tip off

The net closes, albeit slowly, on tax-dodging tech giants

There’s been plenty of media fuss about how little tax tech giants like Google pay in Australia. The problem goes wider, and yes, there are efforts to address it.

Senior Australian government sources say it will prove to be the biggest tax lurk in history; the erosion of the global tax base by the giants of the digital economy, the likes of Google and Apple, Microsoft and Facebook.

Australia, under long-term budget pressure due to the ageing population, is arguably missing out on hundreds of millions of dollars in tax revenue each year. It’s worth noting, however, that there are few reliable estimates, and a Treasury paper last year questioned whether there were yet widespread losses due to so-called “base erosion and profit shifting” (BEPS) here.

Certainly the playing field is uneven for the media industry, which, amid a painful transformation, is crying foul as tech giants hoover up more and more advertising revenue — billionaire Kerry Stokes, for example, demanded federal government action, saying Google was “a fine company doing a good job, except I would like them to pay their fair share of tax”.

Last week we learnt Google, with some 900 employees here, paid just under $500,000 in income tax, after deductions, in 2013. That’s on reported profits in Australia of some $47 million. Escaping the tax net completely was the vast bulk of Google’s local business, an estimated $2 billion of sales to Australian customers by Google’s online advertising business Adwords, a registered business name of a private Singapore company, Google Asia Pacific Pty Ltd. That’s wholly owned by Ireland-based Google Ireland Holdings.

Crikey asked Singapore authorities how much tax Google paid in Singapore. We’ll keep you posted.

Adwords’ Australian revenue is estimated, because Google does not release sales figures, but it’s said to have a 95% share of the search and online directory market here, which monitors IAB put at $2.1 billion last year and rising …

Total Search and Directories advertising expenditure, by year. Source: IAB / PWC Online Advertising Expenditure report

That makes Adwords Australia’s largest media business by sales, which could make Adwords the country’s biggest media business by sales, pipping both Fairfax ($2 billion) and Seven West Media ($1.9 billion) in 2012-13 and falling. Yet Adwords pays no income tax here, and invoices show it pays no GST either. In this cracking piece today Michael West estimates a more appropriate tax bill for Google in Australia might be $136 million.

Mark Zirnsak, Australian spokesman for international activist group the Tax Justice Network, says part of a complex problem is that Google says its Australian employees are servicing products, rather than generating sales.

Google is by no means alone, of course, and many say companies like fast-growing Facebook are happy to fly under the radar and let Google take the heat.

While transfer pricing and profit-shifting by multinationals is nothing new, the digital economy poses fresh problems as most profit is derived from intangible intellectual property, which can be easily transferred to low-tax jurisdictions to support the claim that’s where the money’s being made. Exacerbating the problem are lax US tax arrangements for foreign-controlled corporations, which mean offshore profits of US companies are not taxed until they are repatriated. That leads to US tech giants parking — perfectly legally — a colossal US$2 trillion in accumulated profits in low-tax countries, waiting for the US government to declare a tax amnesty as they do every 10-15 years, when the money will be brought home.

Says Zirnsak: “There wouldn’t be such a debate if these companies were paying income at 35% in the US. It’s not paying to anyone that’s the problem”.

As the OECD’s tax head Pascal Saint-Amans told The Australian in March:

At the end of the day there is no tax anywhere. There no tax where the activity takes place, no tax where the owner is located and no tax where the profit is reported because it is a no-tax jurisdiction.”

Treasurer Joe Hockey is using Australia’s G20 chairmanship in 2014 to push the issue at a country-to-country level. The G20 has approved a 15-point action plan by the OECD, which has three main prongs:

  1. Address tax avoidance, particularly base erosion and profit-shifting to ensure profits are taxed in the location where the economic activity takes place;
  2. Promote international tax transparency and the global sharing of information so that taxpayers with offshore investments comply with their domestic tax obligations; and
  3. Ensure developing countries benefit from the G20’s tax agenda, particularly in relation to information-sharing.

At at an agency level, as The Australian Financial Review’s Neil Chenoweth reported this week, the ATO is leading a historic six-nation collaboration, including China’s tax office and that of four other unidentified jurisdictions, to jointly investigate eight of the world’s largest technology giants, including Apple and Google.

Today and tomorrow, officials from the G20 nations will gather in Tokyo for an international tax symposium, with speakers including Australian Taxation Office Commissioner Chris Jordan, World Vision’s Tim Costello and Rio Tinto’s global tax chief Ross Lyons.

However slowly — waaaaay too slowly — the world’s regulators are trying to catch up.

6
  • 1
    Andybob
    Posted Friday, 9 May 2014 at 1:36 pm | Permalink

    A ‘bit’ tax might be part of a solution. Tax liability being the greater of conventional liability and ‘bit tax’ liability. Pitch the bit tax at rates that capture very large bandwidth internet businesses, without adding too greatly to lesser bandwidth businesses.

  • 2
    Jakob Landis
    Posted Friday, 9 May 2014 at 3:30 pm | Permalink

    We deal with profit shifting in the mining industry by a royalty on the gross value of production (or some near equivalent).

    Surely the same can be done for internet businesses!

  • 3
    Reechard
    Posted Friday, 9 May 2014 at 9:32 pm | Permalink

    How hard is it???
    A company pays the taxes of the country where it makes the money. It is not rocket science and no amount of legal sophistry and obfuscation should be allowed to change that.

  • 4
    Posted Saturday, 10 May 2014 at 12:27 am | Permalink

    There are many ways of shifting taxes between jurisdictions. An obvious ploy is transfer pricing. For example, a company could sell a product in Australia for $1,000 but pay its overseas parent $900 for the product and another $100 for licence fees.

    Follow Henry and start taxing land properly: it distorts economic activity much less than other taxes, it is reasonably efficient to collect and it is hard to offshore.

  • 5
    robert roberts
    Posted Saturday, 10 May 2014 at 12:41 pm | Permalink

    A “bit tax” could be seen as a turnover tax on digital traffic. Much like the gasoline tax. Doesn’t deal with the value of the transaction but just the amount of bits. And, yes, the high bandwidth users could carry a higher bit rate.

    In fact it has been argued for years that we need new taxes for the new economy and the bit tax is one such example.

  • 6
    J Foss
    Posted Monday, 12 May 2014 at 11:03 pm | Permalink

    If the corporate service provider such as google can’t be made to pay tax then tax the person buying the advertising by disallowing as a tax deduction any money spent with companies that use transfer pricing. That should focus their minds.

Womens Agenda

loading...

Smart Company

loading...

StartupSmart

loading...

Property Observer

loading...