TAX PLANNING DOESN’T MEAN THAT A CORPORATION HAS OPERATED OUTSIDE THE LAW TO EVADE TAX.

An interesting article was published today in a major Australian newspaper, The Age. In the article “How 76 big firms saved $5.6b in tax” it says that according to certain groups, many profitable companies haven’t paid the appropriate level of tax due to the adoption of strategies that are essentially either ‘inflating losses’ or ‘shifting profits’.

While times are such that changes to tax systems in many jurisdictions are being reviewed, it is not necessarily to call ‘foul’ against those companies when the existing laws provide for corporations to deal with their taxes in the most efficient manner possible, so long as the laws are not violated.

The Australian Senate inquiry on corporate tax avoidance distinguishes between tax minimisation, evasion, tax avoidance and tax planning. The tax minimisation via appropriate planning is legal, allowing corporations to reduce their tax obligations. This tax planning is legitimate when it is done within the law.

On the corporate side, it is the obligation of management to ensure all aspects of the business are managed in the best interest of the stakeholders and this includes taxation. The current debate often centres around the IT and pharmaceutical sectors. For corporations that have invested vast amounts of money to develop new products (such as in the pharmaceutical industry), a commercial return for the use of those products, even by a subsidiary, is a foundation of many business transactions. To suggest that such practices are inappropriate is not commercial. If the payment under the law can be structured to be more efficient, then why would the corporation elect a less efficient solution to the detriment of the shareholders?

In Australia, transfer pricing and thin capitalization are some of the major focal points of tax authorities and these are consistent with the OECD & G20 agenda. There is an inference that tax practices adopted by the larger corporates are in breach of legislation. This is not necessarily correct. Despite the complex nature of legislation in Australia (and other countries), the Australian system is sound and is able to adapt to a changing environment as the need arises. It is most unlikely to be able to avoid complexity when there is a need to deal with multiple jurisdictions; each with their own laws in addition to wanting to protect their revenue base.

The final report on corporate tax avoidance from the Senate Standing Committee on Economics is due the end of this week on 22nd April 2016.

The Age's article is at http://www.theage.com.au/business/federal-budget/how-76-profitable-companies-left-australian-taxpayers-56-billion-out-of-pocket-20160419-goa6o2.html

OECD BEPS DRAFT GETS A REACTION

As predicted It hasn't taken long for the  self serving "discussion" over the BEPS strategy to start . 

There is a fear in the US  that the initiative  will be a catalyst for  US businesses to relocate to other jurisdictions to avoid the outcome of double taxation  and rising compliance costs . The concerns are varied and include country by country reporting requirements . In addition to the reporting aspects the prospect of shifting the point of taxation may have a major impact on the US tax take. Interestingly , various surveys have shown that business acknowledge that the current rules are no longer fit for purpose .

The cooperation of some 90 plus jurisdictions , to implement the entire plan is likely to require a time frame of 5 years + according to the Australian Taxation Office response yesterday .The Australian position is to keep engaging with overseas investors to encourage economic activity while being mindful of the entire picture . i.e Australia is aware that everyone needs to be able to preserve their own tax base based on the economic activity .While it sounds positive , and there appears to be the political appetite to address the global tax problem  the question will always be , which part of the economic  activity is ( more ) relevant . The customers location, the producers location etc .and what will it cost "us" in revenue dollars without shredding the revenue base in favor of  other locations. A real concern is that of unilateral actions taken by jurisdictions which could very well undermine and slow down the project on a multi lateral level .While various jurisdictions may not act unilaterally , the pace of change will mean that there is a risk of a compromised outcome in the next few years . 

What is clear despite the uncertainty , which is considerable at the moment , the world has changed and the rules as we knew them , have been consigned to history. Based on this new landscape larger businesses need to consider their current models  .This includes likely reporting requirements  and what transparency of data means to the business world and competition . Who will see the data  . There is also the issue of the reality that tax compliance costs  will increase  considerably .

