New tax treaty will close loopholes that allow multinationals to avoid tax


Miranda Stewart, Australian National University

Australia, with another 70 countries, has signed a multilateral treaty to create more coherence in fighting tax avoidance by large multinational corporations. The Multilateral Convention to Implement Treaty Measures to Prevent Base Erosion and Profit Shifting, or BEPS Convention, aims to close loopholes in the international tax system that result from differences in individual country tax systems.

Countries are fiercely protective of their own tax sovereignty and claim the right to set their own company tax rate and base. But this can result in lower company tax around the globe, as multinational enterprises can move capital investment to lower tax jurisdictions and take advantage of tax havens to reduce their global tax bill. This latest treaty will help to overcome this problem.

Since the global financial crisis, nearly a decade ago, the G20 countries have tried to reform international tax with a Base Erosion and Profit Shifting (BEPS) project. Australia has been a strong supporter of the BEPS project since it started, including as chair of the G20 in 2014.

This project resulted in 15 actions that were endorsed by the G20 in 2015. The signing of this tax treaty implements action number 15 to amend existing tax treaties to limit international tax planning.

The other BEPS actions aim to strengthen enforcement, remove inconsistencies in national tax rules, enforce disclosure of corporate tax profits in havens and encourage sharing of tax information between country revenue agencies.

Australia can’t go it alone on international tax

International tax cooperation remains critical and this BEPS Convention enables an anti-abuse framework to be embedded in Australia’s treaty network.

In the last century, countries around the world have negotiated bilateral tax treaties, producing a network of thousands of treaties. Australia alone has about 45 bilateral income tax treaties.

The main goal of bilateral tax treaties has been to prevent double taxation of international business where it operates in more than one country. But the terms of tax treaties can also be used to minimise tax. For example, a company may have significant business sales in a country – like Google in Australia – but under a treaty rule, it may not be treated as having a business presence there.

How does the BEPS Convention amend tax treaties?

Without this multilateral convention, it could take decades for countries to renegotiate these bilateral tax treaties. Where countries sign up, the new rules will take effect as soon as each country has ratified the convention.

The BEPS Convention is the first ever multilateral tax treaty that modifies substantive tax rules. Even the speed of signing the BEPS Convention is unprecedented: from treaty mandate to signature has been only 18 months. Most multilateral treaties take much longer, such as the Trans-Pacific Partnership, which has been in negotiation for more than nine years (and may not ever be agreed).

A leading British tax lawyer observed that the BEPS Convention is “not tax peace in our time”. But it is still significant.

The convention inserts a new anti-abuse rule which states that tax treaties are not to be used to abuse national tax laws, if a taxpayer uses a treaty rule for the principal purpose of reducing its tax liability in a country. The convention will also make changes to prevent mismatches in treaty tax rules and to end the artificial avoidance of a business tax presence in a country, for example by using a separate company to do its operations under a contract.

To push governments to resolve tax disputes, the convention inserts an arbitration clause into treaties. If two countries cannot resolve a treaty dispute, then after two years (and if no court case is on foot), it will go automatically to an independent arbitrator who can make a decision that binds the governments and taxpayer. Its controversial and many countries may not agree to arbitration but Australia has signed up to it.

Australia has adopted most of the BEPS Convention measures, as being consistent with its current tax treaty policy. But many countries, including Australia, will need to enact domestic legislation to bring the convention into law.

Once countries sign up, the treaty changes will take place immediately – this could amend as many as 30 of Australia’s treaties.

The future international tax architecture – but without the US?

The BEPS Convention was signed by more than 70 countries. This includes leading signatories such as China, Germany (the current G20 Chair), the United Kingdom, France and Japan and also several low tax financial centres like Singapore and Ireland. But the United States did not sign.

The US failure to sign is hardly surprising. It comes one week after President Trump withdrew the US from the Paris Climate Agreement. It’s another example of the US retreating from multilateral cooperation on issues affecting all nations.

The US also did not sign the Tax Administrative Convention, now with 111 country members, which provides the legal basis for the country by country exchanges of information about global profits for billion dollar companies, including with the Australian Tax Office. Instead the US insisted on “going it alone” with its Foreign Account Tax Compliance Act, or FATCA regime, which demands foreign countries provide data on US citizens.

