The question of whether multinational enterprises are paying their fair share of tax in Australia is not new. Recent comments by the Government and Opposition have focused attention on proposed changes to Australia's transfer-pricing rules as the principal means to address this politically-charged issue.
What is more worrying about the current debate however is that it appears to be ignoring a much more important question. Why are successful international businesses choosing to invest in countries other than Australia? Less investment by multinationals in Australia ultimately means less tax revenue.
Changing the rules around transfer-pricing does not address this fundamental problem. Australia cannot tax legitimate commercial activities that take place in another jurisdiction. In a world hungry and competitive for foreign direct investment, Australia needs to consider the role that its total tax system plays in attracting international business and large local enterprise investment.
Over the past several months, the Government and the Australian Taxation Office have announced various measures aimed at protecting our tax base and increasing the amount of tax levied in Australia on multinational enterprises. These measures pertain primarily to unique domestic tax rule changes where some are proposed to have a retrospective effect.
In order for the government to increase its tax base in relation to multinationals, however, it must not only work to secure revenue from current taxpayers, but also focus its efforts on attracting increased investment in Australia from these large businesses.
Governments and tax administrations around the world, including countries in South East Asia, have recognised the importance of foreign direct investment and the necessity of increasing local investment and attracting multinationals as a means to secure their tax base.
The argument for Australia to create a tax system that is attractive to foreign investment is further supported by the global business trend which has seen multinationals move from a country-by-country or duplicative territory models to a more centralised regional or global business model. As a result, Australia faces increased competition from its neighbours to maintain and attract the principal functions of multinationals including but not limited to high end manufacturing, research and development and regional or global headquarter activities.
Unfortunately various legislative reforms announced recently by the Government and the administrative policies implemented by the ATO will result in increasingly burdensome tax compliance efforts as well as increased uncertainties regarding the tax positions of multinationals, particularly in light of the retrospective effect of several proposed legislative reforms.
One example is the Government's proposed reform of transfer pricing rules. Although purported as a mere clarification of the way the rules were intended to apply, the proposed changes are likely to have an adverse effect on many multinationals who in good faith have applied the existing rules according to generally accepted practice. These reforms will force many taxpayers to revisit their long standing positions on accepted cross border transaction methodologies that have been struck and applied in accordance with the existing local and international standards. Any proposed retrospective adjustment of these arrangements may result in significant double taxation for several multinationals. Importantly when combined with the broad range of other recent and proposed tax legislative changes for companies; there is a strong sense that this patchwork approach to tax reform will act to negatively impact the confidence multinationals have when investing in Australia in the future.
In order to encourage multinationals to invest and carry out significant value-added functions here, the Government must take a step back and identify all of the key tax and associated regulatory drivers that these companies consider important in determining the jurisdiction in which to carry out their activities.
The discussion around the creation of a competitive tax landscape should also not be limited to a discussion on corporate tax rate reduction. Rather, it should propose a total tax framework that is consistent and competitive with international standards and encourages local and foreign investment in proprietary activities.
Australia does present several commercial advantages over competing countries globally for investment. Unfortunately, compared with many other countries our corporate tax system is more uncertain, more complex and not competitive. With a generally more appealing corporate tax environment, however, Australia could become a destination of choice for multinationals to establish significant portions of their operations, with the correlative effect of increasing economic opportunities and government revenues.
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