Critically , what will increase , is the tax take  which will impact on the profit levels previously enjoyed by business. The challenge therefore is to ensure that under the new world order that is emerging , the strategy will be focused on minimizing  double taxation . What we will see is that existing operations are likely to face  considerable rearrangement and management must start now to get a handle on these issues. 

TAX US IF YOU CAN - Taxation in the 21st century and beyond

The long awaited OECD report on tackling the taxation issues that have been vexing all tax authorities has now been released . The BEPS issue of harmonizing  legislation with current business practices will no doubt create much discussion. The challenge is to have “real” agreement for a multi lateral approach to international tax reform requiring all jurisdictions to be more open minded while not sacrificing to much in their own territory . The US by way of example has indicated that any proposal that severely  impacts its revenue base ,will not be accepted.The OECD noted that the increase prospect of double taxation is real which will lead to disputes over the rules. The conflict is in part with double non taxation and so there is no doubt the proposals are designed to impact. How these issues will be resolved , is too early to tell but one prospect may be an escalation in turf wars between jurisdictions . This may result in jurisdictions not adopting all the recommendations of the OECD or delaying  participation on all fronts. The prospect of going it alone is unlikely but how the local taxation rules will be amended is yet to be seen . Former Australian Treasurer Joe Hockey was criticised by the OECD when Australia headed up the G20 and he introduced tax legislation ahead of the OECD report. The Hockey law changes may be irrelevant under the new OECD recommendations but it demonstrates how difficult the landscape still is with the result that increased litigation is a likely outcome .Hong Kong was another jurisdiction that announced previously that they would listen but not necessarily implement the recommendations as the H K authorities were of the view that the rules they have implemented , worked for them.  The OECD is optimistic that the naysayers will be proved wrong based on the position that some 90 countries have agreed in principle with what the OECD is wanting to do . In principle agreement versus actual implementation is the hurdle yet to be tested. 

What appears to be “out” is the unitary tax methods in favour of the more traditional arms length principle . In essence the rules require that there is to be sound  economics behind any structural decisions when planning the manner in which a company’s cross border dealings are handled .   

As anticipated there is considerable attention given to the concept of the Permanent Establishment and the digital economy . This is a space to watch as the prospect of a deemed PE is very much on the table and will no doubt be the subject of robust discussion  . All the old rules such as  where contracts are finalised etc are being reconsidered. As only one simple example shows, the area is still a minefield.  If an on line seller has lead generation staff in a jurisdiction , does a tax liability arise in the country of the lead generation ?  Staff functions ,while relevant ,  are not considered determinative of the end game in todays environment ? The OECD paper also  moves away from the automatic exemption from PE status where only warehousing / logistics are involved . In fact , are any of the traditional rules relevant or is the country of the buyer the determining factor ? The country of origin may have a different view especially if they are going to have to give tax offsets for tax paid in the country of the buyer.

What is certain is that the large multi nationals which were the focal point of this initiative will be looking at the drafts , lobbying and working strategies to  secure the best outcome in this new world order of multi-lateral cooperation . In the meantime the initial response from the G20 , on October 8th , will be interesting to watch .

Apple, Ireland and the European Commission

The EU Commission is suggesting that Apple should have been paying more tax and that Ireland aided them in achieving that outcome. If Apple was compliant with legislation/regulation at the time they should not be thrown under the bus of inappropriate transfer pricing practices and being a poor global (corporate) citizen.

It has been noted by many in the tax industry, that every company (large and small) seeks ways to (legally) minimize their taxation outlay. If Apple adopted transfer pricing strategies that were in keeping with the law at the time then they should not be taken to task.

The G20 approach to a multi-lateral rather than a bilateral treaty environment combined with other OECD strategies is likely to result in different outcomes in the future. However looking back must be done through the lens of what the law and guidelines were at the time. The reality is that taxation law has not and is unlikely to evolve as fast as the ongoing and rapid change in the global business environment.

Both Apple and the EU Commission present their positions in the press with quiet confidence and no doubt there will be many companies awaiting the outcome but it will be quite some time before this issue is resolved.

