Closing the tax net on online giants

The federal government is on the verge of releasing a controversial scoping study into complex tax minimisation structures being used by e-commerce and tech companies such as Google, Amazon and Apple.

The draft report comes just five months after the Gillard government appointed a specialist taskforce to advise Treasury on the risks of erosion of tax revenue as well as some potential solutions.

It is no surprise that the report will be released shortly after a Senate hearing on Tuesday into the tax avoidance and multinational profit-shifting bill, which is expected to be introduced imminently.

It also comes as Prime Minister Julia Gillard confirmed on Monday that the budget deficit would be close to $11 billion due to a decline in tax revenue. Part of the tax shortfall is due to the strong currency, lower commodity prices and an overall weakening in taxable profits.

In some cases the weakening in taxable profits is due to the rise of internet companies. For instance, buying a book on Amazon, music on Apple or make-up on strawberrynet.com or other internet companies has a double whammy impact on taxes in Australia. Firstly, these companies pay little or no tax in Australia and they also take revenue away from local bookshops, department stores and music stores, which ultimately means less tax revenue collected by the ATO.

When put into this context it helps explains why e-commerce heavyweights such as Google and its "Double Irish Dutch Sandwich" techniques - or other variants - which are designed to pay minimal tax, are in the government's sights.

Australia is not alone. Most OECD countries and the G20 have put the issue as a key item on their agendas, with the OECD expected to release a major report at the end of June.

The US Senate held a committee on Offshore Profit Shifting and the US Tax Code in September which revealed that between 2009 and 2011 Microsoft was able to save up to $US4.5 billion in taxes by transferring certain intellectual property rights to a subsidiary based in Puerto Rico.

In Britain, the media reported that Amazon paid no tax, yet made more than £3 billion in sales. It did this through an elaborate routing of transactions through Luxembourg, where it faced an effective tax rate of 2.5 per cent.

Australia wants to contribute to the debate, hence an early release of its own report at a time when tax revenue and tax revenue erosion is a hot topic.

It is not known how much tax revenue leakage has been caused in Australia but when the bill to beef up tax avoidance is introduced it is expected to save Australia more than $1 billion a year in revenue.

Companies including Apple and Amazon are not breaking the law, they have merely found ways to minimise tax because laws around the world are based on old principles. Furthermore, it is not limited to internet or e-commerce giants. As Assistant Treasurer David Bradbury said in a recent speech entitled "Stateless Income": "What you do need is the global presence of a multinational enterprise and the ability to attribute a large part of your profits to intangible assets. "And we know that intangible assets play an increasingly important role in the modern global economy. Assets such as software, databases, patents, copyright, and perhaps most ubiquitous, goodwill, or more simply put, brand value."

The problem is if the government goes too far in widening the net to capture these "stateless" companies by taxing them where the product is sold it could have some serious unintended consequences. For instance, other countries such as China could decide to adopt a similar practice and start taxing mining companies that export commodities to China.

For this reason, a crackdown won't be easy as it is mired in global politics. Treasury's scoping study is believed to have stuck closely to the OECD's framework, which includes increasing transparency of the reporting of multinational corporations.

The taskforce, including heavyweights such as former tax commissioner Michael D'Ascenzo, Rio Tinto's Ross Lyons, Clayton Utz tax partner Niv Tadmore and Mark Zirnsak from the Uniting Church, is believed to have received a copy of the scoping study in the past couple of weeks. The study will be released for public debate and is expected to look at ways of strengthening anti-avoidance laws even further.

In the meantime, the bill to amend transfer pricing and anti-avoidance law under Part IVA will have a profound impact on the ATO's powers, and those of business.