Many US tax treaty provisions are in line with the BEPS Convention. But surely that misses the point of multilateralism in tax or any other field of global concern. Instead, we see China is taking a leading role in multilateralism. It is unclear what the US stance will mean for international tax in the longer term. However, this treaty will give some help to other countries aiming to tax global profits of US multinationals, including Google, Apple and Uber, while those companies lobby for the US to reform its own company tax laws.

The ConversationThe pace of international tax change is usually glacial and most country co-operative efforts go nowhere. The BEPS Convention provides, for the first time, an international legal architecture for future multilateral tax reform.

Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

This article was originally published on The Conversation. Read the original article.

Full response from the AiGroup for a FactCheck on how Australia’s top tax rates compare internationally



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original.

Sunanda Creagh, The Conversation

In relation to this FactCheck on the AiGroup’s Innes Willox’s statement that Australia has “one of the highest progressive tax rates in the developed world”, a spokesman for the AiGroup sent the following sources and comment: The Conversation

Innes was referring to top marginal tax rates. Data for 2016 show that Australia has a relatively high top marginal tax rate (49%) but not the highest among OECD countries (Sweden is top, at 60%). The rub is that our top marginal rate cuts in at a relatively lower level of income than most other OECD countries (2.2 times our average wage).

Chart created by AiGroup using OECD data.
AiGroup/OECD
Chart created by AiGroup using OECD data.
AiGroup/OECD

The spokesman also sent a screenshot from an OECD report titled Revenue Statistics 2014 – Australia:

A screen shot from the OECD report Revenue Statistics 2014 – Australia.
OECD

Sunanda Creagh, Editor, The Conversation

This article was originally published on The Conversation. Read the original article.

FactCheck Q&A: does Australia have one of the highest progressive tax rates in the developed world?



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The AiGroup’s Innes Willox, speaking on Q&A.
Q&A

Kathrin Bain, UNSW

The Conversation fact-checks claims made on Q&A, broadcast Mondays on the ABC at 9:35pm. Thank you to everyone who sent us quotes for checking via Twitter using hashtags #FactCheck and #QandA, on Facebook or by email. The Conversation


Excerpt from Q&A, May 15, 2017. Quote begins at 0.50.

Look, we just need to keep in mind that we have one of the highest progressive tax rates in the developed world at the moment. – Innes Willox, chief executive of the Australian Industry Group, speaking on Q&A, May 15, 2017.

When Q&A host Tony Jones asked if wealthy people should pay more tax, the AiGroup’s Innes Willox said that Australia already has one of the highest progressive tax rates in the developed world.

Is that true?

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Checking the source

When asked for sources to support Innes Willox’s statement, a spokesman for the AiGroup clarified that Willox was referring to top marginal tax rates.

The spokesman referred The Conversation to OECD tax statistics, and two charts built using that data, saying that:

This shows that Australia has a relatively high top marginal tax rate (49%) but not the highest among OECD countries (Sweden is top, at 60%). The rub is that our top marginal rate cuts in at a relatively lower level of income than most other OECD countries (2.2 times our average wage).

You can read his full response and see those charts here.

Is it true? Not exactly

Looking at OECD data, Australia’s highest marginal tax rate is higher than the OECD median. Out of the 34 OECD member countries in this data set, Australia ranks 13th for the top marginal rate of tax, meaning 12 countries have a higher top marginal rate, and 21 countries have a lower top marginal rate.

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However, a straight comparison like this can be misleading. More than half (19) of the OECD countries impose “social security contributions”. The OECD defines social security contributions as “compulsory payments that confer an entitlement to receive a (contingent) future social benefit”. It notes that they “clearly resemble taxes” and “better comparability between countries is obtained by treating social security contributions as taxes”.

When social security contributions are taken into account, Australia’s “ranking” in terms of top marginal rate of tax drops to 16 out of the 34 OECD member countries – making it still higher than the OECD median top marginal rate, but not by much.

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The other point noted by the AiGroup spokesman was that Australia’s top marginal tax rate applies at a relatively low level of income compared to most other OECD countries.