Australian Budget May 2014 - what the tax industry is expecting: preliminary views

May 2014 Budget Australia – Background and what is likely

Overall no major tax hikes anticipated

Long term deficits are clearly a reality unless some realignment takes place. With current debt levels and long term deficits being a problem combined with our terms of trade and high cost of doing business in Australia, it is clear that action is needed.

One problem however is that the political system isn’t conducive to the long-term thinking needed to improve the tax system. So what is likely to be in store has been the subject of much debate but the general theme that is emerging from the economic observers is as follows:

Raising income taxes is not the issue especially if looked at on a global scale when comparing Australia’s revenue as a percentage of GDP with other economies. Australia is quite high which is why there has been a long time call for lowering Australia’s income tax .

Tax incentives in order to stay competitive on the international stage. By way of example employee share plans need a strong overhaul to stop companies exiting Australia as a corporate headquarters.

Large spending cuts are not considered likely but the pension and social security aspects are very much a target with the likely lifting of the pension age. In addition the level of services being provided is likely to be reworked.

Health care is a global issue and Australia is no different. There may be some changes here. One possibility is the change to the funding model for public hospitals. The suggestion is to move to a model that sees funding based on procedures.

Australian tax office audits of multi-nationals

In the wake of the G20 meeting in Australia last month and the Tax Office Compliance in Focus 2013-2014 publication of July 2013, it is no surprise that tax audit activity is on the rise.  As part of the global initiative to prevent BEPS the Australian Taxation Office has commenced audit activity on 86 multi national businesses. No doubt the usual names are considered to be on this list but the ATO are being somewhat guarded as to the targets .

The question that comes to mind is whether audit activity is the answer. It seems that the problem lies with the current law, as in many cases the multinationals (that have received press coverage about their tax payments)  have acted within the framework of what is the law.

The law it seems is what is out of sync with current business operations and dynamics. The forming of a global set of robust rules is where the attention is required but equally very challenging as evidenced by the recent response to the OECD transfer pricing recommendations).  It is relevant to note, as highlighted by the ATO , transfer pricing is not suggesting illegal activity unlike profit shifting.

What somehow seems to have gotten lost in translation, is that financial engineering does not mean that something has been done incorrectly. Inappropriate practices will get caught by these audits but it will be interesting to see if in fact the outcome will be matched by the ATO view that lower taxation has arisen due to inappropriate practices .

A significant part of the problem is determining how to tax online business, the digital economy. The business economists face a challenge in working through the modelling as to how to determine what revenues and costs are to be attributed to the various locations.

Into this mix comes the added dimension of different jurisdictions wanting to attract business and offering tax based incentives. How difficult will it be for all locations wanting to be pulled in the same direction while endeavouring to be more attractive than their global neighbours? In many cases, such jurisdiction based benefits have been the catalyst for corporations moving location.

Going back some 13 years, James Hardie Industries (unashamedly) moved to the Netherlands due to the change in global operations and tax inefficiencies. As cited on their website

“In summary, the establishment of a Dutch-based parent company and the restructure were driven by the group’s increasingly global focus and international financial tax efficiencies. .”

Such taxation considerations, including tax concessions as business drivers illustrates just how challenging these issues are. The R & D concessions are an example of how countries (appropriately) try to attract business.

Relocation of businesses and how they transact is clearly a battle zone, the rules for which shall take some time to develop. In the meantime the tax authorities continue to rely on audit activity to catch those parties that they feel have not been doing it correctly. It will be interesting to see the dollars raised against the cost of the recent audit initiative .

OECD - Global standard on information exchange - just released

OECD and BEPS – Global standard on information exchange.

For those in the cross border tax advisory arena, the world is a rapidly changing one. The changing face of business and cross border dealings including but not limited to e commerce is pregnant with issues of how business and the tax regimes can cooperate while not adding disproportionate costs (being only one of the concerns) in preserving the tax base.

