Why the ‘Google tax’ is doomed to fail

EXPERTS have warned that Treasurer Joe Hockey’s crackdown on multinational tax avoidance is doomed to be the ‘Mining Tax 2.0’.

“How will the ATO make a foreign entity declare revenue in Australia?”

EXPERTS have warned that Treasurer Joe Hockey’s crackdown on multinational tax avoidance is slated to be the ‘Mining Tax 2.0’, with a high risk of raising no revenue.

One of the signature policies of last week’s budget was enhanced measures targeting “approximately 30 large multinational companies” suspected of “diverting profits using artificial structures to avoid a taxable presence in Australia”.

But writing in The Conversation, University of Sydney associate professor Antony Ting said a close look at the new laws “shows they lack teeth”.

He argues that the conditions which would need to be satisfied under the proposed law, limit the number of companies that could be targeted, and it is doubtful whether it would be an effective weapon even against those few companies.

The conditions are: first, a foreign multinational with annual global revenue of more than $1 billion derives income from sales made to Australian customers. “Second, it avoids booking the sales income in Australia,” he writes.

“Third, the profits generated from the sales are subject to low corporate tax rate overseas. Fourth, the structure is designed with a ‘principal purpose’ of avoiding Australian income tax.”

Leaving aside the issue that many Australian-based multinationals also suspected of tax avoidance will be excluded, the key problem is those two words: ‘principal purpose’, which is an “untested concept in Australian income tax law”.

He argues it will face similar issues as the existing general anti-avoidance rule known as Part IVA, which does not apply unless the ATO can prove that the “‘sole or dominant purpose’ of a tax structure is for a tax benefit”.

“In practice, it is very difficult for the ATO to substantiate that the ‘dominant purpose’ of a complex tax avoidance corporate structure is for tax avoidance,” Professor Ting writes.

“Multinationals often have substantial resources to engage industry experts and tax lawyers to argue that the structure is driven primarily by commercial reasons, and tax benefit is merely an incidental consequence.”

Associate professor Roman Lanis and academic Ross McClure from the University of Technology Sydney, also writing in The Conversation, argue that the definition of ‘taxable presence’ will be another fatal flaw.

For example, when an Australian customer purchases a service from Google such as advertising, the company books the revenue directly to Google Asia-Pacific, which is based in Singapore.

“[Two] major problems stick out very clearly. One is that the profits are booked to a corporation in a different country, and the Australian government has absolutely no jurisdiction over that entity,” they write.

“The very obvious question is; how will the ATO make a foreign entity (whether a related party to Google or not) declare revenue in Australia? It is doubtful that any such foreign entity will do this voluntarily, simply to comply with a law in a different jurisdiction.”

Originally published as Why the ‘Google tax’ is doomed to fail