Australia’s highest marginal tax rate applies to taxable income above A$180,000, approximately 2.2 times Australia’s average wage. The AiGroup spokesman was right to say this is relatively low, with the majority of OECD countries (20 out of 34) applying their highest marginal tax rate at income levels higher than Australia (that is, at income levels higher than 2.2 times the average wage).

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However, it is worth noting that based on the latest Australian Taxation Office statistics, for the 2014-15 tax year, only 3% of individual taxpayers fell into the highest tax bracket.

Where Australia does rank amongst the highest in the OECD is the percentage of total tax revenue that is derived from individual income taxation.

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In 2014, 41% of Australia’s taxation revenue came from income taxation on individuals. This is the second highest in the OECD (the highest being Denmark at 54%) and significantly higher than the OECD average of 24%.

Verdict

The statement made by Innes Willox that “Australia has one of the highest progressive tax rates in the developed world at the moment” is an exaggeration.

Australia ranks 13th in the OECD for the top marginal rate of tax, and 16th if social security contributions are taken into account.

However, Australia does rely more heavily on personal income tax (when compared to other taxes) than all but one other OECD country. – Kathrin Bain


Review

I agree that the statement is an exaggeration. 13th out of 34 is higher than the median, but it would be equally true to say that more than one-third of the OECD countries have a higher personal marginal tax rate than Australia.

It is always problematic to try to compare tax data across different countries. Although the OECD does try to make the data comparable the differences between tax and welfare systems can lead to misleading comparisons.

It is generally well known that certain Scandinavian countries, such as Sweden and Denmark, have a very high marginal tax rate. However those countries also tend to have a different approach to social and welfare spending. Australia does not have a dedicated social security tax: pensions and income support are paid from general revenue. This structural difference in the tax-transfer systems does limit the comparison.

Australia does have a high reliance on personal income tax, and the top marginal rate is higher than the median OECD level. Although the top marginal rate is relatively low at 2.2 times the median wage, the fact that only 3% of the population are in the top bracket says that we, in fact, have a relatively flat tax structure, with most taxpayers in lower tax brackets. – Helen Hodgson


The Conversation FactCheck is accredited by the International Fact-Checking Network.

The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. Read more here.

Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.

Kathrin Bain, Lecturer, School of Taxation & Business Law, UNSW

This article was originally published on The Conversation. Read the original article.

Shifting the tax burden to middle-income earners will undermine jobs and growth


Patricia Apps, University of Sydney

The government’s idea of raising the Medicare levy, while also removing the 2% budget deficit levy on incomes above A$180,000, is less “transformational” and more signature Liberal policy. It shifts the tax burden towards middle income earners, as opposed to Labor’s plan to direct higher tax rates towards higher income earners. The Conversation

Rather than introducing a simple flat rate rise of 0.5% in the marginal tax rate across all taxpayers, the government has chosen to increase the Medicare levy. The reason lies in the fact that the levy contains the equivalent of a low-income tax offset due to the phasing out of the low-income exemption.

For example, in the current financial year, the thresholds for the phasing out of the Medicare levy exemption is A$21,665 for singles and A$36,541 (plus A$3,356 for each dependent child/student) for families. At these thresholds, tax rates rise by the rate of the withdrawal of the exemption, which works out to be 8% (calculated as 10% less the 2% Medicare levy rate).

In the case of a two-child family, this means an 8% rise in the marginal tax rate at an income from A$43,253, to an upper income limit of A$51,803. If a Medicare levy increase of 0.5% were introduced in the current tax year, the upper income limit for the higher marginal tax rate would rise to A$54,066.

In combining a rise in the Medicare levy with the removal of the budget deficit levy, the government is therefore proposing a rise in marginal tax rates across a wide band of middle incomes and a marginal tax rate cut for the top.

This direction of tax reform is a continuation of the incremental shift in the overall tax burden towards middle income earners over recent decades. And because the threshold for the Medicare levy exemption is based on family income, the reform will reinforce the move towards higher effective tax rates on low income second earners in a family.

This shift in the tax burden from top to middle income earners, and to middle income families, will undermine aggregate demand and, in turn, “jobs and growth” in the future.

