‘Homeless’ multinationals undermine international tax and trade treaties

The digital economy has generated many changes in how we shop, stay in touch with friends, and manage our daily routines. Despite this, it seems that politicians around the world are only just starting to realise that the digital world has truly changed the economy.

The recent Australian federal budget was the usual mix of promises and projections. One of the more interesting facts presented was the Treasury estimate that since the 2008-09 budget, federal government revenues from tax receipts have fallen by $170 billion dollars.

When it comes to tax revenue and government budgets, there will always be some level of political debate. It is now pretty obvious that traditional sources of government revenue are insufficient, even when the Australian economy is powering ahead strongly. Particularly when you look at the backlog of infrastructure investments needed to keep the economy productive.

Whichever politicians end up running the country after the September federal election, there will be some very tough decisions to make on taxation.

In an interesting coincidence, the announcement of the shortfall in tax revenue has coincided with Treasury bureaucrats kicking off consultations regarding the tax treatment of multinationals doing business with Australians.

At first blush, the multinational taxation consultation process seems to be a rather belated reaction to major political rumblings aired in the G20 and OECD. The issue generating the angst is ‘base erosion and profit shifting’ (BEPS), a rather dull way of saying tax avoidance.

BEPS is seen as a global issue worthy of the attention of the G20 for one simple reason – it is entirely legal, and can be used to avoid almost all corporate income taxes.

Businesses that are able to transact with clients online across international borders are the most likely to be able to profit from BEPS, but it is certainly not the only way corporate leaders minimise tax bills.

The UK parliament has recently been examining in minute detail how Google’s internal employee workflows have been structured to shift the legal location of a business transaction. The inquiry heard that despite employees, clients and work occurring in the UK, Google has successfully claimed that business transactions are legally based in a foreign country.

Amazon has also recently received a huge amount of negative media attention for their UK tax affairs, which seem at face value to be far less adventurous than Google’s. Amazon is reported to have paid just £2.4 million in UK corporate taxes last year on sales of £4.3 billion, while also receiving £2.5 million in UK government grants.

But the biggest revelations to date have been thrown up by the US Senate, whichp recently grilled Aple CEO Tim Cook. The inquiry heard claims that a single Apple-owned entity reported profits of $US30 billion between 2009 and 2012, with no country receiving any tax on that income. Another separate Apple entity managed to pay a tax rate of 0.05% on $22 billion in revenue for 2011.

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