Tax system weaker in digital age

There is serious concern that Australia's tax system is failing in the digital economy, where global technology companies are shifting profits into low-tax jurisdictions, a Treasury paper has warned.

The Treasury document comes a day after the body representing companies including Apple, Google and Microsoft hit out at the government's efforts to bolster disclosure of the amount of tax they pay here. The issues paper was released by a government-appointed taskforce to advise Treasury on the risks of tax erosion. It said the shift towards knowledge-based goods and services, such as online advertising, had left Australia's tax system unsustainable.

"The global reach of multinational enterprises, along with the developments in information and communication technology ... provides them with a high degree of flexibility in how to structure their affairs."

It said the impact of the global financial crisis on government tax revenues around the world had triggered greater attention on elaborate tax minimisation strategies, such as the "Double Irish Dutch Sandwich", which companies such as Apple use to avoid corporate tax rates in Australia.

However, it admitted it had insufficient data to measure the scope of tax avoidance committed by multinational firms, which are able to exploit gaps in the international tax system through complex ownership structures. "These developments raise serious concerns about the efficiency, equity and sustainability of the income tax system." It called on submissions that addressed possible solutions to tax erosion and any data that would assist the Tax Office identify profit shifting.

The report comes after a Senate hearing on Tuesday into the tax avoidance and multinational profit-shifting bill, expected to be introduced imminently. Both are part of a push by the federal government to clamp down on multinational tax avoidance, which also includes a bill that would force companies to disclose how much tax they pay.

The Australian Information Industry Association said the government's efforts would result in a "naming and shaming" of companies and could prompt some to pull out of the local market, leading to job losses.

But Assistant Treasurer David Bradbury said the moves would tighten loopholes and protect more than $10 billion of revenue over the next four years. "We need to make sure we are doing everything possible through our domestic laws to keep up with the changing nature of global commerce in the information age."