It’s no secret that companies including Apple, Google, Amazon, Uber, Airbnb and Ikea seem to pay less than their fair share of tax in Australia. Despite booking huge revenues from sales to Australian customers they are able to reduce their profits in this country by shifting profits to tax havens such as Ireland, the Netherlands, Luxembourg and the Cayman Islands, to name a few.
Apple shifrts its rights for all markets outside the Americas to a subsidiary in Ireland through a cost sharing agreement. The agreement allows Apple to circumvent the US transfer pricing rules. All international sales outside the Americas are routed through Ireland where Apple negotiated a 2.5% tax rate.
Appple also exploits the different rules regarding tax resident status in Ireland. This enabled it to have an entity with no declared tax jurisdiction that booked over US$30 billion in profits between 2009 and 2012.
Most countries, including Australia, currently rely on transfer pricing rules based on arm’s length principles to prevent transfer pricing abuse between wholly owned subsidiaries. This allows tax authorities to vary transactions to what it would be if the two entities involved were separately owned and transacting in a transparent market.
This approach is realistic when there is a market for the products or services, such as with commodities, but is unsuitable for the transfer of intellectual property rights or online sales and services, as there is no market or acceptable technique for valuing them.
Australia, like many other countries, has finally woken up to this problem.
One solution is the UK Diverted Profits Tax. It is a 25% tax on company profit that is designated (by the tax authority) to have been “inappropriately” shifted out of the UK to a tax haven. In fact the 25% rate is higher than the UK statutory corporate tax rate and has the objective of deterring companies from shifting profits to lower-tax jurisdictions.
Many of the multinational tech companies sell services online and record revenues via a registered entity in a tax haven. The UK government has no jurisdiction over these transactions. Hence it is unclear how the UK will tax entities registered in a foreign jurisdiction. The UK “Google tax” may also lead to double taxation of some profits.
The US has so far resisted attempts to prevent its corporations from aggressively reducing their foreign taxes as many in the US believe this strengthens these corporations and leads to better economic outcomes for the US itself. Without US involvement this approach will fail.
