TECHNOLOGY SPECTATOR: Tough times taxing the tech giants

Australia has become a tax shelter for international tech companies' overseas operations and while both sides of government seem desperate to change this, it may be an uphill battle.

Technology Spectator

Stephen Conroy and Malcolm Turnbull usually have plenty to fight about with regards to the NBN but this week the federal communications minister and his opposition counterpart found something else to trade blows on. That issue is a rather contentious one about making the likes of Google, Dell and Amazon pay their fair dues to the ATO, a task that’s easier said than done.

The flashpoint of the entire exercise was the release of Google Australia’s latest accounts earlier this month, which showed that the local arm of the global behemoth had paid a paltry "total incomes tax expense” of $74,176 in 2010/11. That’s a fraction of the estimated $1 billion in revenue that Google actually makes in the country thanks to its dominance in the ads and search services market.

While Google has claimed that the "current tax” expenses figure is actually $781,471, there’s no escaping the fact that the numbers just don’t add up. However, there is no skulduggery at work here, in fact, everything is by the book and above board. The existing tax arrangements allow Google and a host of other multinationals (not just tech companies) to pay minimal tax on Australian profits and channel them to overseas subsidiaries, in more friendly tax jurisdictions like Ireland, Belgium and the Netherlands. 

This issue of transfer pricing is not a new one but things got interesting this week after Malcolm Turnbull told The Australian Financial Review that the Coalition will bring the tech giants to their heels. The pronouncement was swiftly followed by a release in which the opposition communications minister softened his tone. Unsurprisingly, it didn’t take long for Conroy to seize the initiative and accuse Turnbull of a backflip. He backed it up with some extra bluster, warning technology giants that they were on the government’s hit list.

They have in fact been on the hit list for some time now, after assistant treasurer Bill Shorten announced the Gillard government’s plan to reform the transfer pricing rules in the income tax law in November last year. The government released an exposure draft of proposed amendments that will implement the first stage of the reforms in March and it is likely that things will take on a greater sense of urgency as the federal election gets closer.

Turnbull’s comments this week may have led to nothing more than some cheap points scoring by the Gillard government but at least they have brought some focus back on a knotty issue that is only destined to get more complex.

According to Guy Cranswick, an adviser at IT Advisory services company Intelligent Business Research Services (IBRS),the tech companies aren’t in the wrong here but given the mountains of cash flowing into their coffers, it’s no surprise that questions are asked.

However, Cranswick warns that finding a suitable enforcement policy to shut down the loopholes is going to be very hard.

"It’s complicated because the government and the opposition don’t want to frighten tech companies and multinationals away,” he says.

While such a scenario is unlikely, the spectre of taxes almost inevitably raises fears about decreased investments. We have seen such fears bandied about ad-infinitum during the debate around the carbon tax and the mining tax and no government in Canberra will be party to a regime that rocks the investment boat and takes itself out of the loop. Technology companies are not beholden to a region and there is no compunction for them to stay in Australia if the tax regime becomes unsavoury.

Another potent argument in the arsenal of the multinationals is that while they may not pay a lot of taxes they do still serve as an engine to the economy. Corporations employ local staff, who do pay their taxes, in full – they invest in technology and provide a boost to the overall economy.

Cranswick says what’s needed is calm level-headed negotiations rather than political cheap shots.

"If politicians come in and say they want to tighten the tax regime and make things fairer for all taxpayers then they need to engage with the corporations and they might work something out in some other way,” he says.

While transfer pricing isn’t illegal it does allow the tech giants to make things difficult for the local players. Turnbull makes a mention of this in his blog highlighting the example of Amazon.

"There is no GST levied on those sales, and no Australian tax is paid on the profits earned from them, as opposed to the taxes once paid by the Australian-based book sellers Amazon has, in many cases, put out of business.”

It’s a valid point but Cranswick says that it might be a mistake to label this as a David versus Goliath struggle. 

"In some cases there may be tax incentives there for them through state and federal grants or innovation awards,” he says.

There is plenty that the government can do to give the local players a boost and level the playing field and Cranswick says that policymakers need to have this debate now.

"Our terms of trade are high because of iron ore and coal, we are looking at soft productivity and we are looking at technology like the NBN to turn Australia into an exporter of smart ideas en masse, so we need to see work out ways to ensure that the local sector isn’t disadvantaged.”

The issue of fairness certainly warrants a debate and perhaps the greater issue at stake is that the proliferation of cloud for service delivery is only going to muddy the waters even more. Conroy may have had his laugh at Turnbull’s expense but the recent findings of the media convergence review was an example of the challenges facing policymakers.  

Allowing the likes of Google, Apple and Telstra to escape the regulatory embrace of the proposed watchdog, thanks to a loophole, shows a rather quaint approach from Canberra to how media is consumed today. It will be interesting to see what approach the government takes to transfer pricing but making the tech giants pay more could well be a ‘wild goose chase’ for the government.