RSM Australia

International tax update - Australia

Australia is making plenty of noise on the international tax scene at the moment, which is notable given the current state of global tax turmoil.

Of present note:

  • the Australian Taxation Office (ATO) is advancing its audits of global e-commerce businesses, and is challenging their existing business models
  • the ATO is targeting business restructures generally, and in particular the establishment of regional marketing hubs
  • Australia’s treasurer foreshadows Australia’s own ‘Google tax’
  • Australia’s broad ranging tax reform process has commenced

And all this against the background of a politically charged senate enquiry into corporate tax avoidance.

ATO ‘deep audits’ technology giants

The Australian Tax commissioner has commented publicly on a number of occasions that the ATO is currently engaged in ‘deep audits’ of 12 global technology companies. No names have been released, but there will be no prizes for guessing at least some of those involved.

Two things appear to emerge through the limited public comments. First, the taxpayer companies do not acknowledge that Australia has taxing rights over sales revenue generated by them from Australian sources, or if taxing rights do exist, then only to a very limited extent.

Second, the business models which in theory support this assertion are under microscopic review. Apparently, a gulf has been identified between the theory and the operational reality of the tech company business models.

Example: a multinational group is in the business of licensing (selling) software, and provides local country support and maintenance. The foreign parent company is the contracting partner for all software license sales into Australia, with the software being delivered via the Internet. The group has an Australian subsidiary, and its staff are said to undertake only ‘routine activities’, such as first level support and maintenance, and lead generation, but are not involved in the sales process. On this basis, the Australian subsidiary is attributed only a ‘routine return’ and makes only a small profit. No part of the software license revenue is subject to Australian tax.

But the reality is different; most of the sales process is performed in Australia by subsidiary staff, with only the formal contact signing occurring overseas. Further, the staff of the Australian subsidiary receive sales bonuses for successfully ‘closing’ software deals.

This is an example of the type of activity which is in the sights of the Action 7 of the G20/OECD BEPS Project. Action 7 looks to redraw the definition of ‘permanent establishment’, particularly around the sales process, and reinstate source country taxing rights over at least some of the software license revenue.

ATO on regional marketing ‘hubs’

The Commissioner has also identified publicly multinational ‘business restructures’ as a target for attention. Recent media reports have levelled charges against some large Australian resources groups for establishing marketing hubs in Singapore, and subsequently resourcing profits from Australia to Singapore, with the amounts in question said to run into the billions.

But the phenomenon of ‘business restructures’ is not limited to resource companies, and the functions under scrutiny are not limited to marketing activities.

What can be gleaned from reading between the lines is that the corporate’s rationale for the ’restructure’ must be very well documented, and the commercial non-tax reasons must predominate.

Australia to break ranks with its own ‘Google tax’? 

Australia’s Treasurer, Joe Hockey, has floated the prospect of Australia following the UK and introducing its own ‘Google tax’ (or Diverted Profits Tax in the UK nomenclature), as part of Australia’s May 2015 Federal Budget. This would be a remarkable about-face by a Treasurer who, throughout 2014, represented Australia during its G20 Presidential year, and who was very publicly committed to a coordinated global response to the challenges of BEPS.

It remains to be seen whether this is merely another of the Treasurer’s ‘thought bubbles’, or whether it proves a reality. (The Federal Budget will be handed down on Tuesday, 12 May 2015.)

Tax reform white paper

A discussion paper was released on 30 March 2015, kicking off Australia’s latest tax reform process. The discussion paper will underpin a public consultation phase, leading to a green (options) paper, and finally a white (proposals) paper, to be released leading into the next federal election (the next election is due towards the end of calendar 2016.)

The discussion paper is a neutral document, pointing out certain economic realities as Australia heads for a hard landing post the resources boom, and raises for consideration a number of (already well ventilated) options for broad-based tax reform. The domestic changes are going to be politically difficult, which is going to leave multinational groups in line to do most of the ‘heavy lifting’ in tax reform, notwithstanding a proposal to lower Australia’s corporate tax rate.

Salem in Australia

Finally, this week sees the Senate Economics References Committee’s investigation into corporate tax avoidance holding public hearings on 8 to 10 April. The usual suspects will be in attendance: multinational corporations, tax academics, social justice groups, large professional services firms, and the ATO. Media hype has building for a week with a series of front page exposés, and ‘investigative specials’ - some of which raise real issues for consideration, but many of which do no more than generate confusion (at best), or misinformation (at worst).

Having seen the confusion which followed Senator Levin’s 2013 US Senate enquiry into offshore profit shifting, and Margaret Hodge’s 2012 UK Committee of Public Accounts investigation into tax avoidance by multinational companies, it will be interesting to see whether Senator Dastyari is capable of delivering a balanced, unbiased report out of the Australian public hearings. Given the importance of the broader tax reform process, it is earnestly hoped that the committee’s efforts do not descend into partisan political bickering.

Implications

The current ‘noise’ around international tax is deafening, and Australia remains a relatively small player on the international economic stage. However, the ATO is a major player in the international groups and fora represented by states and their national revenue authorities, and as a neutral middle ranking nation, wields considerable clout. It has been publicly reported that US technology companies have complained to the US government about the aggressive investigatory activities of the ATO, which may infer the ATO has found some chinks in their corporate amour.

The issues noted above are not the only matters currently running on international tax, but in the Australian context, these are the ones of most immediate importance, and taxpayers in the affected industries would do well to consider their own circumstances against the background of these noted developments.

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