Australia builds Pacific tax system to counter China's 'debt-trap diplomacy'

The Albanese government is assisting Pacific island nations to build a tax system that would bolster revenues and reduce the risk of falling prey to Chinese influence.

Australia has been looking to counter China’s influence in the pacific.

The Albanese government is assisting Pacific island nations to build an upscaled consumption and foreign company tax system that would bolster government revenues and reduce the risk of such countries falling prey to Chinese “debt-trap diplomacy”.

While Australia will not be involved in any collection or enforcement of the tax, China watchers say Australia’s deep involvement is part of its efforts to quietly thwart Chinese financial influence in the region.

The development comes as Australia allocates millions of dollars to bolster banking services in Pacific Island countries and signing up nations to superannuation investment agreements similar to that with the Cook Islands.

Australia has been lifting efforts with the Pacific Islands including the recently signed Pukpuk agreement with Papua New Guinea, but has struggled with a stalled $500m economic security agreement with Vanuatu and its attempts to counter China’s security deal with the Solomon Islands.

The Australian Taxation Office revealed it was now helping the Pacific island nations on their tax systems in a move it said would strengthen ties and boost revenue in those countries.

“The ATO … seeks to enhance the co-operation of tax systems; contributing to stronger ties with other tax jurisdictions from around our region, supporting capability and capacity building programs, helping strengthen revenue administrations, improving transparency, and boosting economic growth in several Pacific countries,” an ATO spokeswoman said.

“The ATO has been supporting a number of Pacific countries, including supporting Palau’s Bureau of Revenue and Taxation to modernise its tax system, including the successful introduction of the Goods and Services Tax and Business Profit Tax.”

Part of the tax assistance may include the so-called Netflix Tax in Australia where GST is payable on intangible services and digital content provided to consumers in those countries by nonresident companies.

The design could see a system that allows multinationals to only register once for GST or Value Added Tax across the Pacific countries, avoiding the need for separate registrations. The countries are members of Pacific Islands Tax Administrators Association which includes Fiji, Solomon Islands, and Papua New Guinea among others.

“We have worked closely with Fiji Revenue and Customs Service supporting their debt management reform and focus on improving customer engagement and strengthening overall tax compliance through demand letter and final notice for payment, with clearer communication and more customer-centred language,” the ATO said.

“The ATO has also been actively supporting the Internal Revenue Commission of Papua New Guinea in strengthening key aspects of their tax administration. Since initiating their transformation journey in 2020, the IRC has set a clear vision to evolve into a robust, modern, and efficient tax authority by 2027.

“The ATO actively supports the Australian government’s Official Development Assistance Programs across the Pacific.”

Strategic Analysis Australia director Peter Jennings said he was cautious about the efforts and he would prefer to see the Albanese government create opportunities encouraging Australian companies to operate in the Pacific Islands, by offering tax breaks to companies prepared to engage.

“These changes have to be delivered very carefully in order to not reduce opportunities for foreign investment in Pacific Island states but at the same time to give local government the opportunity to collect reasonable income,” Mr Jennings said.

There is also an issue with corruption in quite a number of Pacific states which can mean that cashed up companies are able to operate freely outside of appropriate legal taxation. The risk is this could continue to happen.”

Charles Parton, a senior associate fellow of the Mercator Institute for China Studies said the Australian government’s decision to be involved in building the tax systems was unsurprising given China’s efforts in the Pacific.

“This is what the Chinese are doing with their financial system because they know it will help them,” Mr Parton said. “Australia is just doing the same. It will have geopolitical consequences.

“It’s an inevitable part of the confrontation between western systems and China’s system.”

Mr Parton said he thought it would take several years to start bringing in revenue at a sufficient pace to make a difference.

“That is not to knock the concept, but only to question the timing,” he said.

“It also is likely that the island countries will continue to look for development loans. and the Chinese will be very keen to supply them and to link them to work carried out by Chinese companies.”

Pacific geopolitical experts have suggested that Australia needs to build up intelligence-sharing programs with such nations to counter China’s aggression in the region.

The Lowy Institute’s Oliver Nobetau and Mihai Sora have proposed creating a Pacific Eyes agreement, which would be a dedicated intelligence-sharing framework designed to transform regional security co-operation.

“Australia should lead the creation of a formal intelligence-sharing framework – a ‘Pacific Eyes agreement’ – initially involving Australia, New Zealand, Papua New Guinea, and Fiji, the four most closely aligned countries in the region,” Mr Sora said.

“By embedding structured, continuous intelligence collaboration between Australia, New Zealand, Papua New Guinea, and Fiji, the initiative would build capacity, deepen trust, and lay the foundations for a resilient Pacific Islands security community.”