By business reporter Nassim Khadem
Australia could be one of the world’s earliest movers in introducing an interim tax on digital companies in a bid to raise more money from multinationals, but tax experts warn it could spark a tit-for-tat tax war with US President Donald Trump.
A long-awaited Treasury discussion paper suggests Australia could consider mirroring a European Commission proposal that would see companies with significant digital revenues pay a 3 per cent tax on their European turnover.
The European plan is estimated to bring in an estimated 5 billion euro a year.
The Treasury paper warns such a tax — which would be a radical reversal of long-held international tax policy by applying tax based on a company’s revenue rather than profit — could discriminate against American technology companies, and those companies may decide to pass on the cost to consumers by hiking their prices.
Countries including India and Hungary have already introduced a tax on digital companies’ turnover, but the measure has many global detractors, not least the United States, that sees it as discriminatory.
US Treasury Secretary Steven Mnuchin has previously said the US “firmly opposes” proposals to single out digital companies.
Tax experts say if Australia does target big digital companies, such as Google, the US President may decide to target Australian businesses.
EY’s tax leader, Alf Capito, told ABC News there were a number of problems with an interim tax measure, especially given the US was firmly opposed.
“That creates the possibility of retaliation [by the United States],” he said.
“If we come out with an interim tax against tech companies, then our steel-tariff exemption could be put in jeopardy.”
Asked whether he thought US tech giants would pass the cost of a new tax onto Australian consumers, he said: “I think there’s a chance they could do that. Why wouldn’t they? If a particular country imposes a tax for doing business in that country, a company can either wear it, to the detriment of its shareholders, or attempt to pass it on.”
Mr Capito said it was also “the start of a slippery slope” that could see other companies, especially big Australian miners selling into China and Japan, also taxed more heavily in those countries.
“We are selling into markets like China and Japan enormous amounts of natural resources but we’re not paying [as much] tax in those countries,” he said.
“If you start going down a path of trying to tax non-residents simply because they’re selling to your market, then Australia is exposing the tax revenues it collects on the taxing of resources.”
The Treasury paper also warns a long-term measure could be difficult to implement.
Mr Capito said that created the danger an interim tax could end up being permanent.
“We may end up being one of the leaders in this area but to our own detriment,” he said.
Australia ‘does not have the luxury of waiting’ for new tax
But the Tax Institute’s senior tax counsel, Bob Deutsch, said Australia could not wait for the OECD — which on behalf of the G20 has developed the Base Erosion and Profit Shifting (BEPS) project to try and collect more tax from multinationals — to come up with a solution.
“Looking realistically at the developing digital economy, Australia does not have the luxury of waiting for a multilateral response,” he said.
“We will inevitably need to introduce some interim measures.”
Apart from an interim turnover-based tax, the paper also mentions an expanded “source rule” designed to capture more profits where goods or services are consumed in Australia.
“Both options are potentially problematic — the former may offend some of our treaty obligations and the latter may be viewed as a blunt instrument that may deter investment into Australia,” Mr Deutsch said.
It is unclear whether Australia would apply an interim tax based on the same turnover as the European Commission proposal — that is, companies with an annual global turnover of more than 750 million euros and total taxable revenues of 50 million euros generated in the EU.
The OECD suggests countries could look to the threshold set for its country-by-country reporting regime — generally 750 million euros for EU-based companies, while Australia’s threshold is set at annual global income of $1 billion.
The Treasury paper notes the Diverted Profits Tax includes a $25 million Australian income threshold.
“In view of Australia’s WTO and FTA obligations, an interim measure would have to apply to both domestic and foreign businesses,” it argued, and that “Australia’s obligations under its tax treaties would also need to be taken into account”.
Depending on how the tax is structured locally, and which firms it affects, the Federal Government could see hundreds of millions annually flowing into its coffers.
Digital tax would build on existing anti-avoidance measures
The Treasury paper notes Australia has been an OECD leader in its bid to collect more tax from multinationals, with the Federal Government’s Multinational Anti-Avoidance Law (MAAL) and Diverted Profits Tax.
The Australian Taxation Office (ATO) has previously said MAAL has resulted in companies booking an additional $7 billion in sales in Australia every year, thus resulting in a higher tax take.
While companies such as Facebook and Google have already restructured their operations due to MAAL and pay more tax here, the law only applies to sale contracts managed by sales teams in Australia.
The ATO does not require tech giants to disclose the revenue they book overseas from local clients.
For example, Google’s gross Australian advertising revenue was $3 billion in 2017, but it paid about $2 billion of this back to its US Google parent entity. An interim digital tax could see that $2 billion Australian advertising income Google generates taxed.
Treasurer Josh Frydenberg said the Government was seeking views “on options to move us towards a fairer and more sustainable tax system for the digitalised economy, which will ensure all businesses operate on a level playing field”.
“While digitalisation has delivered significant benefits for Australian consumers and businesses, the Government remains concerned some very profitable, highly digitalised companies pay very little tax in the countries in which they do business,” he said.
He added that the Government had also written to the secretary-general of the OECD, offering Australia’s assistance on finding a better way to allocate taxing rights in the increasingly digitalised economy.
“This offer builds on Australia’s significant contribution to this work to date, including as a vice-chair of the OECD’s Taskforce on the Digital Economy,” he said.