In contrast to the government’s policy, Labor’s policy limits the rise in the Medicare levy to incomes above the top two bracket points and retains the budget deficit levy. Raising taxes on top incomes is not only a fairer policy, but a more efficient one in the conventional economic sense.

The impact of taxes on hours worked declines as earnings get higher, and has close to no effect on the hours worked by those with top incomes. And by avoiding higher taxes on second family earners, Labor’s policy should have a less negative effect on second earner hours of work and therefore the tax base.

The government’s and Labor’s tax reforms therefore represent very different policies.

Patricia Apps, Professor of Public Economics, Faculty of Law, University of Sydney

This article was originally published on The Conversation. Read the original article.

Google, Facebook fall into line on tax, but eBay remains defiant


Michael West, University of Sydney

Under pressure from the Australian Tax Office, Google and Facebook have begun to bring their revenue onshore to be taxed. eBay remains recalcitrant, still deeming its Australian business to be a Swiss business and thereby avoiding millions in income tax and GST. The Conversation

It is multinational reporting season once again and the early signs are the government’s multinational tax avoidance laws are starting to work. But the world’s largest corporations are still paying a fraction of their fair share of tax in this country.

Until this year, Google and Facebook entertained a corporate structure that booked the billions of dollars of revenue they made in Australia directly offshore. However, eBay is still blithely pretending it doesn’t have an Australian business and that the billion dollars a year it makes from operating its online auction house in this country – through which Australians buy and sell things with other Australians in Australia – is really the business of an entity residing at 15 Helvetiastrasse, Bern, Switzerland.

According to its accounts, the latest for the year to December 2016, eBay Australia is still masquerading as being in the business of “the recommendation of market penetration strategies” on behalf of eBay International AG.

So it is that every cent of the $59 million that eBay disclosed as its cash-flow statement for 2016 came from related parties, mostly for “rendering of services”. On this, eBay paid $1.9 million in tax after ratcheting up its costs by $13 million to wipe out most of the $20 million uplift in cashflow. The average salary at eBay, if the accounts can be believed, is $312,553 – 109 employees, according to the directors’ report, getting $34.1 million.

Mind you, according to the directors’ report, these 109 people are engaged in carrying out the principal activities of the company, which are “the recommendation of market penetration strategies, advertising and promotion activities”.

Gobbledygook, but the numbers are irrelevant anyway. The estimated billion dollars or more which eBay is said to make in Australia is not even included in its financial statements, just the revenue from its secretive associates. Moreover the accounts are not consolidated, according to the notes, rendering the entire disclosure a farce. Auditor is PwC.

Funnily, though, the cover page Form 388, authenticated by EY, talks about “consolidated revenue” and “consolidated gross assets” – despite the fact that PwC says the accounts are not consolidated.

So eBay is the quintessence of the undisclosed agency, a puppet regime designed to whisk Australian profits offshore to a tax haven. The shadow directors are in Bern and the ultimate parent eBay Inc is in the US.

Over the past 15 years, eBay has dodged GST and paid income tax of just $8 million (almost one-fifth of its bill for “professional fees” at $38 million), despite its billions of dollars in cash-flow.

Positive signs of change

Focusing on more positive developments on the multinational tax scene, arch-tax avoider Google Australia and New Zealand is now recognising that a portion of the profits it makes in Australia are in fact Australian rather than Singaporean.

Industry observers believe Google makes about $3 billion in sales from its advertising business here. Until this year, its only revenue has come from three related parties via service arrangements. Now, with the introduction of the multinational anti-avoidance legislation, Google has recognised roughly one-third of its Australian revenue as Australian.

In the broader context it is worth considering the effect of the digital revolution on Australia’s tax base.

Where the TV networks, News Ltd (though belligerent on the tax front) and Fairfax Media once paid hundreds of millions of dollars a year in tax collectively, they are now struggling to make a profit. In their place, it is estimated Facebook and Google now pick up 80% of the advertising dollar in this country but they pay negligible tax.

Globalisation and the internet are similarly challenging Australia’s revenue base in retail, financial services and other sectors. Paypal, for instance, eBay’s corporate cousin, paid more than $1 billion of its $1.2 billion in revenues to its parent and associates in Singapore over the nine years to 2014 thanks to a “service agreement”.

