We have long known that large multinationals have been using complex corporate structures - such as the famous 'Double Irish Dutch Sandwich' - to aggressively shift profits and minimise their tax.
The scale of this problem was brought into stark relief this week when Apple, one of the world's most profitable companies, gave evidence to a US Senate hearing that one of its key holding companies had paid no tax – in any country – even though it had reported over $30 billion in net income over a four year period.
This profit shifting and stateless income represents one of the biggest challenges we face in the modern age.
In the industrial age, where economic activity was centred on the production of physical commodities, our international tax architecture taxed profits in the country where they were earned.
As we move into the digital age, our international tax rules have become progressively out-dated. We now live in a world where commerce is regularly transacted across national borders, not simply through transactions on financial markets but through consumers engaging in trade from all corners of the globe using the devices they hold in the palms of their hands. These changes have brought many significant benefits for consumers and businesses around the globe, improving opportunities for trade, investment and consumption on an unprecedented scale.
Today, a growing proportion of economic activity is being driven by the assets of the digital age: intellectual property, brands and rights.
They are the 'intangible' assets that for revenue authorities around the globe are proving elusive. These intangible assets allow companies to shuffle their income into countries that apply little or no tax and can even give rise to income that is 'stateless' and not subject to tax anywhere.
Intangible assets are not the only way that multinationals can shift profits and avoid tax. There is the notion of 'tax law shopping', where companies take advantage of the mismatches between the laws in different countries. There are also the massive money shuffles where multinationals load up their profitable operations in countries like Australia with deductible debt and shift taxable profits into countries where they pay little or no tax.
As governments around the world rebuild their economies after the Global Financial Crisis, one of the most significant challenges we face is the protection of our revenue base against erosion by the aggressive tax planning of large multinational companies.
We must do what we can domestically, which is why the Gillard Government has announced a range of amendments to our tax laws that protect billions of dollars of revenue.
However, Australia can't combat this problem alone and international cooperation is vital. Australia has helped to put this issue on the G20 agenda and we will continue to push for global action.
The consequence of not acting is that the tax burden is shifted onto those who do not have the capacity or desire to exploit tax loopholes. This provides an unfair competitive advantage to those businesses that engage in these practices.
Families, pensioners and small businesses should not be left to foot the bill – through higher taxes or fewer services – because some of the world's most profitable companies are refusing to pay their fair share of tax. At a time when some are advocating for Australia to increase the GST, I believe that it is a much more pressing priority that we ensure that profitable multinational companies pay their fair share.
The Gillard Government will not be taking a backward step in tackling profit shifting and global tax avoidance. We will continue to fight for a tax system that is fair for all Australians.