Where do things stand with the government’s efforts to combat corporate tax avoidance and evasion, one of its priorities as G20 chair in 2014?
The headlines suggest a contradictory stance.
The latest headline is that Treasurer Hockey 'backflips on tax laws to target multinational profit-shifters’. This refers to the announcement in the 2013-14 Mid-Year Economic and Fiscal Outlook that the government would not proceed with a policy announced by the former Labor government abolishing a provision by which companies could claim a tax deduction on interest expenses incurred in deriving certain foreign income. (Specifically, abolishing section 25-90 -- like everything in tax, it is complicated).
Not surprisingly, the government has been criticised by the opposition, with the shadow assistant treasurer, Andrew Leigh, saying it was "another giveaway to multinational corporations".
But only a few days ago, the AFR said: 'Joe Hockey ups pressure on multinationals over tax avoidance.’ On December 9, the Treasurer told journalists: ‘The developed world has had enough. We are not going to cop this sort of (tax) minimisation and in certain circumstances avoidance and even evasion’.
The Treasurer did not announce any new measures, but said officers from the Australian Tax Office were embedded in ten multinationals to examine their tax affairs. In previous comments, the Treasurer raised the prospect that Australia may follow the recent announcement by the UK and introduce a ‘Google tax’, officially known in the UK as a diverted profit tax, which is aimed at companies that artificially avoid tax.
So the Treasurer seems to be talking tough about cracking down on combating multilateral tax avoidance, but is being accused of going soft and not proceeding with tough anti-avoidance measures.
This may suggest that the government’s actions and words are contradictory, but it merely highlights many of the difficulties in actually doing something about corporate tax avoidance and evasion. These difficulties are increasingly becoming evident with the OECD/G20’s Base Erosion and Profit Shifting initiative.
Firstly, tough talk is easy, but developing well thought through and targeted anti-avoidance measures is hard. The criticism of the former government’s proposal to abolish section 25-90 was that it would significantly increase complexity and compliance costs for corporations and impede legitimate taxpayer activity in investing offshore.
This was the argument used by the Treasurer in defending the government's decision not to proceed with the abolition of section 25-90. However, this is the same criticism levied by industry in response to many of the BEPS discussion papers issued by the OECD.
Many of the comments received by the OECD emphasise that the proposals will impede legitimate economic activity and cover transactions that are not motivated by attempts to reduce tax. This was recognised by ATO deputy commissioner Mark Konza when, in commenting on one of the measures in the BEPS action plan, he emphasised that any new rules introduced by Australia should not apply to unintended situations -- that is, those which are not aimed at achieving a tax advantage.
Secondly, the actions of a few jeopardise the activities of many. While the perception may be that every corporation is involved in highly aggressive tax planning that is substantially undermining government revenues, the reality is that it is probably only a minority of firms that are truly exploiting the system. This is recognised by the ATO, when it noted: "We acknowledge that taxpayers willingly comply with their obligations however there are a minority who use sophisticated tax arrangements to gain an unfair advantage over others".
This was also the case with section 25-90. In commenting on the announcement by the former government that it was going to abolish this section, the Institute of Chartered Accountants stated: "it is a mistake to cast a broad net across all companies when the concerned practices are perpetrated by a minority". However, the action of a minority, particularly when they are well-known corporations, can receive a great deal of publicity and influence public perceptions.
Thirdly, maintaining a coordinated international response to BEPS will be increasingly difficult. The OECD have warned that countries taking unilateral action to combat corporate tax avoidance could result in firms facing double-taxation as well as increased compliance costs and uncertainty. However governments are under increasing pressure to do something ‘now’ to combat what is perceived as tax abuse by multinationals.
This is the motivation behind the unilateral action by the UK to impose a ‘Google tax’. The UK is accused of breaking ranks with the G20/OECD BEPS Action Plan. The same concern is being raised with Australia’s apparent interest in following the UK, which could be seen as a vote of no confidence in the OECD/G20 project, notwithstanding that Treasurer Hockey spent 2014 championing the G20’s BEPS collective action.
The government will come under increasing pressure to be seen to be getting tough on combating corporate tax avoidance. But the challenge will be getting the balance right between targeting action towards those who are essentially ‘abusing’ the system and avoiding imposing excessive costs on those undertaking legitimate activities.
This is easier said then done. The government will likely be damned when it does take action and damned when it doesn’t.
Mike Callaghan is nonresident fellow at the Lowy Institute for International Policy.