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By Peter Hill
Concerns are being raised that the Australian government’s decision to go it alone and impose a new tax on multinational digital companies preempts multilateral efforts and could have adverse consequences.
The warning comes amid the imminent release of a discussion paper, which, according to Federal Treasurer Scott Morrison, “will explore options for taxing digital business in Australia.” Morrison announced his intentions to tackle global digital companies during his 2018-19 budget speech to parliament May 8.
Among the options the Treasury is understood to be exploring is a 3 percent levy on the advertising revenue of digital and tech giants, similar to the proposed interim measure mooted by the European Union May 21. Morrison in his budget speech said he wants to ensure that companies like Facebook Inc. and Alphabet Inc.'s Google “pay their fair share of tax.”
The timing of Morrison’s new move against tech giants may be influenced by the government’s ongoing struggle to convince the cross-benchers in parliament to support its plan to reduce the company tax rate to 25 percent from 30 percent. There are indications the government will get the two votes it needs if it makes such a move.
Niv Tadmore, tax partner at Clayton Utz in Melbourne, told Bloomberg Tax in an email May 25 that his key concern is “the risk of lack of a global coordinated approach resulting in uncoordinated revenue measures around digital commerce.”
Australia is moving unilaterally because the OECD has been unable to reach a consensus on Action 1 of its Base Erosion and Profit Shifting Plan, which concerns tax challenges within the digital economy, Tadmore said. “Other countries and the EU have already moved to that space, seemingly for that very reason,” he said.
However, he noted that some action on the digital economy is inevitable. “That was the key driver of the BEPS project and the G20 support for it,” he said.
Paul Drum, head of policy at CPA Australia in Melbourne, said that even as an interim measure, such a levy will be “a bit of a first.” “Australia has shown it is not afraid of not waiting and going it pretty much alone when it comes to tax,” Drum said in an email May 22.
Imposing the tax might be seen as awkward considering the U.S., home to the multinational companies in Australia’s sights, hasn’t signed on to BEPS plans.
Toby Eggleston, director at Greenwoods in Melbourne, said the U.S. had already indicated its unhappiness with the EU’s interim proposal.
“The difficulty for Australia is that the U.S. and China could well see the proposal as a convenient rejection of the long-standing principles of taxation for one particular sector — where Australian companies have been pretty much non-existent — while retaining the traditional taxation principles on selling raw materials such as iron ore and coal,” he said in an email May 24.
Eggleston warned that given President Donald Trump’s posturing around trade wars and unfair practices against U.S. companies, it didn’t seem out of the question that the U.S. might utilize its “ section 891” power and impose double rates of tax on foreign citizens and businesses of any country the administration considers to be discriminating against US companies. This could also mean targeting of prominent Australian businesses.
Bob Deutsch, senior tax counsel and head of education at the Tax Institute in Sydney, has another concern—that large multinational companies decide to wind back their operations in Australia. He told Bloomberg Tax in an email May 22 a 3 percent revenue tax “may just be the straw that breaks the camel’s back.”
“Taxing foreign companies investing in Australia needs to be approached in a balanced, considered fashion because there is a lot at stake,” Deutsch said.
He noted the country’s Multinational Anti-Avoidance Law (MAAL), the more recent Diverted Profits Tax, and other measures aimed at global companies—both proposed and introduced in Australia.
“We do not want to create an unnecessarily hostile environment where significant global players avoid doing business here because of a real or perceived sense that Australia is an unfavourable tax jurisdiction,” he said.
Other factors may also be at play in the timing of the government’s move against the likes of Facebook and Google.
Both those companies, for example, told an Australian senate committee hearing last year that they had each restructured their respective advertising businesses as a direct result of wanting to avoid being in scope for the MAAL.
The threat of MAAL to Facebook, Google, and other global e-commerce companies has been hailed as a success by both Morrison and the Australian Tax Office as resulting in A$7 billion ($5.3 billion) in extra revenue being declared annually in Australia.
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