Looking at the accounts, thanks to the new tax law, revenue rose from $498 million to $1.14 billion. Sales and marketing expenses, however, recognised for the first time at $324 million, knocked profits about. Profit rose from $50 million to $121 million on which tax expense was $16 million, up from $3 million.

Actual tax paid as per the cash-flow statement was $41 million, up from $16 million. So, like Apple, Google is beginning to pay significant amounts of tax, although still way short of the mark, and it appears to have bloated its cost base here as much as humanly possible. Assuming group sales are heading towards $3 billion (Google booked $882 million in advertising revenue), the real income tax number ought to have nine digits.

For its part, Facebook booked revenue of $327 million, ten times the $33.5 million recorded in the the previous year. After forking out $271 million to related parties for the “purchase of advertising inventory”, it made a profit of just $6.3 million on which it paid $3.4 million in tax.

Under its previous structure, Facebook sales were booked to an associate in Ireland. For the purposes of reporting as little as possible, the company even won an exemption from the corporate regulator when it claimed to be a “Small Pty Company Controlled By a Foreign Coy Which is Not Part of Large Group”. That its foreign parent was valued at more than $170 billion on Wall Street didn’t seem to matter.

Now, Facebook has declared itself to be a reseller of local advertising inventory. Both Google and Facebook are audited by EY.

None of these companies operate to maximise profits for the benefit of their Australian entities. All have small, token boards of directors. All operate in the interests of their foreign overlords and should be taxed as agencies.

It is a good thing the authorities are catching up with multinational tax lurks. This would not have occurred without public outrage and dissent. Nor would it have occurred without the Senate Inquiry into Corporate Tax Avoidance in 2015, which thrust the issues into public view. They should keep this Senate committee rolling with biannual investigations where corporate leaders are held to account and subject to full public scrutiny. After all, directors have a fiduciary duty to perform in the interests of their companies, not some tax officer in California.

Further, the architects of multinational tax avoidance – EY, Deloitte, PwC and KPMG – ought to be subject to greater disclosure requirements rather than operating as murky partnerships whose partners pontificate to government on tax policy while advising their big clients how best not to pay tax, or “leakage” as they call it in the trade.

Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of Sydney

This article was originally published on The Conversation. Read the original article.

GST carve-up to be examined by the Productivity Commission


Michelle Grattan, University of Canberra

The government has ordered the Productivity Commission to review how the GST revenue is sliced up, setting the scene for a new round of hostilities between states over what they get from the tax. The Conversation

The review, to report by the end of January, follows long-standing pressure from Liberals in Western Australia, which currently loses out heavily from the present formula. There is now deep concern, after the Barnett government’s wipeout, that a number of federal seats in that state could be lost at the next election.

Under the Grants Commission’s formula, WA in 2017-18 will get only 34% of the average national per capita distribution of the GST.

The new WA Labor premier, Mark McGowan, welcomed the review, saying he had pressed for it. He said action was needed as soon as the report was received.

But South Australian Labor Treasurer Tom Koutsantonis said that after the WA rout of the Liberals, the federal government wanted “to take GST away from South Australians and give it to Western Australians”.

Expert sources said potential winners and losers from the PC review could not be predicted.

The outcome of the review would be taken to the Council of Australian Governments (COAG).

Treasurer Scott Morrison said the commission had been asked to inquire into the impact on the national economy of the current system of horizontal fiscal equalisation (HFE) which underpins the present distribution.

Under this system, the Grants Commission recommends a carve up to give each state the capacity to provide its citizens with a comparable level of government services.

“In recent years, views have been put to the government that the current approach to HFE creates disincentives for reform, including reforms to enhance revenue raising capacities or drive efficiencies in spending, arguing that any gains from reform are effectively redistributed to other states,” Morrison said.

“It is important for Australia’s future prosperity that our system underpinning Commonwealth-state financial relations supports productivity, efficiency and economic growth across the country.”

The federal government has been topping up WA’s money and confirmed that it will continue to do so in next week’s budget, by providing it with some A$226 million for infrastructure.

One closely watched area in the budget will be health, with the government expected to announce a staged lifting of the freeze on Medicate rebates, probably over three years and starting with GP consultations for those covered by concession cards.

