Budget 2013: new tax laws for tech giants

The Government has delivered on its promise to crack down on the complex tax structures of multinational technology giants operating in Australia, revealing in budget papers plans to improve compliance in an effort to deliver a revenue gain of $1.5 billion. 

The Government has been zeroing in on the “aggressive tax practices” of global giants like Google and Apple as part of an inquiry into transfer pricing, which could force multinationals to reveal exactly how they calculate their local tax bills.

Last month it released a paper seeking to establish whether the local corporate tax base was being negatively affected by the current use of international tax rules.

Google and Apple have been singled out as users of the “Double Irish Dutch Sandwich” method, where a company shifts income from a higher-taxing country to a lower tax one using a territorial rather than worldwide tax approach. 

The territorial method, used by Australia for businesses but not individuals, means a company is only taxed on its earnings sourced within local borders. 

Apple paid $40 million in Australian tax in 2011 on record revenues of $6 billion, while Google paid $74,176 in tax off $201 million in revenue - a figure later disputed by the company, which claimed its tax bill was closer to $781,471.

In last night’s budget announcement, the Federal Government said it would use its position as chair of next year’s G20 to advance the case for multilateral action on profit shifting, and would sign an updated tax treaty with Switzerland to facilitate “better exchange of taxpayer information overcoming long standing bank secrecy provisions.”

‘Immediate action’

Locally, the Government will take “immediate action” to close loopholes and protect the corporate tax base from erosion, it said.

Such actions include:

• addressing aggressive tax structures that seek to shift profits by artificially loading debt in Australia;
• closing loopholes in the Offshore Banking Unit regime and closing loopholes that allow investors to engage in 'dividend washing';
• improving the integrity of the foreign resident capital gains tax regime and addressing low levels of voluntary compliance;
• increasing ATO compliance checks on offshore marketing hubs and business restructures; and
• closing loopholes in the consolidation regime and levelling the playing field between Australian consolidated groups and foreign-owned multiple entry consolidated groups

The ATO will increase the frequency of its compliance checks on offshore marketing hubs and business restructures.

The Government will provide $109.1 million over four years to the ATO to increase monitoring of companies restructuring their business to facilitate profit shifting. It expects to increase revenue by $576.5 million as a result. 

It will also tighten thin capitalisation rules, increase the debt deductions minimum threshold from $250,000 to $2 million, and remove a provision allowing tax deduction for interest expenses incurred in gaining certain exempt foreign income. The changes will affect income after July 1 2014.

As of yesterday, consolidated groups will no longer be able to access double deductions by shifting the value of assets between entities, and non-Australians will not longer be able to buy and sell assets between consolidated groups to allow the same owner to claim double deductions. The changes are expected to earn the Government $540 million. 

Offshore banking units will also be subject to a new measure ruling dealings with related parties ineligible for OBU treatment, while the current list of OBU activity will be tightened. The changes will come into effect after the beginning of July this year, and will reap $320 million. 

A Treasury report this month found Australian companies have been paying around 27 cents tax per dollar of profit compared to the statutory rate of 30 cents per dollar, with company tax receipts accounting for 22 percent of total tax receipts in 2011-12. 

Australia's corporate tax collections have "fallen by more and recovered by less" since the GFC began, Treasury said.