailing the deal “a major success”, both were immediately attacked by the Labour opposition, which has demanded to see the details.

“It is frankly a pitiful amount given the company generates around £4bn a year there, so it’s a tiny percentage of their profits,” University of NSW tax professor Chris Evans tells Inquirer. Evans says British tax authorities have been reluctant to go to court because of the cost and the 50-50 chance of winning.

The French government is trying to outdo them both, reportedly poised to demand up to €1bn from Google. What the French can actually legally recover from Google is another matter, but there is undoubtedly a frenzy around reclaiming taxes from Google in Europe, buoyed by public outrage at farcical tax structures.

Transfer pricing is one technique. A product made for, say $200, in China can be sold for $600 to another international subsidiary in a low tax country, which can then sell the product in Australia for $620, netting a taxable profit of just $20 in Australia.

By the same logic, the Chinese or Australian subsidiaries, say, can pay royalties or fees for use of intellectual capital to another subsidiary within a corporate empire, which effectively — and quite simply — shifts taxable profits to the other jurisdiction. The lack of comparable arm’s length transactions makes it difficult for tax authorities to second-guess the correct cost.

The Senate inquiry into corporate tax avoidance last year heard Google had booked about $2bn worth of advertising revenue in Australia through its Singapore marketing operations, which operate on an almost tax-free basis.

Intra-firm borrowing is another technique. The ATO recently won a tax avoidance case against Chevron, one of whose subsidiaries was borrowing in the US at less than 2 per cent interest and lending the money to its Australian subsidiary at 9 per cent. The effect, again, is to shuffle taxable profit out of Australia.

Definitive estimates of forgone tax are elusive. But the OECD, which has the Sisyphean task of co-ordinating tax reform among 34 nations, reckons multinational companies pay effective tax rates that are between four and 8.5 percentage points lower than similar firms with domestic-only operations. By contrast, subsidiaries in high corporate tax jurisdictions (such as Australia) pay interest at up to three times the rate of the global group.

The ATO has wasted little time putting into practice its beefed-up anti-avoidance powers, which have a similar effect to Britain’s “diverted profits tax” that began operating in April last year. Former treasurer Joe Hockey, who proposed the new powers last year, preferred to harden up Australia’s already tough anti-avoidance rules, known in the industry as Part 4A. The new powers apply to firms with global turnover above $1bn that have a genuine presence in Australia.

Already, the ATO has sent off a batch of testy letters to 86 firms telling them to “get their house in order” or risk being served tax assessments — a key step towards legal action.

And officials expect to send a further 20 such letters a week in coming months.

A new 100 per cent penalty on any taxes found to have been deliberately avoided has altered the power balance in the ATO’s favour, not to mention the hefty legal expenses.

The ATO’s recent victory against Chevron included 22 legal counsel and 12 expert witnesses, and cost the ATO alone $10m.

“They’ve been beating down the door to the ATO since January to clarify their tax affairs, scared the tough new penalties will be applied to them,” says Kelly O’Dwyer, the Assistant Treasurer, who oversees tax legislation and is considering providing further support for the ATO, including protection for whistleblowers and a new tax taskforce.

When asked about the ATO audit and the prospect of an Australian settlement, Google declined to comment to Inquirer but reiterated that it paid its tax in Australia and met all legal obligations.

While potential revenue gains won’t go near plugging Australia’s $38bn budget hole, they can’t be sniffed at.

Recent ATO legal victories against multinationals Chevron and Orica have yielded more than $300m in revenue.

O’Dwyer is confident extra tax will be in the hundreds of millions of dollars a year.

The tax battles in Europe have led some to warn of an impending “global tax war” between US multinationals backed by their home country and other nations led by Europe scrabbling for tax revenue on a piecemeal basis.

Senior US Treasury official Robert Stack, in charge of America’s international tax policy, recently attacked the EU for what he claimed was the unfair targeting of US companies for a quick revenue grab.

“We are concerned that the EU commission appears to be disproportionately targeting US companies,” Stack said.

UNSW’s Evans is “terribly pessimistic” about the OECD’s attempt to modernise international tax rules and individual countries’ “unilateral responses to multinational problems”.

“They will always be playing catch-up with the multinationals; this is another case of locking the door after the horse has bolted,” he says.

Evans reckons the only definitive solution is for global companies’ profits to be divvied up among countries by a global authority — according to some mutually agreed rules.

Xenophon has asked that any settlement between the ATO and Google be as transparent as possible, outlining what the ATO was asking for and what it eventually received.

“We should be at least as diligent in pursuing taxes from Google as other countries have been, and that includes UK, France and Italy. The actions of those countries may well indicate a pattern of behaviour on behalf of Google on how it structures its tax affairs.

“Now I’m not suggesting they have done anything wrong in Australia but we now have new laws in relation to tax minimisation, profit shifting and transfer pricing to deal with those,” he adds.

He also says the ATO should not be scared to pursue a test case under old laws if a suitable settlement can’t be reached.

Source: http://www.theaustralian.com.au/news/inquirer/more-taxing-times-loom-for-hitech-dodgers/news-story/1...