The big tech companies may not like what is coming…

Gartner identifies digitalization as the process of moving to a digital business, which uses digital technologies to add value and generate revenues. As digitalization grows globally, we must understand how external factors affect businesses. The most recent external factors to disrupt business have been tax policies and regulations around countries and governments. The Treasury has recently compiled a document that discusses corporate tax for multinational digital businesses (MNDB) that have been minimizing or eliminating their tax obligations. The discussion arose from the big tech companies such as Google, Facebook, Amazon and more that avoided corporate taxes within Australia and around the world.

The Treasury has made available a discussion paper regarding the Australia corporate tax system and how Australia will play a role in the digital economy. To highlight some notes from the discussions paper, these seem to be the ones that stand out:

Current Situation

Base Erosion and Profit Shifting Project (BEPS)

In 2013, G20 had established an action plan to target multinational companies who would shift profits to avoid taxes. These were addressed through:

1. Coherence of international tax rules
2. Taxing rights align with those jurisdictions in which the company has economic activity
3. Transparency of international tax system.

The BEPS achieved the following in Australia:

1. Digital Products and services GST
2. Rules associated with tax under jurisdictions for multinational enterprises
3. Rules surrounding profit shifting
4. Safety harbour debt limit lowered from 75% to 60%
5. Identifying harmful tax practices and eliminating where possible
6. Updated tax treaties
7. Implemented the Multinational Anti-Avoidance Law, whereby multinational companies must bring their sales teams into Australia.
8. Implementing Diverted Profits Tax which aims to ensure that any profit gained from economic activities delivered in Australia, will remain in Australia.
9. Disclosure of aggressive tax planning
10. Reporting rules associated with transfer pricing documentation
11. Implementing Mutual agreement procedures to assist with treaty related tax payer disputes
12. Multilateral instrument that enables Australia to amend its bilateral tax treaties quickly to address any changes or updates that come from BEPS.

What has Australia implemented to help prevent tax avoidance?

1. Strengthened its Multinational Anti-Avoidance Law
2. Diverted Profits Tax
3. The Tax Avoidance Taskforce will ensure it identifies and addresses tax avoidance by large companies, multinationals and high wealth individuals.
4. Doubled maximum penalties associated with tax avoidance and profit shifting.
5. Doubled penalties associated with lodging tax documents for significant global entities (with annual global income of $1 billion or more).

International Regulatory Updates for Digital Businesses

1. Businesses that generate profits from user created value e.g. user data, user generated content, network effects (popularity of a platform) without any physical presence should be considered for tax purposes.
2. Taxing includes intangibles such as brand, since each digital business won’t have a physical asset in that country.
3. International discussions to update the tax frameworks for profit attribution rules to include businesses that generate profits through a digital presence and may not require physical assets but are reliant on intangible assets and user contribution.
4. Nexus (a business which has a tax presence in a particular state or territory) will also need to be updated similar to profit attribution rules.

What stands out most to you?

Next Steps for Australia?

Australia has not concretely confirmed an interim measure associated with digital services tax as it waits to decide with other G20 countries to decide on the best way to handle the revenue of MNDB. Although, it is considering the following:

• To target businesses that generate revenue by providing digital advertising services with a connection to Australia such as:

1. Direct Australia users
2. Paid for by Australian businesses
3. Paid for by Australian businesses and directed to Australia users

• To target platform businesses which, collect a fee or commission with a connection to Australia such as:

1. Customers in Australia
2. Supplier of platform located in Australia
3. Supplier and customer connected in a platform located in Australia
4. Either Supplier or customer connected in a platform located in Australia

The OECD is due to host a discussion on the issue in May 2019 and release a final report in 2020.

The interim solution is provided by The Treasury and should be:

• targeted at businesses that benefit most from user-created value;
• designed to minimize cost and complexity;
• narrowly targeted to avoid over-taxation;
• designed to minimize impact on business creation, start-ups and small business;
• consistent with countries’ international obligations, including World Trade Organisation (WTO) obligations, free trade agreements (FTAs) and tax treaties; and
• apply only until a consensus-based solution is developed.

Here are some questions to think about:

1. Do you think these should be applied to new and existing digital businesses?
2. Do you think the playing field will become fair once regulations are in place for Multi-national businesses?
3. Do you think prices will go up from these multi-national businesses since more regulations and frameworks will be in place?

See the Treasury discussion paper by clicking here.

Written by Eijaaz Charania