Labor is pre-emptively seeking to raise the bar higher than the government will meet. Bill Shorten and health spokeswoman Catherine King said in a statement that if the government “doesn’t drop every single health cut in full”, including the entire Medicare freeze from July 1, it would be “more proof that they can’t be trusted on health”.

Meanwhile, Education Minister Simon Birmingham is setting the scene for the imminent announcement of the university funding policy by releasing a study on the cost of delivery of higher education, commissioned by the government and undertaken by Deloitte.

It showed revenue rose faster than costs – between 2010 and 2015 the average costs of delivery per student increased by 9.5%, while per student funding growth was 15%.

“This independent analysis speaks for itself: funding for our universities is at record levels, but it has grown above and beyond the costs of their operations,” Birmingham said.

“Australian taxpayers gave universities around $16.7 billion in 2016 alone or around $19,000 per student, which is more than ever before. In the context of a tight national budget, the Turnbull government is focused on getting the best return for every taxpayer dollar invested,” Birmingham said.

Birmingham has a meeting with university leaders and business and student representatives on Monday.

With housing affordability a key item in the budget, there is speculation one measure could be a tax break for first home buyers’ savings.

In its pre-budget monitor on the economy Deloitte Access Economics says the economic news is getting better – reinforcing the point Morrison made last week.

“National income is jumping by $100 billion this year, equalling the gains of the previous two-and-a-half years in one gulp,” it says, adding that the good news is mostly in profits. But wages growth remains low, restraining the growth in revenue.

Deloitte projects a deficit of $38.3 billion this financial year, $1.8 billion worse than in the official mid-year budget update, and (on the assumption of no further policy changes) the deficit falling to $27.5 billion next financial year. That would be $1.2 billion better than projected in the mid-year update.

Deloitte doesn’t expect Australia to lose its AAA credit rating in the near term. “Were it to happen, the initial trigger may actually be the debt of families rather than that of government,” it says. “In recent months Australian families passed those of Denmark to move into second place as the world’s most indebted [behind the Swiss].”

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Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Chevron is just the start: modelling shows how many billions in revenue the government is missing out on


Roman Lanis, University of Technology Sydney; Brett Govendir, University of Technology Sydney, and Ross McClure, University of Technology Sydney

The federal government could collect billions more in royalties and tax revenue if it changed the rules on debt loading and adopted alternative royalty schemes in dealing with oil and gas giants, new modelling shows. The Conversation

Our modelling, funded by lobby group GetUp, found that over the four-year period from 2012 to 2015, Chevron’s average effective interest rate was 6.4%. However, it has been steadily reducing from 7.8% in 2012 to 5.7% in 2015.

We estimated that if Australia adopted a similar approach to Hong Kong to eliminate debt loading abuse, United States oil and gas giant Chevron would have been denied A$6.27 billion in interest deductions, potentially increasing tax revenues by A$1.89 billion over the four-year period (2012-2015).

The issue of debt loading abuse was highlighted last week when the full bench of the Federal Court dismissed unanimously Chevron’s appeal against the Australian Taxation Office (ATO), ordering the company to pay more than A$300 million.

Chevron Australia was using debt loading, where, compared its equity, it borrowed a large amount of debt at a high interest rate from its US subsidiary (which borrows at much lower rates). It did this in order to shift profits from high to low tax jurisdictions.

Based on Australia’s existing “thin capitalisation” rules, there is a maximum allowable debt that interest deductions can be claimed on, in a company’s tax return. Companies can exceed this debt but the interest charges must be at “arm’s length” – at commercial rates.

Chevron’s size and financial strength allow it to negotiate very competitive (low) rates on its external borrowings and this was the main issue in the Federal Court case. As the court has now ruled on what constitutes a reasonable interest rate for inter-company loans, this benchmark will likely be adopted by the ATO.

It can now approach and enforce this benchmark in similar disputes with confidence that companies engaged in debt loading will want to settle rather than engage in a costly court battle.