Last week the OECD unveiled a uniform global standard for the automatic exchange of information between tax authorities worldwide.

Discussion about this new standard by some respected commentators and industry participants suggest that it does not achieve what it set out to do. One concern as expressed by PWC was that it caters for needs of the revenue authorities without regard to business. Concerns include costs and confidentiality. These aspects alone gives rise to serious reservations about the success of the standard.

Of particular concern was the 2 tier file system that business will need to maintain. Specifically the requirement to keep a file that meets country requirements as well as a separate “Master” file that will need additional documentation. One fear is that there will be a mismatch resulting in double taxation.

Some interesting points are also made in a paper put out by Bond University and whether the ‘modernisation’ provides a solution to BEPS or whether the solution to BEPS lies in international cooperation. The paper can be found at : http://epublications.bond.edu.au/rlj/vol23/iss1/3

Dirkis, Michael Dr. (2013) “On the eve of the global response to BEPS: Australia’s new transfer pricing rules,” Revenue Law Journal: Vol. 23: Iss. 1, Article 3.

According to the OECD, the standard is a “game changer” in terms of cooperation and transparency in the fight against tax evasion. The underlying thinking behind the strategy is an extension of the thinking behind the US legislation FATCA and general anti money laundering positions of many jurisdictions. The question is whether in fact it has given sufficient thought to the totality of the situation?

Annual data is to be automatically provided rather than on a request basis. The level of data to be provided by financial institutions and the taxpayers to whom it applies will be better known once the report is presented at the next G20 meeting in Australia on February 22nd / 23rd .
Apart from the strong reservations of PWC, other jurisdictions have made comment that they are reviewing the standard but they may not adopt it at this stage.

Hong Kong by way of example is of the view that their current legislation which was introduced in 2009 is adequate to protect against inappropriate taxation practices and in principle is in line with the OECD program. Hong Kong will seek feedback from stakeholders at this stage.

The OECD is expected to deliver a more detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.

Australian property

There has long been a debate about property pricing in Australia and in particular with respect to residential property. In October last year the independent think tank, The Grattan Institute , published a report that stated all options must be on the table in order to address the property pricing situation in Australia. A significant part of this strategic rethink challenged the sacred cow of negative gearing.

Saul Eslake in his submission to a senate inquiry, again raises the prospect of fundamental changes but goes one step further. He articulates what everyone has been thinking for so long but hasn’t been quite so direct .

UK - E tail and Tablets

E tail in the UK is accounting for 18 per cent of all ecommerce,  according to researchers as reported in The Telegraph.

Tablet commerce alone is anticipated to triple this year to take 10.4% of total UK online sales. By 2017 that figure is expected to account for over a quarter of all UK ecommerce.

Notably tablets are overtaking smartphones, with tablets expected to account for 58% of all retail. 20 million people – more than one in three consumers in the UK – use tablets .

http://www.telegraph.co.uk/technology/news/10487947/10-per-cent-of-shopping-to-be-done-on-tablets.html

GST for on-line sales - What is the real impact?

There is much debate globally about taxing on line sales and no more recent than the treasurers ( Federal & States ) meeting this last week in Australia to look at the GST for on line sales with a view to cutting back the $1,000 GST free threshold on imports. As was noted by the Grattan Institute following the announcement and politics aside, the economic impact/benefit of lowering the $1,000 threshold does not appear to be a worthwhile exercise. Not at this stage anyway.

According to the Grattan Institute, Treasury estimates suggest a loss of $650 million in revenue in 2013, growing to $860 million in 2016 is not going to deliver a meaningful result. While making changes to achieve such savings are desirable, in context they would appear to be small in light of the overall budgetary savings that need to be achieved. The Institute suggests that the focus should be on more effective strategies that will yield greater economic benefits given that the budgetary hole is circa $60 billion. This argument is given further credibility when the savings noted by Treasury don’t take in to account collection costs. The debate is heading towards broadening the GST base which will yield far greater results even after providing certain safety nets to protect those sectors of the community that would be adversely impacted .