Australian Financial Review
Nothing is more fundamental to a nation state's sovereignty than its right to tax, but that right is under threat from profit shifting and international tax avoidance.
Working out how to protect the taxation base in the age of digital disruption looms as the most significant challenge to the world's major advanced economies and was raised by the Treasurer at the G20 meeting last weekend.
Put simply, the international rules that govern taxation have passed their use-by date. Designed for the industrial era, the tax rules have failed to keep pace with the rapid changes in global commerce.
In the knowledge economy profits are increasingly attributed to the creation and use of intangibles assets, like intellectual property, marketing and licensing rights. Often, these highly-mobile intangible assets are located in low or no tax jurisdictions. Many of these strategies were pioneered by the tech sector, whose business models have exposed particular vulnerabilities in the international tax rules. We are now seeing traditional sectors of the economy emulating these strategies, loading up the profits for tangible commodities into their intangible components, like brand names and research. All of this is designed to make profits a moving tax target, supported by complex transactions that exploit differences in domestic and international tax rules to reduce tax around the world.
In its most recent report, the OECD highlights the essential structural problem: today multinational enterprises can be heavily involved in the economic life of a country through the internet without having a taxable presence in that jurisdiction.
Australia is not alone in confronting these issues. As confirmed at the G20 meeting, jurisdictions around the world are locked in a battle to stop multinational enterprises from shifting their profits offshore to avoid paying their fair share of tax.
Governments are constantly moving to close the loopholes and rorts that enterprises exploit to shift profits, but there are other countries whose tax arrangements are so concessional that they are simply havens for the world's serial tax avoiders and aggressive tax minimisers. This is a race to the bottom that only serves to strip global taxation revenues and erode the living standards of hundreds of millions of people.
This is why we need international cooperation of the kind we saw at the G20 last weekend.
It is not enough for our corporate citizens to hide behind platitudes. Yes, they create jobs and economic activity, but that should never be a trade-off for paying their fair share of tax.
Where multinational enterprises enjoy the benefits of the stable regulatory environment, infrastructure and human capital of their host country but do not pay their fair share, domestic companies are at a competitive disadvantage.
I will never accept the proposition that in the future Australian families and small businesses should shoulder more of the tax burden in the absence of a fair contribution from multinational enterprises that go to extraordinary lengths to ensure their tax obligations are next to nothing.
What signal does it send to individual taxpayers, who operate in a system of voluntary compliance, that 'shopping around' for ways to avoid paying tax is acceptable?
I am not trying to tar all multinational enterprises with the same brush, but this is also part of the problem – we simply do not know which taxpayers and which sectors are paying their fair share.
Some have taken the bold step of outing themselves. Others just quietly decline to refute the claims made about the tax that they pay.
This should not be a guessing game. This Government will be progressing reforms to improve transparency around how much tax large enterprises are paying.
Transparency in taxation would go a long way to improving not only government's understanding of which taxpayers are pulling their weight, but it would give the community the capacity to engage in an informed debate.
Put simply, there is a strong community expectation that the most profitable companies pay their fair share.
This is a principle that most should find difficult to argue with. Some in business reject the notion that paying a fair share of tax forms part of a broader social compact, instead believing that it is just another cost of doing business.
On this point, I vehemently disagree.
The Government will not take a backward step in making sure that we tackle the challenge of base erosion so that we continue to have a tax system that is fair to all Australians.