As elsewhere in the world considerable work has been done in the region on countries sharing tax information to overcome major avoidance and even evasion but the basic question of how much tax multinationals or even individuals should pay - and which countries they should pay it in - remains unresolved.
"The basic question of how much tax multinationals or even individuals should pay remains unresolved."
Mark Lawson, Journalist, editor & author
An international approach with agreed rules would be ideal, but individual countries are going their own way.
The Australian parliament is considering a diverted profits tax (also known as the Google tax) specifically targeting multinationals, mainly the technological majors thought to be avoiding far too much tax.
Indonesia, meanwhile, is well advanced in a tax amnesty program to encourage citizens and companies to repatriate an estimated $US42.5 billion worth of undeclared assets held overseas.
The international approach has not been neglected. In January, Thailand joined the Global Forum on Transparency and Exchange of Information for Tax Purposes and in 2015 Hong Kong was removed from the European Commission’s blacklist of non-cooperative tax jurisdictions.
But the emphasis remains on unilateral action with much of the debate over multinationals avoiding tax focused on the major technology companies such as Apple, Microsoft and Google, which earn vast revenues in some countries without seeming to pay the corresponding tax.
A 2015 Australian Senate committee inquiry on tax avoidence notes Apple’s Australian subsidiary earned revenue of more than $A6 billion in 2013-14 but declared a taxable income of just $A247 million. Microsoft earned $A2 billion but only $A100 million of the revenue was relevant to the Australian tax system.
The challenge though is tax is not as simple as looking at revenue and profits. The committee, which included Labor senator Sam Dastyari, was also told Microsoft booked its Asia Pacific revenues in Singapore on products developed mainly in the US, with its Australian operations providing marketing and support.
The Apple products are developed in one country (often the US), manufactured in another and the intellectual property held in a third.
Those IT companies and the likes of the major pharmaceutical corporations, which spend billions developing new drugs, have had Advanced Pricing Agreements with the Australian Taxation Office since the 1990s. Those agreements look at just how much revenue Australia can tax.
Another complex case in point examined by the Senate committee where it is far from clear which country should get the tax revenue is BHP Billiton.
Like Rio Tinto, BHP generates billions in revenue selling coal in China, but the coal is due out of the ground in Australia and the company has substantial marketing operations in Singapore.
These issues are well known to the ATO which administers transfer pricing regulations (the prices companies can charge overseas subsidiaries for products) and thin capitalisation rules (which deal with interest payments which may be disguised profits).
Just how much a diverted-profits tax in Australia, which adds a test of ‘economic substance’ and the concept of a ‘tax mismatch’ between countries to an already strong anti-avoidance suite of legislation remains to be seen. The tax, now before a Senate committee, is expected to take effect from July 1.
Tax professionals have expressed concern about the approach.
David Watkins, a tax partner at Deloitte in Australia, says business has become “increasingly digitised, globalised and fragmented with value increasingly attributed to intangible, mobile assets.”
These new business models place stress on and expose weaknesses in the international tax system, which is based on laws and concepts developed almost 100 years ago, he says.
“The international tax system is in need of modernisation – and that is actively occurring at the moment under the leadership of the G20 and the OECD via the Base Erosion & Profit Shifting (BEPS) process,” Watkins says.
A recurring theme is that profits should be located and taxed where the value creation activities occur.
Australia is in the first wave of BEPS implementers, Watkins says, including some unilateral measures which arguably go beyond BEPS (such as the multinational anti avoidance law and the Diverted Profits Tax) – but it should be appreciated that the Australian BEPS implementation build upon many strengths in Australia: a robust tax system, with strong anti-avoidance laws, an effective tax administration and a strong culture of corporate tax compliance.
“At the same time as global tax rules are being strengthened and harmonised, countries are continuing to compete for investment capital and talent. Tax systems need to have carrots as well as sticks,” he says.
Liam Delahunty, a director in KPMG’s tax practice says, Australia already has a “very robust transfer pricing and anti-avoidance rules.
“It is questionable whether the DPT is necessary and it is open to challenge whether unilateral action is desirable,” he says.
“The DPT may also present practical and reputational difficulties for Australia as a capital importer. Nonetheless, the determination has been made to proceed with the DPT, so multinationals are now going to have to deal with it as best they can.”
Although a company’s revenue in Australia may not be a fair indication of the tax to be paid, finding just where any particular company has paid tax can be hard, particularly in the case of Apple.
In August last year, after investigations by a Task Force on Tax Planning Practices, the European Union ordered Ireland to bill the iPhone maker €13 billion in back taxes plus interest, for 14 tax years up to 2015. The task force concluded Ireland had permitted Apple to create stateless entities which permitted the company to decide how much tax it would pay.
Indonesia, in contrast, faces a different problem of citizens and companies holding assets overseas which they should report to the country’s tax authorities but have not done so.
The Indonesia Parliament voted for an amnesty in June of last year, with President Joko Widodo hoping penalties of 2 per cent to 10 per cent levied on previously undeclared assets will help cover an expanded budget deficit. (The government has also been reported as declaring it hopes to gain 30 per cent of the repatriated assets).
As of mid-February 104 trillion rupiah or just north of $A10 billion had been collected by the government, which is about two thirds of the expected amount.
Indonesia’s tax system is not as sophisticated or all-embracing as Australia. In a country of 255 million people, there are only 27 million registered taxpayers.
Both countries have a similar problem of taxpayers holding substantial assets overseas which the authorities know nothing about. Until the last decade or so, identifying those assets could be difficult indeed.
This problem is being attacked by various committees in the European Union, the OECD and the United Nations. In 2000, for example, the OECD committee on fiscal affairs had a list of more than 40 countries not committed to its rules on transparency and exchange of information in tax and revenue.
In May, 2009 the committee decided to remove the last three list countries from the list – Andorra, the Principality of Liechtenstein and the Principality of Monaco. Nauru and Vanuatu made their commitments in 2003 and Liberia and the Marshall Islands in 2007.
Despite those advances, as the 2015 incident of the so called Panama papers shows, there are still plenty of people and companies using tax havens.
This incident involved the leak of 11.5 million internal documents from a law firm in Panama, Mossack Fonseca, which arranges shelf companies in tax havens or former tax havens around the world.
The list of people who had shelf companies arranged for them included the Prime Minister of Iceland, President of the Ukraine, close associates of Russian President Vladimir Putin and the family of Chinese President Xi Jinping, as well as 800 high net worth individuals in Australia.
International tax is proving a very complex area, particularly now production chains are spread across regions and major corporations can have operations in many countries.
There are now fewer places to hide those profits and companies, but the question of just how much tax should be paid on goods and intellectual property in each particular jurisdiction in the supply chain remains unresolved.
Mark Lawson is a freelance journalist and author
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.