What the government could save from addressing debt loading

Chevron’s tax avoidance measures meant the interest rate, adjusted for maximum allowable debt, varied only slightly from their effective rate. Our modelling showed that if the ATO had applied the thin capitalisation rules to Chevron’s accounts each year over the four-year period, it would’ve reduced Chevron’s interest deduction by A$461 million and potentially generate an additional tax liability of A$138 million.

We modelled a scenario where Chevron Australia’s interest deductions were limited to the group’s external interest rate, applied to its level of debt. This would have reduced in the interest deduction by A$4.8 billion over the four year period, potentially generating A$1.4 billion in additional tax revenue.

We also worked out what would happen if Australia applied the debt loading rules Hong Kong does currently. Hong Kong disallows all deductions for related-party interest payments, making abuse of the system difficult. According to the latest ATO submission to the Senate tax inquiry, investment in the extraction of Australian oil and gas is almost entirely in the form of related-party loans.

Chevron Australia’s debt is entirely made up of related-party loans. If the Hong Kong solution was operating in Australia, we found that Chevron would have been denied A$6.275 billion in interest deductions, potentially increasing tax revenues by A$1.89 billion over the four-year period.

We also looked at ExxonMobil Australia, which also has high amounts of related-party debt (98.5%), and the Hong Kong solution would have denied ExxonMobil A$2.7 billion in interest deductions, potentially increasing tax revenue by more than A$800 million for the same period.

Changing the PRRT for more revenue

Our report also includes an analysis of the potential for additional revenue from replacing the Petroleum Resource Rent Tax (PRRT) with resource rent systems used in the US and Canada. Oil and gas sales have increased from an average of A$5.96 billion per year between 1988 and 1991, to an annual average of A$33.3 billion between 2012 and 2015, indicating the huge growth in this sector.

We modelled what would happen if the US and the Alberta, Canada, royalty schemes were applied to Australian production volumes and realised prices, to compare returns to those achieved by the PRRT.

The US royalty scheme charges a flat percentage royalty on production volumes, priced at the well-head. The royalty rate was progressively increased in the US from 12.5% to 18.75% between 2006 and 2008.

Based on the data from Australian production volumes and realised sales prices, the US royalty scheme could have potentially raised an additional A$5.9 billion in revenue for Australia since 1988, or A$212 million per year.

However, over the period from 2010 to 2015, the additional revenues would have been almost A$2.5 billion per year. This is because of both the decline in the PRRT revenues, relative to price and volumes, and the increase in the royalty rate in the US.

However, while the US scheme would raise more than the PRRT, the Alberta royalty scheme would raise substantially more revenue than both of these schemes. The Alberta scheme is progressive in nature, meaning the royalty rate increases with the realised price, similar to income levels and personal income tax rates.

The Alberta scheme has been amended many times and the current scheme only started in January 2017, so the full effects of this scheme will not be evident for some time. However, based on the data from Australian production volumes and realised sales prices, we calculate the Alberta royalty scheme would have raised an additional A$103 billion in revenue since 1988, or an additional A$3.7 billion per year.

As the scheme was only implemented this year, these results may be unrealistic, but are indicative of the level of revenue that could be raised. Over the period from 2010 to 2015, the additional revenue would have been A$11.3 billion per year.

The modelling done for our report considers just two multinational corporations, their use of debt loading and the PRRT. Now we can can hope for more revenue collection from many of the multinationals operating in Australia, as a result of the recent Federal Court ruling.

Critically, too often corporations are able to work within Australia’s tax rules to avoid paying for operating here, by constantly arguing they can’t develop business in Australia unless there are tax breaks. Our modelling demonstrates governments need to ensure corporations benefiting from the use of Australia’s resources are contributing the same as they do in other jurisdictions.

Roman Lanis, Associate Professor, Accounting, University of Technology Sydney; Brett Govendir, Lecturer, University of Technology Sydney, and Ross McClure, PhD Candidate, casual academic, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

Imposing GST on low-value imports doesn’t level the playing field


Kathrin Bain, UNSW

The government wants to extend GST to imported online goods under A$1000, effective from 1 July 2017, with Treasurer Scott Morrison stating it will “establish a level playing field for our domestic retailers”. But the proposed legislation doesn’t do this. Rather, it unfairly imposes GST on goods purchased from overseas sellers, that wouldn’t be subject to GST if purchased from an Australian seller. The Conversation

The government also hasn’t cleared up how the collection will be adequately enforced. Without appropriate enforcement, collecting more revenue from this tax seems unlikely.

