“The international tax architecture is horribly out of date with the result that the existing structure should be condemned as no longer fit for purpose,” said Professor
Chris Evans from UNSW’s Australian School of Business.
He argues that the ability of multinational companies to ‘drive a coach and horses’ through the international tax rules, such as by legitimate profit shifting strategies adopted by miners to reduce their corporate profits to zero, poses a serious risk to corporate tax revenues for all countries, undermines tax sovereignty and adds to the perceptions of an unfair tax system for ordinary taxpayers.
“Although we can attempt to shore up existing tax arrangements with patchwork renovations such as revising the transfer pricing, thin capitalisation and general anti-avoidance rules, or by exchanging more information across international borders, a better and more imaginative process might be to tear it all down, re-design and re-build on a multilateral level.”
“Australia’s tax system is creaking under the strain of globalisation and we need to act radically and in concert with other countries to plug revenue holes,” he added, warning that Australian governments shouldn’t get too distracted by a planned global crackdown on ‘base erosion and profit shifting’ (BEPS) prompted by the increasing ease with which firms such as Apple and Google can shift their IP & profits to the lowest tax country. “It’s high profile – but in the general scheme of things I don’t think the G20 and OECD approach to tackling BEPS will get us very far” he said.
“We need to be a bit more imaginative in how we deal with the problem” he added. “For example, the problem stems from the fact that multinationals are treated as if they are a series of separate entities operating in different tax jurisdictions for tax purposes. That way they can easily shift their expenses to high tax countries - where they are worth more to the company - and their income to tax haven jurisdictions where they will pay little or no tax.”
“If, instead, the multinational were treated as one single global entity, and had to make a consolidated report on all its activities to all tax authorities for the countries it operates in, then it would be a relatively simple task to stop this tax arbitrage activity. A portion of those consolidated profits could be allocated to each of those countries on the basis of predetermined factors, such as the number of employees, or amount of sales or physical assets in each of those countries. Each country could then tax their share of the profits at whatever rate they deemed appropriate and put an end to the game playing.”
He will discuss how Australia’s tax system should be reformed at the 2014
Pathways to Growth, Economic and Social Outlook Conference on Friday 4 July.
For further comment call
Chris Evans on 02 9385 9546, 0403 206063, or Email
Julian Lorkin: 02 9385 9887