Currently, low-value imports (those with a customs value of A$1,000 or less) are exempt from GST. If the legislation is passed, overseas vendors who sell more than A$75,000 of low-value goods to Australian consumers would be required to register for GST, and collect and remit GST on low-value goods to the ATO.

Those imports will continue to be stopped at the border with any GST, customs duty, and associated fees paid to Australian Border Force by the importer before the goods are released.

For sellers of low-value goods it will mean that an overseas supplier of both low and high value goods will be subject to two separate tax regimes. The requirement to collect GST will apply only to low-value goods.

Online marketplaces and mail forwarding services

The new law will also apply to online marketplaces such as eBay and “redeliverers” – businesses that forward goods to Australia from overseas companies. For goods purchased through an online marketplace, the marketplace rather than the seller will be treated as the supplier. Similarly, if low-value goods are delivered to Australia by a redeliverer, they will be considered to be the supplier for GST purposes.

While extending the GST to these goods is meant to level the playing field between overseas and Australian vendors, treating the online marketplace or mail forwarder as the supplier of goods is inconsistent with the treatment of domestic transactions.

As eBay has stated in their submission to the Senate Committee: “eBay is not a seller. eBay is a third-party online marketplace that simply connects buyers and sellers”.

For Australian vendors who sell items on eBay, it’s the individual seller who is responsible for collecting and remitting GST on products they sell (if they are required to be registered). A seller who uses eBay, but isn’t carrying on an enterprise or does not meet the A$75,000 turnover threshold, isn’t required to be registered and would not be required to collect GST on their sales.

However, the proposed legislation does not treat overseas vendors in this way, by treating online marketplaces and mail forwarding services as the supplier of goods. The Treasurer stated that:

Including online marketplaces ensures that only a limited number of entities need to collect the GST, rather than the multitude of small, individual vendors making supplies through these online marketplaces that compete with Australian retailers here in Australia.

With all due respect to Scott Morrison, he seems to have missed the point that small, individual vendors should not (if their turnover of low-value goods into Australia is less than A$75,000) be required to collect GST merely because they use an online marketplace.

EBay has gone as far as stating in their submission that: “Regrettably, the Government’s legislation may force eBay to prevent Australians from buying from foreign sellers”. This is because they would not be able to comply with the requirements imposed under the new legislation.

Compliance concerns

Despite the legislation being intended to come into effect on 1 July of this year, it is still unclear how the new system will be adequately enforced.

At the moment, information displayed on international mail declarations doesn’t indicate whether the overseas supplier is registered (or required to be registered) for GST. It also doesnt say whether GST has been collected, and whether it is being correctly remitted to the ATO. Even if this information was readily available, it’s not clear how the ATO would deal with non-compliant entities.

If it was determined that GST had not been charged and collected by the overseas supplier of the low-value goods, there is nothing in the proposed legislation that would allow the GST to be collected from the importer (instead of the supplier) when the goods enter Australia. However, attempting to enforce an Australian tax debt against a non-compliant overseas vendor would be a complex, costly, and likely fruitless endeavour.

Consumer advocate group Choice has expressed concern that the government would use powers under the Telecommunications Act to block the websites of non-compliant entities. However, Scott Morrison has indicated that the government has no intention of using this power.

Concerns regarding enforcement have been echoed in a number of submissions, including the Taxation Institute of Australia and Amazon. Both highlight the fact that lack of enforcement may simply encourage Australian consumers to purchase goods from non-compliant overseas entities that are not charging GST.

By treating online marketplaces and mail forwarding services as the supplier of goods, the proposed legislation does not treat overseas vendors in the same way as domestic vendors. The tax will only be effective if the system for collecting GST on imports can be adequately enforced. Without appropriate enforcement, high levels of compliance seems unlikely. A lack of compliance will continue to leave Australian retailers at a disadvantage, with only minimal increase in GST revenue.

Kathrin Bain, Lecturer, School of Taxation & Business Law, UNSW

This article was originally published on The Conversation. Read the original article.